Alex Jeffrey, CEO of M&G Real Estate, sees capital inflows into European real estate from Japan and greater China increasing but warns that the current market upswing will not last forever.
What do you hope for most for your business in 2018?
This year I expect allocations to continue to rise with real assets increasingly becoming a more established core part of institutional portfolios. I expect Asia-Pacific to remain a key driver of not just global economic growth, but also investible wealth, with Japan and greater China being particularly prominent. Regulatory requirements and risk management infrastructure are becoming ever more demanding for small and medium-sized businesses and capital is more likely to flow to those asset managers who are not only able to offer a superior investment capability but also to satisfy investors’ operational due diligence.
What do you fear the most in the coming year?
At such an advanced stage in the cycle, what I fear is the elevation in valuations in certain sectors and markets. Investors should remain disciplined around asset quality, location and fair value. Central London offices are a specific case where valuations are at risk of becoming disconnected from the greater occupational pressure as a result of Brexit. Savvy investors will find increasing opportunities for value in unfavoured sectors if they keep away from the herd.
Will you be expanding or scaling down your business?
We are expanding strongly, with a particular focus on continental Europe and Asia-Pacific, as we continue to become a more global business in terms of people on the ground and the investment markets in which we operate. We are now invested in 27 countries. In terms of sectors, I expect growth in long income offering valuable inflation-linked cash flows, residential offering defensive income and assets benefitting from technological change and changing occupier behaviour and preferences. M&G Real Estate is focused on staying ahead of the curve in the design and sustainable construction of our assets to meet the long term needs of investors and occupiers.
What is set to have the biggest impact on your business and what will trigger the next cycle in the European real estate industry?
There is a danger that the market convinces itself that the cycle will go on forever. It won’t – all cycles come to an end either through natural causes driven by underlying economics or a specific occurrence. A global recession would certainly change the cycle. With China ever more impactful in the global economy, a more likely trigger than previous cycles is any problem in its economy, such as in the banking system. Just as likely, however, is something from left field that no-one predicts – so the more relevant question is how to protect yourself in the event of a downturn – and that is all about resilience of income, quality of assets and proper diversification on multiple dimensions.
