Non-listed funds are starting to get their mojo back, the annual INREV conference in Berlin heard last week.
Non-listed funds are starting to get their mojo back, the annual INREV conference in Berlin heard last week.
Money is starting to flow back into non-listed funds after historic lows, even into the value-add and opportunistic segment. Last year, €48.2 bn flowed into such funds, a figure which is expected to increase this year.
'There is clearly a recovery under way,’ said Jeremy Plummer, CEO of CBRE Global Multi Manager. ‘But I don’t expect non-listed funds to recover to 2007 levels.’ However, for smaller investors, non-listed funds and joint ventures remain an important investment tool, he added.
So far the US has led the recovery with the likes of Blackstone churning out fund after fund. Just last month the private equity giant announced that it had raised a record €5.1 bn in six months for its fourth European real estate fund. Meanwhile in Europe, London-based Orion Capital Managers is spearheading a new wave of opportunistic investment by pan-European boutique firms after raising €1.3 bn at end-2013.
Blackstone and Orion’s success reflects a sharp uptick in interest in blind pools, according to Nick White, a managing director at Morgan Stanley. ‘€3 bn has been raised for blind pools in Europe in the past nine months for recovering markets like Ireland and Spain. Investors are taking the view that these markets are poised to recover,’ White said. 'I don’t think such pools will be super long lasting - this window will close,’ he added.
Core is losing its sheen and investors are taking on more risk, partly due to the perception that core assets are overpriced today, noted Jeff Jacobson, global CEO of LaSalle Investment Management. However, investors tend not to invest at the right point in the cycle, he warned. ‘Value-add and opportunistic assets perform best at the beginning (of a crisis) but often underperform after that. But a lot of investors are only willing to take on more risk towards the end of the cycle - and end up dissatisfied,’ he said.
The preference of large investors to have more control (separate accounts, JVs etc.) is the most important factor driving the future of the non-listed funds industry, according to 41% of attendees in response to an electronic poll taken during one of the conference sessions. During another poll, almost 30% said the most important factor was investment performance relative to alternative methods, 6.2% voted for the shift from defined benefit to defined contribution plan, 11.1% said changing regulatory requirements and 3.4% voted costs or other.
Growing appetite for risk vs. regulatory burdens
And while more capital is flowing into value-add, there are still some limits in terms of where banks want to be in gearing terms, according to Charles Balch, head of real estate, international clients, at Deutsche Pfandbriefbank. The strength of the asset management team is also key, Balch said. ‘If someone is buying core, I don’t need to assess their asset management skills as much but when it gets to value-add, you want to know if they can deliver,’ he said.
In addition, the regulatory environment that has emerged since the onset of the financial crisis also creates obstacles. ‘The regulatory environment has come on like a freight train,’ said Jacobson. And it is unlikely to improve, warned Balch: ‘Clearly we live in a very regulated industry. Regulations are becoming more burdensome and we don’t see any change there, really. No-one’s sure what will come out of the ECB stress tests, so we could all be putting the brakes on in July when more comes out.’
There are other inherent dangers, warned Jacques Gordon, a global investment strategist at LaSalle Investment Management. While the quantitative easing adopted by many central banks in the wake of the financial crisis has provided economies with a much-needed boost, the pace needs to pick up for markets to be truly out of the woods. ‘There’s a lot of quantitative easing globally but without velocity, that’s dead money,’ said Gordon. ‘When will that speed pick up?’ Whoever figures that out will be well on their way to riding the next cycle.
Real estate is coming back to life
Nevertheless, the signals for real estate are auspicious, INREV CEO Matthias Thomas said during his opening address. In a homage to Pink Floyd, Thomas said ‘the moment has arrived to kill the past and come back to life’. ‘The flow of capital is moving up to pre-crisis levels. Investor interest is back,’ he said.
Capital flow - and the sizeable war chests chasing real estate opportunities in Europe - was a big theme at the conference. According to Jacobson of LaSalle Investment Management, the top 10 global real estate managers accounted for 40% of all capital raised last year. ‘If you put Blackstone in there, they’d account for a big chunk of that,’ Jacobson said.
However, despite the wave of capital chasing investment opportunities today, there is still a big difference in what ‘real estate’ means to different investors, said Philippa Malmgren, founder of DRPM Group and one-time financial market advisor to former US president George W. Bush.
‘Property is territory,’ said Malmgren. Subsequently, some less well-known asset classes can be a hit with some investors. ‘For example, agricultural farmland is an asset class to SWFs in Asia,’ she said. ‘Even in the UK, rural farmland prices are rising faster than house prices in Mayfair,’ she added. (Prices of good agricultural land in the UK have soared almost three-fold in the past decade, compared with 135% for prime central London prices, according to Savills.)
In a further sign of how difficult it can be to agree on a definition of real estate, conference-goers could not settle on just one definition when they were polled electronically at the conference. Almost 65% of those polled defined it as urban commercial and urban residential, whilst 16% added rural agriculture into the mix, 14% said other and 3.6% defined it as just urban commercial.
Pendulum swings back to Europe
There has also been a seismic shift in the way some investors view their own national markets, Malmgren said, citing Asian SWFs who have started to look more closely at investing in infrastructure on their home turf. Similarly, there has been an increase in the number of international companies moving production out of Asia back to their home markets.
In October, Apple announced that its redesigned Mac Pro would be assembled in the US, not in China. Robots, not people, will account for much of the workforce. And as Chinese wages rocket, some Chinese companies are also looking at moving production elsewhere. All of this trickles down into the real estate sector.
‘It will compel Asian companies to come up with a new business model,’ said Malmgren. ‘Emerging markets are going to have to innovate massively to compete.’
Unsurprisingly, in light of this shift, Europe and the US are back in the spotlight, according to LaSalle's Gordon. He noted that after several years of strong growth in emerging markets such as India and China, the pendulum was now swinging back towards Europe. ‘For the first time in around 12 years, developed markets, including Europe, are having more of an impact on global economic performance - and up there at the top are the US, the UK and Germany,’ he said.
GDP forecasts for 2014 highlight that many European markets are performing better than they were just nine months ago, Gordon added. ‘Money is everywhere - it’s flowing cross border but economic growth is below capacity,’ he said. However, real estate cycles continue to play havoc with investment, he added. ‘How do you play the market today, given that most of us can’t just sit it out for five years? We (real estate) are an asset class now - we don’t have the option of going to zero.’
Economic volatility is also worrying investors, who are especially concerned about the impact of deflation. In an electronic poll at the conference, 82.9% said that deflation was the most important risk factor for real estate investment, with inflation garnering just 17.1% of votes. In addition, investors also need to avoid a repeat of the mistakes that precipitated the financial crisis in 2007, according to Plummer of CBRE Global Multi Manager.
‘Only in real estate do you hear 'core is expensive, I’m going up the risk curve'. In other industries, you’d go down the risk curve! Maybe that explains the volatility out there,’ he added. ‘Today, investors have to be quite careful - there are already some similarities to 2005-2007,’ Plummer warned.
Finding traction
Ultimately, it’s about finding traction, according to one group of panellists at the conference. ‘Has confidence returned? Absolutely, in capital markets,’ said Sonya Sawtell-Rickson, senior director of global multi-asset at Australian fund manager QIC. However, to succeed, investors need to be very flexible regarding their allocations to real estate, according to Peter Pereira Grey, head of property investment at global charitable foundation The Wellcome Trust. ‘People are making money from real estate now when they weren’t a year or so ago. But real estate is highly cyclical and illiquid. Subsequently, we can go to zero or very high with our asset allocation.’
Being flexible about how much you invest in real estate also frees up capital to invest in other areas, such as venture capital, said Pereira Grey. ‘We hope to exist in perpetuity, which is not something that most institutions can aspire to. We don’t have set strategic allocations to real estate, so we are looking to juice up our return from our venture capitalism and private equity business. We are looking for higher returns in private equity than we are in real estate,’ he said.
Other investors are also changing their investment remits. According to Sawell-Rickson at QIC, her firm is ‘in the process of rotating out of some of the core markets’ and is looking more at value-added in Europe, including debt opportunities, ‘to play the dislocation in that market’.
For many investors, including Stéphane Jalbert, managing director of real estate investments at pension fund PSP Investments in Canada, ‘real estate is here to stay as an asset class’: ‘Real estate provides an inflation hedge, so we’ll always invest in real estate,’ he said. ‘We have CAN$ 10 bn (€6.6 bn) in real estate - our target is CAN$13 bn.’
Sara Seddon Kilbinger
Correspondent PropertyEU
See also latest interview with Blackstone's Ken Caplan in the link below and profile of Blackstone and Orion Capital Managers.