IPE Real Estate asked some of the leading managers for their views on some current issues facing investors and the market in general...
1. Which steps should the investment management industry undertake to rebuild the trust of institutional investors?
2. Which products will be in most demand from institutional investors over the next three years?
3. Is additional regulation required for the financial system and if so in what form? What is your view of the draft EU AIFM directive?
4. Which three markets are likely to lead the recovery and when do you expect these markets to bottom out?
Head of European funds
ING Real Estate Investment Management
1. The industry needs to continue working on further improvements in transparency, reporting and corporate governance, through organisations such as INREV, to improve the confidence of institutional investors. However, we would also argue that trust has been lost only in those managers who have overstretched themselves and didn't have the financial and management resources to weather the storm.
2. This is very difficult to predict. Investors have become more risk aware, so core investments will most likely continue to be in favour, although the constant demand for higher returns means that alpha creation through active management in value added and opportunistic strategies will also attract capital.
3. Corporate governance is, of course, of vital importance, but we are not sure more regulation by government is the answer and it could be that home-grown industry solutions are better. We are adopting a wait-and-see attitude to AIFM.
4. Following the correction in capital values in the period between 2008 to 2010, we expect markets to stabilise and future unleveraged total returns to start to look relatively attractive, largely due to the prospect of higher income returns. It is noteworthy that towards the end of this period - following a more severe correction in capital values in the short term - countries such as the US and Japan are expected to start to outperform other markets. Pricing in some areas of those markets that have experienced the sharpest corrections is already starting to look attractive, but we expect the real momentum in investment returns to start building in the US and Australia from 2010, closely followed by the UK and Japan, with markets in parts of Continental Europe lagging these by a year or so.
President and chief investment officer
Morgan Stanley Real Estate
1. Increased communication and transparency
with investors, and the application of mark to market accounting treatment are important steps the industry can make. The marking to market of investments and the timeliness of disclosure enable investors to have a clear understanding of their
2. Liquid vehicles will continue to be most important. We're seeing a tremendous amount of money coming into new and existing listed vehicles on the public markets, which tend to move in advance of private markets. Access to debt financing in all forms will be crucial to real estate owners in the coming years. Investors should position themselves to take advantage of the lack of supply of debt capital at a time when a surge of debt maturities will lead lenders to underwrite to more conservative terms, and the CMBS markets, which accounted for over 25% of all lending in 2006 and 2007, are no longer accessible.
4. China has begun recovery from a capital markets perspective and is enjoying very strong liquidity due to government stimulus packages. In developed markets, financial services cities like New York and London were hardest hit but as the financial services industry recapitalises and begins to move towards recovery, expect these markets to attract significant capital flows as they continue to be the deepest and most liquid investment markets in the world. As the recovery unfolds, international office markets with supply limitations and stronger demand drivers like Sydney and Washington, DC will be out in front. Finally, in terms of property sector selection, expect multifamily and industrial properties to most likely recover first.
Global head of research, strategy and business development
AXA Real Estate Investment Managers
1. It should be no different from what it has always been, which is openness and transparency. This will allow for a better understanding of risk management and services offered by the manager and cater for appropriate governance and alignment of interest. A manager/investor relationship is a partnership and successful partnerships works best when there is clear communication and understanding from each others perspective. Both have a duty of responsibility and therefore accountability to make sure this works.
2. Markets are evolving fast, and in times of huge dislocation and distress investors should flock to the two ends of the spectrum. There will be those who should seek to reduce risk and as a result, look for stable, low volatile, core real estate products. While there will be others who could be more opportunistic and be willing to take the risk to capture some potential higher returns (but commensurate with higher risk). A ‘barbell' real estate strategy would be the most appropriate for the next three years.
3. In respect of the forthcoming EU Directive on alternative investment fund managers, we are generally supportive of this movement. There are many positives such as its aim to improve transparency into the industry and the future development of the ‘European passport' concept. The latter is particularly beneficial as it would allow authorised fund managers to market funds across all 27 EU member states by sidestepping national regulations. For example, a fund regulated in France could be marketed to all investors across Europe without the need to have it registered in the local territories where the investors reside. This increases the choice for investors and breaks down barriers that result in restricted investment vehicles. However, as with any directive, a lot of work needs to be done and at this stage in the evolution of the draft, there are more questions than answers. (See news analysis on page 6 for a full explanation.)
4. One obvious answer is the UK market. At the prime core end of the spectrum, capital values are already adjusting upwards. Secondary type stock is still falling in value but that's where the opportunity exists for higher returns if you can get your selection right. This is followed by the Spanish real estate market, despite some very weak economics. In a lot of cases the occupier market has reacted quickly where we have seen strong double digit rental values falls feeding into valuations. Together with strong cap rate adjustments, capital values are down 50% or more. France exhibits some resilience and therefore may not show strong recovery potential but will come across as a stable market in demand. The bottoming out of real estate in general is likely to occur during the years 2010/11. There will be leaders and laggers allowing the opportunity to diversify real estate exposure.
Chief investment officer
Aberdeen Property Investors
1. Asset managers need to offer transparent and understandable investment processes and products and keep investors informed. Processes also need to be consistently applied so that there is no surprise if a product under- or outperforms given a certain market environment. A successful long-term investment process needs to be robust, but it should also accommodate changes in market circumstances. A more proactive approach to the use of debt in property funds is needed, as many of the current performance and liquidity problems are linked to the effects of leverage.
2. In the short to medium term, the UK property market looks interesting, particularly for non-sterling investors. However, our long-term view remains that the demographic profiled and urbanisation trends in Asia and some emerging markets mean that the relative importance of these regions to the global economy and asset returns can only increase.
3. As a global asset manager we anticipate greater consistency of approach by national regulators through increased co-operation and sharing of data, facilitating orderly markets on a global basis, to underpin investor confidence. The draft AIFM Directive is a significant step toward a consistent regulatory approach for non-UCIT funds in the European Economic Area. While recognising the benefits that consistent ‘cross border' regulation would bring, to be effective regulation should build on sound market practices and appropriately recognise the diversity of risks presented by different asset classes and markets. Through constructive discussion and debate we anticipate that the draft AIFM Directive will better recognise the diversity of risks presented by asset and markets.
4. We expect that prime commercial property markets in the UK, France and Norway will be among the first to bottom out in terms of their capital values stabilising. Indeed for the UK, there is already some evidence that prime yields have stabilised and that some yield compression can be expected over the coming quarters. Both France and Norway are expected to hit bottom at the beginning of next year. As a general trend, we expect that capital values will stabilise well ahead of rental values, as letting markets will continue to struggle until sustained economic and employment growth resumes.
Managing director, global business development,
1. Significant steps towards rebuilding trust have already been taken by some managers, through canvassing their investors' opinions regarding issues that have arisen and responding accordingly in terms of actions on existing and new funds. We are now in an environment where a high level of engagement between manager and client is delivering positive results for all parties.
2. The answer is different for different investors groups. However, common themes across all successful funds will be a high level of transparency, aligned economic interests and very clear deliverable strategies.
3. As is very often the case following a major crisis, participants within those markets tend to evolve to operate within new parameters ensuring that the same issues will not occur again (effectively self-determined improved governance). Additional regulation is unlikely to bring any additional real benefits to managers or investors.
4. The UK market is leading the recovery and is already close to the bottom. We expect Paris to follow closely on the UKs heels. We expect various Asian markets to bottom out next year and bounce back quite strongly.
International director and head of European strategy
Regional director - client services, LaSalle Investment Management
1. Not everyone in the industry kept to the basic rules of communication and did not deliver news - particularly bad news - proactively and on a timely basis. In addition, some managers have taken on risks that turned out to be bigger than expected and did not have the resources to manage those risks. These issues need to be fixed.
2. Investment products that reflect the traditional features of real estate as an asset class: reliable income producing, lower volatility, low correlation to other asset classes (which will come back once the financial markets stabilise).
3. Getting to certain (minimum) standards on the reporting side has been a concern of investors already for the past couple of years. This would help them to streamline the monitoring of their investments across various products, managers and countries/regions in order to provide greater transparency and comparability. The INREV reporting guidelines are a welcome progress in that respect. The current draft of the AIFM Directive, with its formulaic approach trying to capture all alternative investments, would create certainly difficulties for the property investment management industry as some aspects of that regulation do not really fit for property as an asset class. If the specifics of property are taken into account though, it should help to set international standards, which would be to the benefit of both investors and fund managers.
4. In the following order: UK bottom now, Continental Europe (particularly France & Germany) bottom at Q4 2009/early 2010, US in course of 2010.
Head of real estate Europe
JPMorgan Asset Management
1. For asset managers that promoted transparency and fostered open communication with their clients and their clients' consultants throughout the financial turmoil, trust is intact. The industry will, however, need to rebuild confidence in the strategic case for property as a fundamental component of an institutional investment portfolio. The industry will need to re-engage investors with a discussion on the longer-term benefits of diversification and performance - arguments as valid today as when they set their strategic allocations to property. Managers should also begin making the tactical case for opportunistic property investing, while acknowledging what they didn't get it right with the opportunity funds raised and invested in 2006 and 2007. The next three years may be one of the most attractive property investing environments in decades. Investors that can take advantage of the market dislocation and credit scarcity are likely to be well rewarded.
2. Institutional investors over the next few years will primarily fall into two camps - with some straddling both. As equity markets rebound, or at least stabilise, the first group of investors will find themselves below their strategic allocations to real estate. Core funds in Europe and the US are likely to benefit from the rebalancing of institutional portfolios out of equities and into property. The second group of investors will seek to seize opportunistically the bargains that arise from distressed sellers - both owners and lenders. Opportunistic strategies will see a rise in demand from this second group....here are their answers