REAL ESTATE – The Pension Real Estate Association’s Spring Conference, organized around the theme "Public Real Estate and Private Market Implications," brought together almost 700 professionals for two days of discussions.
The keynote address was given by Mike McCaffery, managing director and CEO of Makena Capital, which he co-founded after leaving Stanford Management Company.
"We’re big believers in real estate," McCaffrey said. Makena has around a 16 percent allocation to real estate, at the high end of the scale for endowments and foundations, which range from 5% to 20% allocations to real estate.
Later sessions emphasized the importance of partnerships in real estate investing, for example, in deals with public operating companies.
Marjorie Tsang, assistant comptroller, real estate investments, for the New York State Common Retirement Fund, stressed that the fund is a "big proponent of the joint venture structure.
David Henry, vice chairman and CIO of Kimco Realty Corporation, advocated marking a large co-investment, and going for a long-term hold, saying that this increases the alignment of interest with the joint venture partner.
Downsides to the joint venture model, noted Field Griffith, director of real estate investments for the Virginia Retirement System, include concentration risk, avoided in the fund format.
Today’s environment, in which speed is essential, is fertile ground for the use of bridge equity in facilitating the acquisition of major property portfolios and real estate companies. In such fast deals, the relationship between players has to be sound. The market for bridge equity has evolved over the last three years, and the limited number of users includes Tishman Speyer and Lehman Brothers. However, it has facilitated key deals, including Beacon Capital Partners’ purchase of the John Hancock Tower and related properties for $910 million.
Susan Doyle, investment manager at GEAM, explained that bridge equity is a hybrid product. Although it is a co-investment with a fund, the investing partner has less say that it would in a joint venture relationship.
Working with the right sponsor is key. "You want to underwrite the real estate and the sponsor," she said.
For the sponsor, reputation risk is paramount. "We cannot afford to have a deal that is not successful," said Alan Leventhal, chairman and CEO of Beacon. "Our reputation is on the line – and we are also the largest investor in the fund."
Yet Leventhal believes that a bad deal is inevitable. Bridge equity calls for great discipline in looking at the transaction and the underwriting. "The risk is that bridge equity will get used too often, people will get too short-term, they will let standards slip and lose that discipline." But although it is risky, expensive, and hard to classify, bridge equity is here to stay.
The globalization of real estate investment was also a hot topic. For all investors, globalization adds a new dimension to REIT investment. In contrast to the mature market in the US, in Asia there has been an astounding increasing in trading volume, pointed out Ritson Ferguson of ING Clarion. In 2001, The US, on the other hand, will continue to see privatizations. He likened the wave of privatizations to "a natural Darwinian process."
Ferguson maintained that in three to five years, the US market will amount to around 35 percent of the global market. This is less than today, yet this decrease is due to outsize growth in Europe as well as continued growth in Asia, rather than any shrinkage in the US.
