As the annual sprawling property convention took up residence in Cannes once more, much of the talk was focused on a land located some 200-300 miles to the west. Spain cropped up in conversations more than any other European country and this summed up at the mood at MIPIM in 2014.
Last year’s event was about the possible return of risk appetite, despite the possibility of a triple-dip recession in Europe. Spain was largely a no-go area.
But this week it was about how to compete in an unprecedentedly fast-moving market and not to miss out on opportunities.
The opportunity in Ireland had come and gone in the blink of an eye. And so all senses were focused on the biggest of the PIIGS economies, Spain and Italy. Anecdotes about multiple bidders in the former suggest many believe the story in Ireland will be replicated.
But the fundamentals in Spain (which has a much larger economy and real estate market than Ireland) are questionable. One investor, representing a large North American institution, thought that many of these short-termist “trend investors” would be disappointed. And he was not alone.
Cushman & Wakefield announced its latest global figures on Wednesday, revealing that annual investment volumes hit $1.18trn (€848m) in 2013 and are expected to rise to $1.33trn this year. The last time the trillion-dollar mark was reached was in 2007.
It was understandable that amongst the optimism, many were talking about comparisons with 2007 and were keeping an eye out for signs of market exuberance.
An important difference between 2014 and 2007 is that loan-to-values (LTVs) on new investments are much more modest, although one fund manager said he had been presented with a worryingly exotic financing service whereby all interest would be payable at the end of the loan. It’s only a matter of time before the market starts thinking up new complex debt solutions, he said.
But for the time being it is not leverage that is concerning the pessimists but rather the sheer weight of equity looking to be deployed. Nowhere else was this more apparent than at RE-Invest, MIPIM’s annual gathering of sovereign, pension and insurance funds.
The closed-door event brought together nearly 40 investors, all of whom had differing strategies, approaches and objectives, but many of which had one thing in common: a large pool of capital allocated to global property.
Patrick Kanters, who manages the global real estate business of Dutch pensions giant APG, was one of the attendees. “It is very striking to see first of all how much money is still sidelined to be invested right now,” he observed at the INREV seminar the following day. “They have very different return requirements but seem to be looking for very much the same kind of properties.”
A report released this week by Colliers International highlighted the situation for European investors on their home turf. Competition from sovereign wealth funds and other investors meant they were largely frustrated in 2013 and are likely to shift to higher-yielding property this year in a bid to reach their allocation targets.
At the RE-Invest summit – for which IP Real Estate was an industry partner and where I took part as one of the table moderators – the issue of where to invest capital in such a competitive market was a recurring theme. One Nordic pension fund was being priced out of its domestic market on many occasions, according to its portfolio manager.
Alternative sectors, such as healthcare, hotels, student accommodation and private-rented accommodation, were seen to offer some solutions due to less keen pricing. But they come with their own risks, and, most importantly, would always be limited in size.
Shifting to non-core assets in the traditional sectors is therefore becoming increasingly compelling, but there are risks that anaemic economic growth fails to support value-added-type strategies.
Most investors and fund managers at MIPIM agreed there would be one main key to success in Europe in 2014. The phrase was “speed-to-market”.
Eric Adler, CEO of Pramerica Real Estate Investors, summed it up well when he told the INREV seminar that “the unprecedented wave of cross-border capital” was striking not just by its volume but also “by the speed with which it moves from opportunity to opportunity”.
He said it was leading to “an ebb and flow” of opportunities he had “never seen before”.
Both investors and managers face a dilemma in achieving and delivering speed-to-market. Joint ventures and club deals require investors to have in-house resources and the ability to make timely decisions. Funds that give discretion to the manager are often better at moving quickly, but they take a long time to launch in the first place.
The institutional real estate industry in Europe is in a much more optimistic mood than it was 12 months ago. But popularity can bring its own problems.