Even a glamorous Beverly Hills setting could not hide a marked change in sentiment at PREA's autumn conference. Martin Hurst reports
The theme of this year's meeting was, in the words of PREA's director of research, Jim Clayton, "a focus on things that are new", from the point of view of US investors. Subjects discussed during the day-and-a-half programme included sustainability, derivatives and infrastructure, as well as a look at the impact of the US sub-prime crisis.
The issue of sustainability is moving to the fore as the value case gathers momentum, and the subject was at the top of the conference agenda. Keynote speaker Stephen Schneider, senior fellow at the Woods Institute for the Environment at Stanford University, commented that "developed countries which have enjoyed a greater share of the world's wealth will have to work harder to transfer technology to developing countries".
Peter Lehner, executive director of the Natural Resources Council, said: "The market doesn't work for efficiency as well as it should. The good news is that there is a crystal-clear groundswell of support for sustainability which will have a significant impact on the economy."
Energy conservation is one key issue, but not the main one. As Michael Kleeman, senior fellow at the University of California, San Diego, noted: "Water will be the number one political issue after carbon over the next 10 years. The number one storage facility for water - snow - is melting due to global warming."
In a general session on the global economy, David Hale, founder of Hale Advisors, said that the current economic conditions "are the most benign since the end of the Roman Empire, with 120 countries expecting growth in excess of 4% this year. Only four countries are experiencing negative growth." He added: "China is also surging ahead with its exports, having enjoyed four consecutive years of growth of 30%. This time next year it will have the largest exports of any country in the world. Other Asian economies benefit considerably from this with 80% of Chinese exports accruing to them."
"Africa is also strengthening, primarily due to the increase in raw materials prices and major improvements in governance.
"Emerging markets dominate in the accrual of foreign currency reserves which reduces the risk of a global crisis. They can grow driven by domestic consumption so will be insulated from downturns that occur elsewhere."
Referring to the current liquidity crisis, Hale said: "There has been a very profound change in lending standards. The sub-prime sector has suffered considerable damage. So far the housing downturn has had no impact on consumer spending, but a decline in the level of consumption will drive the US into full-blown recession. Consumption is the key variable; the danger is that falling house prices will cause consumers to draw in their horns. All we can do over the next three to four months is watch consumer spending very carefully. That said, given that sub-prime affects 3m people out of a total US population of 300m, I don't think it will lead to a crisis."
In a panel looking at investment in global real estate, reference was made to the difficulty of finding credible partners in India. Hastings Johnson, CFO of Hines, agreed that investing in India is very hard work "but that it is such a dynamic economy that it needs to be considered. A major problem in India is the paucity of infrastructure but if it continues to compare itself with China where things are much better India will get there." Ronnie Chan, chairman of Hang Lung Properties, referred to the fact that in China all decisions rest with individuals rather than with the system because it is only 10 years since the country emerged from communism. Speaking about Europe, Erwin Stouthamer, managing director of Composition Capital Partners, said that "risk has returned as an issue, there has been a flight to quality and lending has adjusted, although there are a lot of sound fundamentals". In response to questions about corruption in China, Chan said that there is "corruption all over the world. Look at Italy and Ireland." He added: "What you need is the right relationship."
Speaking about developing economies in general, Johnson said that the mistake that many people make is that they do not look at the underlying real estate. Chan said that his company stays away from companies with political risk because "you could lose everything. If you don't know a country very well don't go there."
In a session looking at capital markets John Bollinger, president and founder of Bollinger Capital Management noted that "growth and value are both working successfully at the moment. Volatility will be the name of the game but we will be compensated for that."
Robert Kessler, founder and CEO of Kessler Companies, said: "The good news is that because of the current exchange rate, Europeans think that US real estate is cheap. The Federal Reserve will lower rates more than many people think - maybe down to 1-2%." Donald Straszheim, vice-chair of Roth Capital Partners, stressed: "If we legislate in a protectionist manner - which is likely if the Democrats win the next election - it is certain that China will retaliate."
The conference then turned its attention to derivatives, which have gained traction in the UK but are still in their infancy in the US. It has been suggested that one issue is NCREIF's index which has come in for criticism for lacking the coverage of the IPD indices. Douglas Poutasse, executive director of NCREIF, said that "innovations in indices have been good but make it very difficult to decide which to use".
Phil Barker, senior vice-president, real estate derivatives, at CBRE, commented that in light of the current liquidity situation "there are not many people lined up on the buy side". On a more positive note he said that investors could acquire exposure to US real estate very easily through property derivatives, which would create liquidity, although with direct property acquisition costs in the US lower than they are in the UK the case for using them isn't quite as clear cut.
The final session of the conference looked at investment in infrastructure. Session chair Cynthia Steer noted that US investors "have hardly touched the surface" compared with allocations in Australia running up to 15% of assets. She referred to "a lack of education and knowledge. Most people think that infrastructure is financed by municipal governments."
As with other asset classes, infrastructure has its pitfalls. Julian Allen, COO of the
infrastructure investment group at Goldman Sachs, advised investors "to be aware of the regulatory environment and the regulatory risks". But there are significant benefits. Allen noted the fact that infrastructure provides a very good inflation hedge - "very important to pension funds which represent a very large proportion of our total investment."
There is no shortage of potential either. Like other countries the US has suffered from underinvestment in infrastructure and the deficit is now too great for the government to finance on its own. The American Society of Civil Engineers has estimated that US infrastructure needs updating to the tune of $1.6trn (€1.1trn) over the next five years.