To find the right opportunities, investors are reassessing the relationships between location and risk, looking closely at space utilisation and demographics and responding to changes in population and economic drivers. These were takeaways from the autumn meeting of the Association of Foreign Investors in Real Estate (AFIRE), in Boston.
Doug Poutasse head of strategy at Bentall Kennedy sounded an early note of caution. “It is critical to understand the demand side, because in this cycle, demand is less even,” he warned.
And while the economy has returned to growth, this real estate cycle pales in comparison with other growth periods – except in the San Francisco area, which is basking in the tech boom.
He pointed to significant political risk in the public concern about immigration. “Immigration is again a driving force in America,” largely legal immigration through the quota system, which has helped to foster innovation.
“There is a real risk of shutting a crucial part of the labour supply that comes from immigration,” he said.
Poutasse advised investors to look to the long term, because it is sometimes “difficult to focus on the important rather than the urgent”, and it is true that buyers are today seeking both yield and security, and are interested in long-term value.
The ability to weather storms is an important characteristic,” said Doug Weill, managing partner at Hodes Weill & Associates. “How do we ensure that portfolios will be resilient?” He noted that investors are starting to think about much more targeted strategies, attracted to managers that have specialisations or run sector-focused funds
Investors are much more asset-focused today, noted Michael Stark, senior managing director at Blackstone Group, and co-head of Park Hill Real Estate. “Investors want to look at a specified asset or opportunity rather than a macro blind concept. They want a greater degree of discretion or control.” Investment themes are raising interest but not money, he said, as investors focus on deals.
Adam Spies, senior managing director at Eastdil Secured, said that his firm is seeing more direct investment from investors, rather than flows into the funds, with a growth in separate accounts and sidecars. He said 40% of recent transactions in New York City have been joint ventures.
One problem with such a strategy is that it can slow investors down, Weill noted. “As the market becomes more liquid on the transaction side, it gets harder if you can’t move quickly. It is great in concept to have clubs or joint ventures, but the manager needs to execute quickly.”
Although markets are tighter and pricing is keen, the US is still the most important market for foreign investors, said Youguo Liang, head of global research for the Abu Dhabi Investment Authority (ADIA). And despite concerns over interest rates (allayed by Fed chair Janet Yellen’s announcement holding off any rate rise until later in the year), there is no indication that international capital flows will slow.
In fact, in the first half of 2015, of $400bn in transactions, only about half of the capital was from the Americas – and $67bn was from the Asia Pacific region, according to Real Capital Analytics. And this international flow exceeded the total for the whole of 2014.
“We have only seen the tip of the iceberg of Asian capital,” said Jason Kern, CEO for Americas at LaSalle Investment Management. “There is a wall of potential capital frustrated and waiting to get to work.”
Liang agreed, believing that the cycle of Chinese capital flowing into the US was in its earliest stages – while it will ebb and flow, Liang expects a continuation for the next 30 years.
He said foreign investors are yield hungry, considering development in mature markets or mezzanine investments that bring good cash returns.
“That’s exactly what domestic investors are looking for as well,” said Kern. “There are some new foreign investors staying with gateway office, but at the same time some new Chinese money is going straight into risky development.” But, he said, the sweet spot is core-plus/value-add.
Investors understand that prices are high, said Liang, so they are looking for investments in “permanent locations”, ones that offer stability for the longer term. Liang advocates following “human capital” – investing in markets where smart people like to live.
Glenn Lowenstein, CIO at Lionstone Investments, agreed. “The major markets are defined by liquidity, but industry in a place like Boulder, Colorado is much stronger than in Chicago,” he said. “Target where the jobs are – focus on rental growth and demand, rather than liquidity – and you may find a different America.”
A lot of investors are tracking corporate relocation trends, investing with “an economic-engine perspective,” said Mark Gibson, CEO at HFF. They are looking at what industries are going to power the economy, backed up by corporate relocation statistics.
“Both domestic and overseas capital are branching out,” he said. “It is not necessarily a monumental shift, but it is definitely measurable.”
Kern added: “Gateway is for office. Other property types lead to different cities.” The LaSalle strategy is to invest in full-occupancy assets in places with strong job growth, like Nashville or Austin. “You sacrifice some liquidity risk for higher cash flow.”
Liang stressed that permanency of location does not necessarily equate to the urban core or to property type. He gave examples of “permanence” – student housing around the University of Florida Gainesville, or multifamily near major healthcare centres. “In 20-30 years, or even 50 years, this kind of location will be as important as it is today,” he said.
Lowenstein agreed, classing them as “locations that get better no matter what happens in the city”.
Kern said investors are no longer seeing big premiums for niche sectors. “We are starting to look at these property types less as silos and more as elements in human-connected environments,” he said, looking for characteristics like walkability and liveability.
These are the very characteristics that are coming into play in the 21st century city, according to Edward Glaeser, professor of economics at Harvard University. “Instead of spreading out, we are clustering in,” he said, noting that population growth concentrates in areas that have the strongest skill bases, and more densely populated areas also have higher income levels.
Successful cities, in his view, are marked by concentrations of human capital, as Liang had noted, and cities foster concentration and creative diversity. “Cities enable cross-industry leaps of imagination,” he said. “Knowledge is more important than space – that’s the secret of cities.”