Sovereign wealth and pension fund delegates at the MIPIM RE-Invest summit heard that the global real estate sector is continuing to benefit from economic headwinds but with a good measure of caution.
Robert White, president and founder of Real Capital Analytics, said that, with negative interest rates now a reality in a large part of the Western world, “juicy spreads” in property are leading to a continued “digging in” to core markets. The top 25 global cities accounted for two-thirds of all property investment in 2015, he said, pointing to a focus in liquidity and a “growing array” of property sub-sectors and an exploration of peripheral areas of core cities.
White also warned of a slowdown in investment in recent months as investors pull back due to a range of uncertainties including commodities prices, fears of a US recession, and political uncertainties such as the UK’s referendum on EU membership and Donald Trump’s presidential campaign.
Perhaps unsurprisingly, 2015 saw large outflows from Asia. Currency volatility also meant investment volumes were “flat to down” in dollar terms in 2015, White told the 53 institutional investors with global real estate assets representing of more than $500bn.
Summing up a series of investor roundtable discussions at the closed-door summit for investors, Jason Oran, partner and head of southern Europe at Europa Capital, said: “Those pricing [real estate] from within the industry are struggling to reconcile appropriate returns, even over the long term, but on a relative basis to other asset classes still suggests a strong case for real estate.”
Andy Pyle, UK head of real estate at KPMG, observed: “Does the cycle actually matter when you’re a long-term investor, looking to recycle capital when fundamentals make sense?” He added that there were some concerns about build-to-core strategies because prices and risk may not justify returns.
Anne Kavanagh, global head of asset management and transactions at AXA Investment Managers-Real Assets, noted that the majority of the roundtable participants said they were going to be net-buyers in the coming year.
“The consensus was that pricing is seen as very hot in core investments and half are building to core,” she said. “In terms of markets, some investors are in the top five, 10 or 20 cities, but very few are in the top 30. More investors are building in home markets and looking to deliver risk-adjusted returns.”
Summing up the roundtables on sectors, Isabelle Scemama, head of the funds group at AXA Investment Managers-Real Assets, also pointed to an air of caution among investors. “Don’t do what you don’t know,” she said. Nevertheless, some investors were considering new sectors, including student housing, senior housing and healthcare, she said.
Russell Chaplin, CIO for property at Aberdeen Asset Management, said three factors were holding investors back: scale, where it will be tough for large volumes of capital to access niche sectors; scarcity of assets, and a need for specialism in areas like underwriting and management.
Erwan Quintin, associate professor at Wisconsin School of Business, said liquidity was a concern, as were a shortage of opportunities. Nevertheless, conviction plays a role, he said: “People are investing in those sectors because they feel that the sector has a future that justifies investing in it.”
Deitrich Heidtmann, managing director, head of international capital markets at GTIS Partners, said there had been a lack of focus on emerging markets despite there being significant opportunities to take advantage of positive demographics.
“There is an economic dividend and it can be very profitably exploited, but [it can be] too off-piste for people to head out there,” he said. “Just as we look back at 2009 at our own real estate markets, opportunities never look super appealing and safe at the moment you look at them.”
Some investors perceive emerging markets to come with “career risk”, he said. “It makes a small difference to your portfolio but a big difference to your career if you get it wrong.”
The UK’s EU referendum was another concern for the participants: “For investors hedging sterling from the outside, Brexit adds another degree of volatility and another reason to hold out for another six months,” said White.
Simon Mallinson, executive managing director, EMEA and APAC at Real Capital Analytics, said there seemed little point in making investment decisions before the referendum is held on 23 June. “There are advantages and disadvantages but no benefit until a decision has been made,” he said. “There was a clear feeling that from a business and commercial view that [Brexit] is a bad idea.”
In a keynote speech, Peter Beckett of KPMG pointed to the OECD’s base erosion and profit shifting project, where real estate investors could be affected in three areas. One is hybrid structures where receiver and issuer are treated differently for tax purposes across jurisdictions; a second is in tax deductibility of interest expenses.
A third area is the general requirement to prove substantial operations in the particular jurisdiction is domiciled for tax purpose, which can be difficult for real estate entities. The OECD is understood to be looking into ways to accommodate this requirement for long-term investors such as pension funds.