GE Real Estate has been in the property business for 50 years. Having invested primarily for itself during that time, it is now set to take the world of investment management by storm - rather late in the day, it would seem, and now facing a depressed market.
Martin Hurst met its recently appointed president and CEO, Ron Pressman - a GE veteran of 28 years spanning several businesses and regions - and his senior European management team, to learn about the rationale behind the new business and GE RE’s broader strategy
GE’s real estate business has come a long way in recent times as it expands steadily into new territory. “In the late 1990s our real estate business was primarily a US debt business,” explains GE Real Estate’s president and CEO, Ron Pressman. “At that point we embarked on two new strategies to expand the business: one was to develop the equity side of the balance sheet and the other was to move into the global capital markets.”
GE Real Estate’s original business was the provision of debt financing, and the business is still predominantly North American. But in other areas things have moved on considerably. “We have a very different business today to that which we had 10 years ago,” Pressman continues. “We have a very global equity business, in 32 different countries around the world, based on 17 different investing platforms, 13 of which represent more than $1bn each of assets under management. It peaked last year at $40bn of investments around the world; in Europe it peaked at $22bn.” The European platforms consist of teams in Spain, France, Italy, Germany, the UK, Scandinavia and Central Europe.
According to Francois Trausch, managing director, GE Real Estate Western Europe, in Paris, “France is now the largest equity platform in the European businesses.”
Some 70% of European companies own their own real estate, while in the US the figure is only 30%. According to Trausch, the European percentage is now declining because companies realise that owning and managing real estate business “is not necessarily something all companies are able to do. We are very active in exploiting that space.”
He adds: “We aim to double our assets under management and establish ourselves as a leading equity player in the French market.”
The central European team, based in Prague, is another key component of GE Real Estate’s European coverage. GE has had an office in Prague for 10 years. In 2004 it shifted its strategy from an acquisition business to a development business, as the managing director of GE Real Estate CEE Central Europe, Karim Habra, explains. “When we started the business we achieved yields of 10% but within four to five years they were down to 5% due to the rapid yield compression that took place in the region,” he says. “So our strategy moved to intensive asset management and development, operating with partners.
“We went beyond the core markets of the Czech Republic, Hungary and Slovakia and invested in Romania and Bulgaria,” he says. “We also have representations in Russia and Turkey. We still think there is growth ahead in these countries.” Concerns have been growing about the inflation pressures building up in some emerging markets - in India and China for example - along with the associated political risk. Pressman is clear that investors must understand what they’re getting into. “If you are going to be an emerging markets investor, you are taking a higher level of risk for an anticipated higher level of return,” he says. “You will also have a higher level of volatility along the way. If you don’t want that you probably shouldn’t be investing in the emerging markets.”
GE Real Estate’s European arm has also seen progress in the development of the company’s debt business, as Michael Rowan, managing director, GE Real Estate UK, explains. “Last year when the market shifted, we changed our focus to buying debt in the capital markets. We are buying the debt books of certain companies and are working with them. Since November we have bought $7bn-worth of debt.”
A key growth platform for GE Real Estate is the launch of its investment management business. “It is a huge marketplace,” says Pressman. “It consists of some $60trn of investor appetite around the world growing organically at 8-10% per year. These investments take the form of either of equity investing, fixed-income investing, hedge funds, private equity or real estate. Today, real estate represents less than 5% of that $60trn but it’s growing due to increasing transparency and, in the long term, increasing liquidity.”
GE Real Estate’s investment management service will roll out in three phases, initially targeting the larger more sophisticated investors. “In the first phase we will offer club joint ventures,” Pressman reveals. “In the second phase, GE will offer funds - again to the larger investors - where GE will also invest its own capital to ensure alignment of interests. The third phase will target all other investors.” The GE pension fund is invested via GE Asset Management. “So that is completely separate,” stresses Pressman.
The investment management market is thronging with players. GE, one of the world’s largest real estate businesses, is only entering the market now. What has taken it so long?
“Good question,” Pressman says. “GE Real Estate has spent 10 years investing for itself very successfully, but we can only have so much GE balance sheet allocated to real estate. So now is the time to open the doors to third-party investors. Ten years ago we didn’t have the capability or the track record; now we have demonstrated a track record as an equity investor which we can offer to prospective pension fund clients. “I don’t think any of us would argue that we could have moved into investment management five years ago and it might have been a good thing to do,” Pressman continues. “But the other perspective is that we have become a very significant earnings business for the General Electric Company, generating about $5bn of profit in the last decade. So there was no particular need to go to outside investors.”
Since many pension funds are waiting on the sidelines as the credit crunch continues to bite, timing for the launch of the investment management business might be unfortunate. How have the current difficulties affected GE Real Estate’s strategy going forward in terms of going into third-party management in terms of the scope and scale and timing?
“I don’t think our strategy has changed, Pressman says. “We will always have markets that go through phases of dislocation but that doesn’t get in the way of long-term strategic thinking. We will continue to pursue our capital-raising strategies into the future, even if they progress a bit more slowly than perhaps we might have forecast two years ago. Work will continue on the same strategic plan over the next decade.”
There are concerns that the current banking crisis might last so long that real estate fundamentals will be affected as well. But Pressman is optimistic. “Although it is a bit of a patchwork quilt around the world, we still believe that real estate fundamentals are sound,” he notes. “Supply and demand dynamics are in pretty good balance. There are some markets where rental growth has stopped but in many markets around the world rental growth iscontinuing.”
The UK has led the cycle and has been more affected by the credit crunch than other European countries. “The City might be under some stress in the next year or two,” says Rowan. “The lack of lending is affecting corporations, which may impact occupier demand. But overall real estate hasn’t changed that much.” Meanwhile, in Stockholm there might be trouble ahead, as Lennart Sten, managing director of GE Real Estate’s Nordic Northern Europe operations, explains. “Overall in Sweden there is still enough liquidity at the moment,” he says. “Historically Sweden is 12 months behind London.”
In spite of the gloomy backdrop, investor allocations to real estate are holding up and are set to increase in some cases.
Pressman believes that investors should stick with the asset class. “From the 1990s, real estate was trading at a 200 basis point spread over treasury bonds,” he notes. “From 2000 to 2007 we saw unprecedented yield compression in the real estate markets. But if you are a long-term investor and invested at the top of the market, the situation is not necessarily any different to holding a bond during a period of time until that matures.
“Liquidity will eventually return and the real estate markets will rebound but we
don’t expect the markets necessarily to go back to the incredible liquidity levels which we experienced in the 2004-07 period,” he adds. “As liquidity returns there will be a great real estate investment opportunity as we emerge from a period of tremendous supply constraint with overall good financing. Of course the unknown factor is how difficult the economies around the world will be.”
As for the timing of a recovery, amid generally sobering predictions, Pressman is cautious. “By mid-2009 we should start to see some recovery as the impact of the monetary policy actions in the US is felt,” he says. “There will be very slow growth in markets like the US and some of the more established European markets,” he says. “There is no reason to think the central European markets will see a dramatic downturn, and Asia looks fairly robust. By 2010 we will see a modest recovery in the US, and Western Europe will follow suit - indeed most markets around the world will either be in recovery or solid growth mode. We think that investors will become more active again in 2010.”
Inflation has moved to the fore as a major concern that might prolong the downturn. Pressman considers the facts. “If you look at the overall rate of inflation in the US market you will see three major inflationary pressures - wages, housing costs and everything else,” he says. “Wages exert no inflationary pressure in the US. Rental rates are the proxy for housing inflation, and there is no inflationary pressure there. The only inflationary pressure is in fuel and food prices, which are not the heavyweights of inflation; wage and housing costs are much more heavily weighted in terms of inflationary pressure than fuel costs, which do appear severe as far as the average consumer is concerned.
“So the actual inflation pressure in the US is viewed to be relatively modest right now, despite what you see in the press.” By way of summing up, Pressman offers a guardedly optimistic view. “Overall, we’re playing through with our customers in a tough market environment. We are working with them to support strategically important transactions, ones that really meet their long-term needs,” he maintains.
Update: Last month, GE Real Estate announced that Mark Hutchinson, who had headed Asia-Pacific operations, will become president of the newly created GE Real Estate International. In this role, Hutchinson, who was unable to attend IPE Real Estate’s interview session, has responsibility for Europe and Asia, reporting to Pressman.
Mike Rowan, the UK leader, has moved to the US to run GE Real Estate’s Americas’ Equity group.