Opportunities arising from the current crisis and surprise at the low position of corporate governance in investor priorities were key themes arising from INREV's latest survey of investment intentions. Richard Lowe reports
The results of this year's INREV Investment Intentions Survey threw up a few surprises for a round table of industry experts assembled to discuss the findings.
The panel which was moderated by IPE Real Estate editor Martin Hurst, comprising two fund managers, a fund of funds manager and an institutional investor, was brought together to reflect collectively on the report's findings and to attempt to arrive at some conclusions.
The first major surprise for Patrick Kanters, managing director, real estate, Europe and Asia Pacific at ABP Investments, was that the global credit crunch has not had more of an apparent influence on survey responses.
For ABP, the liquidity crisis and consequent market turmoil and uncertainty has meant the pension fund has readjusted its approach to real estate investment going forward.
"We are a bit more conscious of the quality of underlying assets," he said. "We tend to prefer prime markets as opposed to secondary markets."
More significantly, Kanters revealed that ABP intends to benefit in 2008 from the sorts of opportunities that commonly arise from troubled market phases.
"We have committed capital to the kind of vehicles that can more or less capitalise on the opportunities that we expect will arise in the next year or so," he said.
In fact, the entire panel expected institutional capital to be targeting funds that are able to take advantage of the turmoil and dislocation that is expected.
"What we see from our clients is a continuation of interest in funds that can capitalise on the present situation," said Georg Allendorf, managing director at RREEF. "The most important thing is to set up funds that can take advantage of changing market conditions."
Simon Martin, head of research and strategy at Curzon Global Partners, added that his was one of a number of funds "seeking to capitalise on the dislocation and disruption that occurs as a result of the credit crunch", but was in fact surprised by the level of interest generated among investors.
In contrast, the turmoil at the start of the last decade did not produce anything like today's appetite for opportunism, he suggested.
"The experience of the early 1990s was somewhat chastening," he said. "If you were a manager trying to sell the concept of an opportunistic fund to capitalise on distress in 1991 and 1992 you didn't get an awful lot of shelf space from investors.
"But investors are clearly very switched on to the dislocation and disruption that is occurring because of the credit crunch and that those will present opportunities."
Martin said the development was very positive "from an historic perspective".
He added: "It means potentially the market may correct and find an equilibrium a little faster than when we saw credit conditions deteriorate in previous cycles. It is certainly good for the managers who have been trying to raise money for that particular strategy."
The survey showed that Germany, France and the Nordic region continue to represent the most popular locations in Europe for investors. This was no surprise to the panel.
However, the key question is whether the status quo will change during 2008, and the dislocation and distress currently evident in the UK and Spanish markets, for example, spreads to these regions.
"I wouldn't be surprised if we see a bit of rotation in the geography over the course of the next 12 months as people start to latch on to other people's problems," said Martin.
Allendorf warned that investors should expect "a slow first quarter" this year, after which they will gain "a better indication as to which markets are really becoming attractive".
The panel was surprised that corporate governance did not show up as one of the most important criteria when choosing funds. The issue was ranked in the survey below fees, fund legal structure, target sector, target location, style and manager's local presence, the latter coming top.
"We always give a lot of attention to governance," said Kanters. "It is striking to see in the questionnaire that governance issues for investors were not a high priority."
And Allendorf thought the findings contradicted the trend he has witnessed, citing recent fund manager selection processes as evidence.
"Questions of corporate governance and investment process have always been scrutinised well," he said. "But it seems that the clients tend to take even more interest in these matters and they are much more discussed than they were in the past."
Martin was similarly surprised that investors weren't putting governance right at the top.
"It is absolutely paramount they get the right controls in place for a market that is going to be pretty tough for the next couple of years," he warned.
Peter Dellsperger, head of real estate research and portfolio solutions at Credit Suisse, meanwhile, was surprised manager's local presence scored as the top criterion. Instead, criteria that take into account manager's reputation should be the front-runner, which would include "corporate governance issues, investments processes and so on," he said.
The survey also revealed significant capital was being directed towards Asian markets, one of the findings that met the panel's expectations.
"It is pretty much in line with our analytical findings," said Dellsperger. "The interest in Asia is great."
He added: "Even the mature markets [in Asia] offer better opportunities than European or US markets from a fundamental point of view. I think this is the area with most potential."
Martin added that the survey's evidence of a "shift to the Far East" is reasonably consistent with what has been witnessed in the public equity and public real estate markets. This has been largely driven by the potential for the Asian region to decouple itself should the US economy enter a major downturn.
"If the US comes down with a reasonable bump, Europe is unlikely to escape without getting a bit of collateral damage," Martin said. "But the highest probability of markets continuing to function normally and getting some cyclical upside lies in Asia."
He advised investors that are underweight Asia and concerned about the outlook for the economic cycle over the next 18 months to increase their exposure to the region dynamically and as fast as possible.