ULI CONFERENCE Geopolitical uncertainties will not slow overall capital flows

Sovereign wealth funds from oil-producing countries may be closing their purses, but overall capital flows to real estate will continue unabated, according to Chris Morrish, managing director and regional head, Europe of GIC Real Estate.

Speaking during a panel discussion on European capital markets at the annual conference of ULI Europe in Paris on Wednesday, Morrish said he didn’t expect the current ‘huge’ capital flows into real estate to stop any time soon. He pointed out that bond rates remained historically low at around 0.6% on the Continent and 1% in the UK.

‘The political situation and the low oil price are creating some uncertainty and there may be a slowdown in some quarters, but there is still so much capital in the world that is being funded by QE and the cheap cost of capital. The direction of where capital is coming from may change, but there will be no slowdown overall.’

Morrish conceded, however, that the perception of risk in the real estate market was changing. ‘Break clauses and lease vacancy represented opportunities until recently…since the turn of the year they are being seen more as threats.’

Long-term perspective
That said, GIC takes a long-term perspective on its real estate portfolio, Morrish said. ‘We don’t have any liabilities, we think in terms of holding assets for 20 years, although we are very performance-focused. But as so far as pricing adjustment is concerned, we are less worried about short-term fluctuations, we can hold through the cycle.’

Yields are very low in a number of leading cities around Europe such as Berlin and Munich, but buy opportunities still exist in markets that are fundamentally good, Morrish argued. ‘There’s always something to do somewhere for a global investor like ourselves. We have a long-term and countercyclical approach…We also try to avoid the herd mentality…The best time to invest is when pricing is low and the market is on its knees. We are investing a lot in Brazil right now. Time will tell whether we’re getting that right, but the market will turn the corner and come good,’ he predicted.

While yields in London and Paris are dropping to levels last seen in 2006, and in some cases, even lower to 2-3%, Morrish contended that Europe’s leading capitals would continue to attract the biggest real estate investment volumes. These markets offer the biggest lot sizes and the highest values, he pointed out. ‘These are the easiest markets for newcomers to Europe. It’s easy to transact in London and not so difficult in Paris. There is less risk there. Can you find suitable opportunities in other markets? Yes, you can. But the first port of call (for global investors) are London and Paris,’ he said.

Mixed-use developments gain ground
Cashflow is key, he added. ‘One of our challenges is how returns will be measured in the long term. If bonds increase over time, we could underperform long term (on real estate) if we get the price wrong today. That’s why we focus very much on cashflows. If you don’t have that, it’s a lot riskier. Long term, we have a required rate of return. Investors looking for a safe haven have a different objective to long-term growth.’

Commenting on the trend of urbanization and densification in many parts of the world, Morris said that Asia was already far more au fait with the dynamics of mixed-use developments and cross-financing of projects. ‘Historically we have had a tendency to separate uses from an investment perspective…The centre of London used to be an example of that. But I think mixed-use offers a benefit.’

Pointing to the Broadgate project in the City of London and King’s Cross, Morris said these developments were leading the way as ‘vibrant’ examples of a more appealing office environment. ‘We’re making these places exciting places to be by mixing offices with leisure, retail and residential.’

Keen on student housing
In terms of real estate segments, Morrish said he remained keen on student housing. ‘We first invested in student resi in the early 2000s when 19% yields were possible. We helped Unite to get into this segment and financed their development programme for students living in London.’

Unite’s student accommodation is not cheap, he conceded. ‘But it’s a good solution for international students and offers quality and safe accommodation with services like internet connections and so on.’

Another niche segment that GIC has focussed on in the UK is senior living. The UK investment did extremely well, he said, as enough people were prepared to pay for it and had the equity to do so from their own homes. In Germany, however, the investment was ‘pretty unsuccessful’, he said, due partly to a lower level of home ownership. ‘There was not the same demand, people did not have the same equity in their homes and the culture was very different. You can’t assume that what works in one jurisdiction will work in other jurisdictions.’