Editor's Choice: Disruptive forces

One of the more memorable quotes that has stuck in my mind from the line-up of the good and the great at the annual ULI Europe conference in Paris this week is the analogy Henry Cheng, CEO of retail developer Chongbang Group, made during his introductory address.

Looking at real estate is like looking at a painting by Picasso, he said. ‘We all see different things and have different views.’

Like Cheng, Sergey Riabokobylko, CEO and managing partner at Cushman & Wakefield Russia, also attempted to build a cultural bridge between east and west during the same panel which focused on views from three continents. In the run-up to his ‘seven-minute presentation for my sins’, Riabokobylko cited an anecdote that described his predicament in talking about the current state of affairs in Russia.

In 1991, during a visit to Moscow, former UK prime minister John Major was given the opportunity of a brief meeting with the then-Russian president Boris Yeltsin. Aware that Yeltsin was pressed for time, Major asked him whether he could sum up in one word how Russia was doing at that moment. Yeltsin had to think for a moment, and then said: ‘Good.’ Unsatisfied with this answer, Major asked Yeltsin if he could maybe say in two words what was really going on. Yeltsin didn’t hesitate. ‘Not good,’ he replied.

The incident describes in a nutshell where real estate investors find themselves at this point in the cycle. It may seem as if there should be a huge gap between 'good' and 'not good', but it has become something of a sliding scale. The good thing about the current market is that there is a tsunami of capital heading for European real estate that will not abate any time soon as long as interest rates remain low. And if Eric Chaney, chief economist at Paris-based insurance group AXA, is right, they are set to remain low for at least another two years with quantitative easing expected to continue beyond September 2016.

A GOLDEN TIME TO INVEST
No wonder some real estate investors like Jack Chandler, chairman of US alternative asset management giant Blackrock Realty Advisors, is saying this is a ‘golden time’ to invest in real estate.
That may sound good but there is a shadow – and it seems to be lengthening. Later on during a panel discussion entitled ‘Follow the money? Global real estate capital’, Chandler noted that real estate is the ‘least bad’ of a series of not so attractive opportunities. ‘The good news is that there’s lots of money; the bad news is that a lot is competing with you… It’s a much better time to be a seller than a buyer.’

Indeed, bubbles are already appearing in some pockets of the European property market such as the top end of the UK residential market where apartments are selling for £1,800-2,000 a foot. And a number of investors including Charles Graham, principal of London-based opportunity fund manager Europa Capital, and Goodwin Gaw, chaiman, managing principal and founder of Hong Kong-based Gaw Capital are steering away from Spain.

‘I don’t know enough about Spain and I think we may be too late,’ Gaw said. Blackrock’s Chandler echoed this sentiment: ‘There have been some good trades but we haven’t been that confident with the underlying economy.’

THE WORLD HAS BECOME MUCH MORE VOLATILE
But although a large part of the discussion at the ULI conference in Paris inevitably focused on economic issues and fundamentals, the key message of this year’s edition is that there are disruptive forces beyond the realm of even the cleverest minds and most foresighted economists - and these can have a massive impact on conditions for real estate investment.

C&W's Riabokobylko demonstrated the point well in his outstanding presentation on Russia. ‘It’s hard to believe that 12 months ago the major conversations in this same room amid an oil price of $115 centred on the budget of the Olympic Games and whether or not there would be snow at the Olympic Games. It’s hard to believe how circumstances of the last months have thrust the country and its real estate market into a perfect storm.’

The political, economic and social environment in Europe has become much more volatile, ULI thought leaders agreed during a final panel discussion at the event. ‘We will talk about politics for the next 12 months,’ Alexander Otto, CEO of ECE Projektmanagement, told the conference. Pointing to the rise of IS, the conflict in Ukraine, the Greek elections and the issue of the euro, he said: ‘We are living in a much more volatile world and it will remain volatile for the next couple of years.’

‘The geopolitical context is worrying,’ agreed Christian Ulbrich, CEO of JLL EMEA. Asked which piece of news he would be watching out for this year, Ulbrich noted that the world has always had trouble predicting where the next war is coming from. ‘I’ve just come back from the World Economic Forum in Davos and none of the issues that flared up in 2014 were predicted at last year’s meeting. The same will be true for next year.’

SLOW DISRUPTERS ARE THE MOST DANGEROUS
ULI Europe’s new CEO Lisette van Doorn said she was struck by the huge impact that water and disasters can have on our lives. ‘Extreme weather is an issue that more people need to be more concerned about and ULI needs to do more with it too. We have already started with our extreme weather report, now we need to do more with it at the level of the national councils.’

There are huge risks for the real estate sector if it ignores the potential impact of climate change, population growth and globalization, according to Kate Brown, group director of sustainability at Grosvenor Group. ‘There is little certainty and significant uncertainties.’ Slow disrupters are the most dangerous, she said. ‘They give us a false sense of security.’

A sobering message but as always, there were glimmers of hope too at this year’s ULI conference. ‘When the winds of change blow, some build walls, others build windmills,’ Riabokobylko said.

And if all else fails, humour can help ease the pain, even in Russia. ‘What people are saying these days in Russian board rooms,’ Riabokobylko said, ‘is smile, because tomorrow will be better than the day after tomorrow.’

Judi Seebus
Editor in chief