If debt was the word on everyone’s lips at Expo Real this year, participants still found time to discuss Germany, the US market and sustainable real estate.
The complexities of the German market were on the agenda in fine detail. In addition, as IPRE editor Richard Lowe points out, Germany is probably the best place to source financing. Despite a number of global participants – including the Abu Dhabi Investment Authority – and sessions on growth markets such as Brazil, the German market featured prominently.
Not only debt and regulation but also changing demographics are significantly affecting the contours of the German real estate market, one session audience heard. As rural depopulation reduced local demand, and public concern over PPP projects made future infrastructure supply difficult to quantify, the biggest impact was in office, student accommodation and retail as changing work, studying, and consuming patterns altered demand for the asset sub-classes.
Still up for debate is how investors can best shift their focus on sustainability from good intentions to capital commitment. Erasmus University professor Michael Braungart, opening a conference on sustainable investment, urged the industry to recast sustainability as a quality issue, rather than a moral one. “What you do with all this eco stuff, this green stuff, is make your customer your enemy,” he said. “It’s about quality, not Mother Earth.”
Despite a trend away from sustainable asset management towards whole portfolio management, the debate raised familiar questions. Should the industry wait for a benchmark? Will the private or public sector drive sustainability? Above all, who pays?
Tatiana Bosteels, head of responsible property investment at Hermes Real Estate, which manages portfolios for investors including the BT pension scheme, argued that EU plans to spend €1.5bn to meet climate-related targets over the next five years would create significant opportunities for investors. In non-European markets, such as Australia, the public sector is likewise making the running by setting sustainability as a requirement in the development of public-sector real estate assets.
Yet Michael Creamer, UK deputy managing at CBRE, pointed out that, even if governments have an interest in supporting sustainable real estate investment, their enthusiasm did not necessarily extend to landlords of tenants. “The landlord doesn’t get the benefit and the tenant doesn’t want to pay for it,” he said. “You have to work with them to convince [tenants] it’s useful,” allowed Reinhard Kutscher, management board chairman at Union Investment Real Estate, which this year completed a green analysis of its 300-asset portfolio.
What remains unclear is whether a market premium will emerge in European markets for green buildings. According to anecdotal evidence from Frank Hovorka, director of sustainable real estate at Caisse de Dépôts, it already has: he knocked down the price of a recent acquisition by 5% because of doubt over the building’s lifespan, and he claimed some occupiers had cited a ‘green’ lease as a condition of extending their tenancies.
Whether investors should wait for a single industry-accepted benchmark remains moot. “We operate in a market where a lot is about instinct and expert knowledge,” said Bosteels. “We’re not seeing the evidence in valuation data yet, because it’s retrospective but at least with a benchmark we can go and check what others are doing.”
Meanwhile, the questions for US real estate panellists was where to find value. Francis Lively of the Kuwait social security fund said he identified a correction in the retail sector 18 months ago and was shunning major malls for grocery-anchored and high-end assets. “It’s hard to find stuff that meets the demands of investors,” he said.
Elsewhere it was a question of betting on likely income growth. Christoph Kahl, principal of real estate fund manager Jamestown, said investors’ ability to influence only income growth meant he was looking for – primarily retail – assets with potential, and an exit. “The question is, where is the next Chelsea?” he said.
Meanwhile, Leonard O’Donnell, CEO of insurance subsidiary USAA, saw opportunities in providing debt to ventures that had survived the downturn but without capital. “I’m a big fan of the recapitalisation business,” he said.
Debt was again in evidence in the session on what European markets could learn from the US. Unsurprisingly, debt emerged as the main topic. According to O’Donnell, there is a “tremendous availability” of debt in the US market. “Borrowers are running beauty contests for debt quotes. They’re getting them not only from insurers and banks but from private funds that need to deploy capital in with a better return than with treasuries.”
But only up to a point. Although Kahl acknowledged a broad spectrum of debt for core and core-plus, there was less available for development. Even so, he admitted construction financing was more available than it had been a year ago, with both Bank of America and Wells Fargo active in the market.