Inspiring views

Global investment was a strong theme at this year's IPD European property investment conference, alongside the central need for more and better information. Martin Hurst reports

Exceptional weather conditions in Geneva in May allowed visitors to the city a crystal clear view of the spectacular beauty of Mont Blanc 85 kilometers away. This was an ideal and indeed appropriate setting for IPD's European property investment conference, which was attended this year by around 300 delegates.

Piet Eichholtz of Maastricht University chaired the conference and after a brief introduction from Laurent Ternsien, a managing director at IPD, the conference got under way with a look at the reasons for going global and the challenge of global property investment.

Then Ngee Huat Seek, president of GIC Real Estate in Singapore, asked whether the argument to invest cross-border is really so compelling or are investors responding to circumstantial forces? "Pension funds are looking for alpha but there are also pull factors, namely that markets are becoming more accessible and attractive," he said.
Investment opportunities in Asia he described as "good from far but far from good". 
He added: "We leverage on a small number of local partners, which is very effective. Longevity of the partnership lies in shared expectations. We bring to the table our strategic perspective; they bring their operational expertise. This strategy enables us to scale up without providing additional manpower." 

He continued: "Focus on where you can get results and don't spread your human resources too thinly.We have the ability to cover the whole world but we decided to increase our foreign holdings incrementally so that we would not spread our human resources too thinly. Furthermore we need a ¬flexibile strategy to be able to exploit the opportunities and be nimble."

He added a further note of caution, pointing out that "if you take the attitude that domestic is core and overseas is non-core it will be very difficult to build up large amounts of capital overseas. Local players are better timers."
"The theory behind global diversification is very elegant but it presupposes the ability of managers to combine investments perfectly but there are many difficulties with this," Ngee Huat Seek concluded.

Julius Colman, former CEO of MCS Property, talked about Australian superannuation funds, which had accumulated $1.1trn by the end of last year. "Australia has just a population of just 20 million and 1.5% of the world's assets yet it is the largest investor in US property in each of the last three years, it is currently the single-largest foreign investor in the US and has the fourth-largest fund management industry in the world. Why? Australian superannuation funds held $262bn in June 1996 and $1.1trn as at December 2006. Is this a glimpse of things to come in terms of institutional capital flows from other countries?"

In the next session, looking at the strategic framework for global property investment, Hans Timmer, lead economist and manager of the global trends and development prospects group at the World Bank, suggested that strong fundamentals in the world economy favour a soft landing. "However, the threat of a US recession and of overheating in emerging markets are serious risks," he said.
"The housing market in the US is in sharp decline and commodities prices have peaked."

"The attrition of local versus global markets is where most of the opportunity lies," said Joe Valente, head of research at DTZ. "Capital has become more discriminating but not as much as we would like. "These days everything is delivering a 5% yield, which is ridiculous; the differences in yields in Europe, the US and Asia that existed five years ago have disappeared. Owner occupation rates in Europe are 50% on average so there is no shortage of stock. However a different approach is needed to tease this onto the market."

Valente also pointed to dangers in Poland and Hungary where 95% of the real estate is in the hands of foreign buyers. "So when the froth disappears and interest rates move, capital will leave and yields will jump from 5% to 6%," he said. "This is not being factored into current pricing."

Malcolm Frodsham, director of research at IPD, drew attention to the great spread in European property returns in 2006 and the past 10 years. In 2006 the return in Germany was 1.3% and in Ireland 27.2%, although this compares with a total spread of 35% in 1998. "Property markets are very local and real estate investment is opportunity led," he said. 

Juri Pill, senior vice-president of research at Toronto-based Oxford Property Consultants, stressed that volatility is not synonymous with risk - it can provide opportunity. "Periods of low volatility lead to a mispricing of risk and are always followed by a flight to quality," he said.

He added: "We are not ready to move into developing countries for transparency reasons. Real estate is a local business so a top-down approach is not easy but it can help to determine which markets to focus on and when. This must always be combined with local knowledge and bottom-up real estate underwriting and commercial judgement."

Pill also noted: "We have an A-list of core countries which we use to create scale where good real estate data is generally available and analyses of cycles and drivers is generally possible. We also have a B-list of cyclical countries where transparency is acceptable for core and value-add investments and opportunistic where we apply evaluation criteria at a deal level, wherever risk is properly rewarded."

Timmer of the World Bank pointed out that political risk in some emerging markets is declining and that "there are 20 countries in Africa which are growing year on year. Now the question is what will happen to America. Why are we focusing on markets where the growth will be relatively weak?" 

In a lively panel session after lunch, Jim Clayton, head of research at PREA, talked about the benefits of using property derivatives and how useful they are for gaining international or global equity real estate exposure, especially for the smaller investor.
Cameron McVean, head of fund services at IPD, talked about transparency in the unlisted market. "Estimates of the size of the market vary between €320bn and €785bn, which demonstrates the unequal distribution of information." He pointed out that the market had grown by 120% since 1997, with a significant increase of opportunistic and value added funds, which now account for 30% of the total, as well as sector specialised funds, which have grown by 630%, mainly in the UK. "The growth is due in part to the fact that data is now available for eight countries, whereas in 2001 only the UK and the Netherlands offered this possibility."

Joseph Mannina, executive vice-president of research at US data providers Real Capital Analytics, spoke about the challenges to transparency. "There continues to be a mentality of confidentiality," he said. "There are issues with data availability in that it is slow and out of date, coverage is spotty, and it is rarely accurate or reliable. There is also a lack of standards."

Alasdair Evans, corporate finance director at Hermes Real Estate and chair of the INREV corporate governance committee, stressed that "confidentiality should never override investor interests".

Julius Colman added that with real estate accounting for 50% of world capital but only 8% of allocations, "we can't make it so difficult in terms of information".
In assessing the following morning investment in Asia, Kiran Patel, global head of research and strategy at AXA REIM warned delegates not to underestimate the local characteristics of Indian markets.