During the day, investors discussed how to negotiate risks and stay on track, and in the evening Ivanhoé Cambridge came away with the top award
The city council of Amsterdam wants to build tens of thousands of new housing units in the city as it grapples with the issue of affordability of living. And it wants to team up with institutional investors to carry out this mission, deputy mayor Eric van der Burg told a gathering of Dutch and foreign pension funds aboard a boat on the River Amstel in late May.
City of Amsterdam director Bob van der Zande was able to point – literally – to areas where that construction could take place, as the boat made its way down the river. Van der Zande and the deputy mayor had been invited to speak as part of a property tour on 13 May organised by local investor Bouwinvest.
The day before, the city’s mayor Eberhard van der Laan conveyed a similar sentiment, telling delegates at the 12th IPE Real Estate Global Conference & Awards that Amsterdam is faced with the challenge of ensuring rising residential prices do not cause creative, industrious people – the lifeblood of any growing city – to leave.
It had been five years since IPE Real Estate held its annual conference in Amsterdam and today the city is in the midst of reinventing itself for the 21st century. Van der Laan, who became mayor six years ago, is overseeing a transformation that includes the building of a new bridge and a long-running campaign to ‘clean up’ the city’s famed red light district.
The mayor told more than 300 institutional investors that the city would make a decision that day on a public-private partnership that would invest in the city’s ‘1012’ postcode. Days later, IPE Real Estate reported that Syntrus Achmea will take part in a €300m makeover of the area, transforming part of it into housing and retail.
“People are finding Amsterdam expensive to live, and while you wonder whether or not we are following a similar path to London, it is already too late,” Van der Laan said. “We are worried that prices are rising too fast. I’m very worried; if we cannot create partnerships with institutions and pension funds, it will be a defeat. We can only solve the problem if we build in numbers.”
The mayor also spoke about the importance of closer collaboration with Rotterdam, Utrecht and The Hague which, together with Amsterdam, comprise the Netherlands’ Randstad metropolitan area. “The future is not that we make Amsterdam bigger, but we bring the four together,” he said.
The four-strong Randstad can compete with larger global cities. Van der Laan recently visited Beijing, where he discovered that the Chinese city’s diameter was the same as the distance between Amsterdam and Rotterdam.
Population growth is important for cities to remain economically vibrant, and for most European cities this means migration. But not all cities are equipped for migrant mobility, delegates heard. June Lee, from the International Organisation for Migration, told investors to look at cities where there are “opportunity structures” for migrants to quickly integrate into community and society. “Good human capital is coming your way,” she said.
As opportunity structures are put in place, the ability to take more migrants rises and there is no upper limit to how many migrants a city can take. Large cities across the world are facing the same issues, Lee said, while secondary cities are less prepared. Asian cities are experiencing significant migrant movement, she said, with movement between the world’s developing countries.
Lee said there are as many as one billion people – a seventh of the population – on the move within China. “Those with global portfolios will need to look east.”
Population growth, she said, is likely to be created by migration. “So it’s an important issue and one of the main drivers of economic growth.”
With urbanisation and demographic trends driving global demand for housing, institutional investors are increasingly looking to enter the sector and both the Netherlands and the UK are undergoing structural changes.
Moderating a subsequent panel on residential markets, Piet Eichholtz, professor of real estate finance, Maastricht University, asked: why the interest in the sector now?
Lisette van Doorn, CEO of the Urban Land Institute Europe, said there was a point where the residential sector looked like too much work and effort for investors, with management of multi-tenanted assets a dissuading factor.
Jaap van der Bijl, managing director, investor relations, at Syntrus Achmea, said a wider environment of low-yielding investment options had turned the focus on the residential sector where there is a “mismatch between supply and demand”.
Guido Verhoef, head of private real estate at PGGM, said residential assets provide stable income, low risk and diversification, while Dietrich Heidtmann, head of international capital markets at GTIS Partners, said he was “not sure it’s a new trend or just getting more attention now”.
In the US, attention has been “almost exclusively focused on multifamily”, Heidtmann said. However, single family has been completely ignored by institutional capital, he said, adding that 82% of families live in a single-family home. “It’s a very attractive sector,” he said, pointing out that, of 16m single-family homes in the US, just 2% are held by institutional investors.
PGGM, said Verhoef, sees opportunity in the UK, where it recently teamed up with Legal & General on a £600m (€764m) joint venture. He said the UK has some way to go when compared with the situation in Germany. Working with local authorities could provide an opening, he said.
Verhoef said he was pleased that the fund’s domestic Dutch residential market has now opened up to international investors.
The ULI, van Doorn said, feels the public and private sectors need to work in partnership for cities to succeed and for demand to be fulfilled. “There’s a lot to be done,” she said. “Cities need to have a vision and need the collaboration of public and private.” The public sector still has a role to play, she added. “They’ve really thought hard over the long term – you need a long-term vision.”
Earlier in the day, Mahdi Mokrane, head of research and strategy for Europe at LaSalle Investment, echoed some of the points already made about affordability of housing. It is the biggest threat to cities, he said during a session on risk management.
The risk of Brexit, the outcome of the US elections, the unwinding of debt in China and a “brutal interest rate normalisation” were all factors for investors to pay attention to. A 25bps rise in interest rates is not expected for five years in the euro-zone and four years in the UK, with negative implications for stocks, he said.
In a subsequent session chaired by LaSalle Investment Management’s global head of client capital, Jon Zehner, risks varying from currency to political – including the US elections – were discussed.
Christophe Schumacher, managing director of institutional property at Union Investment, said there was fear among investors of investing in the wrong market.
“Style drift,” said Martin Towns, head of capital solutions at M&G Real Estate, was the biggest potential risk for investors.
Co-panellist, Will Rowson, partner at Hodes Weill, agreed, warning against “chasing yield by going off-pitch”. He said “investors should be careful of that”, adding that there is a general “reticence to take risk”.
Increased communication between investors and managers and improved governance has helped, said George Pappadopoulos, director, total portfolio management at Canada Pension Plan Investment Board. “There is more discipline now and people have not pushed things,” he said, accepting that institutions are at risk with investors “bidding pricing up”, creating some concern over investment entry points.
Leverage risk, with non-traditional lenders less conservative, was also considered. Rowson said that while loan-to-values are rising, he had not seen leverage beyond 70%. “The temptation is to take more risk because you’ve promised to deliver returns,” he said. “On the fringes, it could get overheated.”
Interestingly for those attempting to predict the next market downturn, the panel varied in its predictions, with Schmacher not expecting an event for seven to 10 years, and Rowson two to three years.
Pappadopoulos said: “We already have slowed down. Minor stabilisation is okay. Returns could be flat and that’s a good thing for the market.”
Rowson said there is a need for balance and working out “which risks could kill your returns”.
APG to ‘scale up’
According to the head of real estate at the Netherlands’ largest pension fund group APG, the biggest risks today relate to geopolitics and interest rates. Fortunately, the €490bn APG is in the position of not being forced to invest in real estate if does not feel comfortable, Patrick Kanters said.
In an interview conducted by Eichholtz, he said any new investments would most likely be achieved by expanding existing holdings and partnerships. “We don’t rule out any new investments, but we are unlikely to be seen at an auction for a super-prime shopping centre,” he said. Instead, the asset manager is “trying to scale up investments” and “create new platforms”.
Kanters gave, as an example, hotel operator citizenM, which started in 2008 and now has 3,000 hotel rooms under development.
APG is willing to start with “small tickets”in the range of €75m to €100m, Kanters said, but only if these investments are scaleable and capable of reaching its “sweet spot” of between €300m and €900m.
Kanters later explained that APG has been selling many of its non-core assets but that “on a net basis, we still add money”. He said: “We are very keen on trying to purely focus on the best assets in the best growth cities in the best sectors.”
APG is in favour of taking an integrated approach, which includes being able to take development risk, he added.
Responding to a question about whether working with developers offers synergies or is “dangerous”, Kanters suggested that developers should not be feared if they are developing for their own portfolio and have money at risk. In this case, “they are no longer cowboys” developing assets only to be sold, he said.
Need for data
Kanters also said more “bottom-up, asset-level information” is needed, when asked about what sort of research was missing in the real estate market.
He cited GeoPhy as a company “looking into that bottom-up approach” and said that this type of information would be a welcome addition to the research currently available.
Also surprising – and disappointing – according to Kanters, was the continuing focus on country and regional forecasts and rankings. “Honestly, I’m not very interested in these outlooks per country, per region,” he said. “It’s all about the city – or actually it’s not about the city even, but locations in that city.”
Olivier Rousseau, executive director at France’s Fonds de réserve pour les retraites (FRR), also told the conference he had found the lack of accessible data a big challenge when moving into illiquid asset classes.
He said he had begun by comparing the new set of investments with other more liquid asset types. “We face a very serious conceptual issue going into illiquids,” he said.
Last November, the €36.3bn national pension reserve fund was given permission to invest €2bn in French illiquid assets, including infrastructure and real estate, and allowed to invest beyond the previous expected closing date for the fund of 2024.
Rousseau said the FRR’s teams were proud of the way they constructed the fund’s portfolio, but that the dearth of available data on illiquid asset performance was “a minefield”.
Previously, the fund had been working with easily accessible data because its portfolio consisted almost solely of liquid assets, he said. In order not to jeopardise the portfolio construction process, the FRR had decided, at the implementation phase, to put in illiquid assets as proxies for liquid asset classes, he said.
“For example, with infrastructure, we say equity structure behaves like two-thirds of investment-grade debt and a third of equities, and for real estate, we determined it is half equities, and half investment-grade debt,” he said. “That’s not the final word, that is a starting point – it needs some refining.”
However, he said that with illiquid assets, the FRR would never achieve the satisfactory process that it had with purely liquid assets.
Isabelle Scemama, head of the funds group at AXA Investment Managers-Real Assets, told the conference the industry had made some progress in addressing the difficulty of assessing the performance of real assets, with MSCI, for example, offering good proxy reference. “Nevertheless, in the end it’s the low transparency of the market resulting in asymmetric information,” she said.
Scemama said AXA Investment Managers’ aim was to review 80% of the markets, whether in debt or equities, and then it was possible for the team to create its own database. But she said this market would never be easy to benchmark. “Because we are not talking about assets that are traded on the stock exchange, the values are made based on appraisals – and appraisals will always be approximate.”
Institutional investors are committed to increasing their exposure to real estate in Asia Pacific despite the expectation of short-term volatility, delegates heard.
Rita-Rose Gagné, executive vice-president for growth markets at Ivanhoé Cambridge, said: “It’s going to be very volatile, but capital is coming back in, because there are too many long-term trends there and you have to enter these long-term markets long before those trends really materialise.”
“Because we are not talking about assets that are traded on the stock exchange, the values are made based on appraisals – and appraisals will always be approximate”
Gagné was speaking on a panel focusing on Asia Pacific real estate, moderated by Petra Blazkova, senior director of analytics for Asia Pacific at Real Capital Analytics.
Gagné said Ivanhoé Cambridge – which won Best Global Investor at this year’s IPE Real Estate Global Awards – currently has between 7% and 8% of its real estate portfolio invested in the Asia Pacific region, and aims to increase this exposure to 10-15% within the next two to three years.
Geographically, the subsidiary of Caisse de dépôt et placement du Québec, plans to expand its property investments to Indonesia and the Philippines and then to Australia, she said.
Nicholas Loup, chairman of ANREV and CEO at Dymon Asia Real Estate, told the panel that the long-term prospects in Asian real estate were very strong.
“The long-term drivers in China remain very strong and are very well underpinned,” he said. “There are some adjustments going on in the short term, but the medium term is undoubtedly strong.”
However, François Trausch, who recently became CEO of Allianz Real Estate, said that, because it was not very easy to invest in Asia, investors could not be too ambitious about the allocations they can achieve there.
“I think the long-term market is very good but you are going to have this short-term volatility that will not show up every quarter,” he said. “You have to try to try to navigate through this short-term volatility and keep in focus that the reason you go into China is for the 10-year outlook.”
Allianz Real Estate has a 5% target allocation to Asia, he said, and that for a European-based investor, the allocation to US property should be three or four times that.