Converging returns in Europe and a possible change in the role of property were among the subjects at covered IPD's European investment conference in Berlin. Richard Lowe was there
International Property Databank chose to focus very much on Europe for its latest European Conference, held in Berlin during May. This might appear unremarkable, but in past years the event has cast its net wider to reflect the growing globalisation of real estate investment. However, with IPD claiming that risk is back at the top of the agenda, it was deemed wise to regain some regional focus and concentrate on the prospects for the continent in the context of ongoing market volatility and economic uncertainty.
The event, spread over three days, was certainly ambitious in scope. It aimed to explore the issues from macro-economic and top-down market perspectives, as well as looking in more detail at such themes as portfolio construction and alpha generation. Fortunately, Piet Eichholtz, professor of real estate at the University of Maastricht, was on hand to chair the series of presentations and panel debates. He succeeded greatly in the unenviable task of bringing clarity and consistency to the ensuing flow of ideas, questions and points of contention.
The opening session took a broad perspective on trends in the European economy and real estate markets and attempted to assess the threat posed by the global credit crisis. The economic backdrop is certainly not looking promising. This year looks set to be characterised by the return of global inflation and 2009 is likely to see world productivity growth slow to 3.6%, explained Véronique Riches-Flores, chief economist and head of the European team at Société Générale.
Philippe Legrain, author of ‘Immigrants: Your Country Needs Them', delivered some fairly positive news by highlighting the implications of an increasingly mobile cross-border workforce on European economies and real estate markets. Countries that remove obstacles to labour mobility will benefit from faster economic growth, driven by "greater innovation and enterprise", he argued. This, of course, will create more demand for property. Legrain also made the point that the propensity for enterprise and innovation to become more concentrated in particular geographies or cities will lead to "diverse mega-regions", leading to renewed regional divergence among property markets.
For the time being, however, Europe is set to see a convergence of total returns across Europe. Malcolm Frodsham, director of research at IPD, explained how this would make it potentially difficult for investors to achieve diversification when investing on a pan-European basis. Having said this, Norway topped the scale for total returns in 2007, posting 18.3% (although this was attributed to a move to a less conservative valuation methodology), while the UK was the only market to see negative values at -3.4%.
The 380 delegates also heard from Morten Kampli, co-founding partner at the newly established Realkapital Partners, a Norwegian private equity fund management company specialising in real estate. He explained how the Norway Government Pension Fund is expected to double its assets under management (currently at around €250bn) by 2012 and it is targeting a real estate allocation of 5%. This, of course, will represent a huge amount of capital to be invested in property, although at the moment the fund is not allowed to invest outside its national borders. Undoubtedly, this will have to change.
Having only just had breakfast, delegates were by no means eased into day two of the conference. Instead, Tony Key, professor of real estate economics at Cass Business School, started proceedings by launching into his in-depth and heavily researched presentation on leverage and diversification in European property investment. He concluded that the unwinding of the current credit boom by the global financial system could have a downward drag on markets until 2013.
Perhaps of more concern is that the recent changes to the capital markets - higher trading volumes, wider choice of investment vehicles, broader investor base and greater liquidity - could in turn change the performance and behaviour of real estate. In short, it could lead to higher correlations with other asset classes and weaken the case for property's role as a diversifier.
There is too little space to recount all of the presentations on the main day, but a great deal of ground was covered. In contrast, Martin Bruehl, managing partner at Cushman & Wakefield, followed by giving an entertaining, fast-paced talk on how markets are converging on all fronts and how pessimistic investor sentiment is becoming a self-fulfilling prophecy. Much can be learnt from behavioural science, he concluded.
According to Bret Wilkerson, CEO at Property & Portfolio Research, the trend of the US as a net exporter of real estate capital - much of it ending up in Europe - is set to stop as US investors retrench. While the opposite can be said for all other financial markets, non-US property assets are becoming increasingly expensive as the dollar continues to weaken and inflation rises, he said.
Paul Cheshire, professor of economic geography at the London School of Economics, explained how investors have to look at planning systems in markets to really understand their individual demand-supply dynamics. He compared Birmingham in the UK with New York City, where construction costs are twice Birmingham's, but where occupational costs are, surprisingly, half Birmingham's.
Lisette van Doorn, chief executive at INREV, revealed how the association would be releasing a white paper (released in June) and a consultation period - including roundtables in London, Munich and Amsterdam - to enable it to move towards a more sustainable model for defining fund manager styles - one that analyses "bundles of risks" and removes internal rates of return from the equation. This would also facilitate the creation of a style index.
Talking of indices, IPD co-founder Ian Cullen revealed the first results of his pan-European index, recombining the 20 European mature markets already being tracked. These markets have been rebalanced to reflect their true market weighting - the German market, for example, is really closer in size to the UK market, despite the latter having a greater coverage by IPD. Total unhedged return for 2007 was 5.9% and this low figure was explained by the poor relative performance of the UK and Germany, which have a heavy weighting in the index. However, taking into account currency, the total return drops to 2.6% for euro-denominated investors.
Bringing the event to a close, IPD chairman Rupert Nabarro held a straw poll to gauge the audience's sentiment for future European property returns. Did the delegates expect total returns to be positive in 2008? There was not a single show of hands. Not so surprising, but when he asked the same question for 2009, only two-thirds indicated a positive response. Furthermore, a handful of individuals revealed they did not expect to see positive returns until after 2010.