At his first EXPO Real as CEO of AEW Europe, which he joined in March after 15 years with Axa REIM, Christian Delaire takes the upbeat sentiment with a pinch of salt, as he explains to Martin Hurst
During his time with Axa Christian Delaire rose rapidly through the ranks to become global head of fund management involved with the overall strategic direction and growth of the company.
For some time now the real estate industry has been crying out for direction and growth. There has been much talk of distress in the market but so far little evidence of it as banks have preferred not to become asset owners and have therefore been reluctant to act on loan-to-value (LTV) breaches. But there are other concerns as occupier demand continues to exert downward pressure. "I believe we will see distress in the market," says Delaire. "If interest cover (ICR) is not maintained banks will become nervous. The main question to consider is the risk of an ICR breach if tenants default."
The mood at EXPO Real was notably more upbeat than last year but Delaire believes this is misplaced. "You can sense some optimism as you walk the corridors but I think it is much too premature. The fundamentals of the real estate market - notably tenant demand figures - are not always rosy.
"There is still a lot of money to invest, so we will not see a repeat of the last crisis because some sellers will really be able to sell. But if you need to sell now you are in trouble because there is still huge pressure on pricing. If you can be patient with your existing assets - hold out and manage."
Investors with money to spend still need the banks to invest, so what is the outlook for lending? Delaire stresses that leverage is still available. "When I started 15 years ago all transactions were done without leverage and that is still possible, so we should keep that in mind. We have funds which are making acquisitions and we can still obtain financing for this. It is a question of margins: financing at 60-65% is still possible - but of course it is more expensive. It is also more a question of who the banks trust."
Many investors are still waiting and most of those that are not are moving very cautiously. However their mood is now more forward looking. "A year ago when we spoke to investors about new funds they were interested but had other priorities," Delaire explains. "Now investors are ready to consider new ideas. Of course they want to be comfortable with the product, with the risk management guidelines, with the track record of the asset manager and the teams. There are difficulties in the case of specific portfolios because there are ongoing discussions about their value but they're happy to consider new projects provided there is clarity about asset type, location and risk management."
As the balance of power has shifted in favour of the buyer some managers comment that investors want too much control. "We are seeing more club deals today where investors want more say in how the fund is managed - especially regarding liquidity," Delaire notes. "Problems arise when investors in discretionary funds become intrusive without being equipped with the appropriate expertise. However I think they understand this is not the right solution."
Another consequence of the fall in demand relative to supply is consolidation among fund managers. "I am sure we will see more concentration in the market," Delaire says. "The industry mushroomed with small players starting up everywhere - this is now over. The largest players and the small very specialised players will survive the downturn. The intermediate market, which offers neither specialisation nor economies of scale, won't survive. I think and hope that a sufficient number of players will remain so investors can diversify their choice of manager."
The losses suffered by investors have prompted the authorities to add to existing regulation but Delaire stresses that this should be applied selectively.
"Regulation is useful for retail investors because they need to fully understand what they are investing in," he says. "For the disciplined institutional sector which follows best practice procedures and informs their managers about their investment needs, regulation isn't necessary. The EU's draft Alternative Investment Fund Managers Directive (AIFM) directive makes no sense - investors will tell you they are grown up enough to make their own investment decisions. Another problem with regulation is that by the time it comes into force is it still relevant? You may have to live with rules that have come from nowhere for the lifetime of the legislation - maybe 10 years. But we do need something like what INREV is doing with regard to best practice and investor involvement in decision making."
If investors are to develop in terms of investment decision making one of the major areas of focus will be risk management. "The key question is diversification by country, sector and tenant base," he says.
Regarding lessons learned, Delaire stresses that we should not try to be too clever. "If nobody understands a product there will be issues with it. At the same time we also need to be equipped with both financial and real estate expertise."
Delaire points to the importance of sensitivity to the more minor market signals. "We should listen to conversations about the level of pricing in the market," he says. "This helped us to stop investing at the right time in the cycle. We have a fund in which we had spent over half the equity and investors asked us why we stopped investing. Our answer: we decided to listen to early signals and stopped early. Now that the market has moved on we are ready to start investing again."
So where should this investment be directed? Windows of opportunity are opening - and closing again. "It's a fast moving environment and at the moment we need to operate opportunistically," says Delaire. "There were some opportunities in the UK which we have now seized. We are still positive on the UK but the large number of funds focusing on the UK will have an impact on the pricing so the market will be less interesting in a few months. The UK will remain the big market but the 10% yield opportunity is over."
AEW Europe is also focusing on opportunities in France and Germany. "In both countries we focus on the big markets; elsewhere the approach is opportunistic, deal by deal. Our main areas of interest in these markets are offices and logistics."
Delaire notes that Spain is very difficult because the whole economy is linked to real estate investment and the economy is in sharp decline. "So it will take years before the Spanish market recovers," he says. "That said there are opportunities in great locations where the sale is distressed."