Too much capital chasing too few assets was key EXPO 2015 conference theme, writes PERE’s Thomas Duffell
EXPO “was really busy this year – it felt like speed-dating having to jump from meeting to meeting so quickly”, said one delegate at the annual EXPO REAL conference in Munich last month.
He was one of 38,000 real estate professionals who descended on the Messe München, the conference centre on the east side of the city that houses the event.
The throng of people reflected the state of the world’s real estate markets: overcrowded. That was a common theme in numerous conversations in Munich. The serial complaint was that way more capital wants to be invested in solid property deals than there are solid property deals.
“There is a shift towards real assets from the largest pools of capital within their overall portfolios – it’s seen as being different from other asset classes and has a ‘stored value’ perception,” said David Hutchings, head of EMEA investment strategy at global brokerage Cushman & Wakefield.
Investment nears pre-crisis peak
Hutchings was the author of a report released at EXPO that revealed global real estate investment had reached $942.8bn in the 12 months to June 2015, growing 16% from the previous 12-month period. The figure marked the highest global real estate investment volume since 2008 – just 13% below the pre-crisis peak.
“The market is pretty buoyant and I think a key EXPO theme was that finding the right product for value was a challenge for most,” said Matthias Leube, Germany managing director of AXA Investment Managers – Real Assets, the French insurer’s real estate arm, which has managed to close more than €533m of German acquisitions so far this year.
In another prevailing theme from the event, investors now accept that they need to take greater interest in a fund manager’s ability to deploy capital if they are to put their money to work sensibly. Seeded joint ventures are gaining popularity as a result, as they ensure that money committed is not sitting on sidelines.
Subsequently, investment managers’ deal pipelines were being greatly scrutinized. “It’s all about finding the right stock, so there is a need to stay disciplined,” said Sophie van Oosterom, CBRE Global Investors’ chief investment officer and chair of the firm’s EMEA executive committee. “We will only take risks on what we can control.”
Her colleague Pieter Roozenboom, head of global separate accounts at CBRE GI, added: “Capital is looking at core assets, but you need to be careful and very critical of deals, as the market is full of ‘core’ products that are not really core.”
Many managers at EXPO were bullish about collecting capital, be it for commingled funds, separate account mandates or for partnering with investors on club deals.
Two types of strategies were garnering particular interest from investors. “Investors want either value-added returns that see the manager get in and out before the end of this cycle, or a focus on defensive, income-
producing assets to be held through the next downturn,” said Will Rowson, London-based partner at New York-headquartered capital advisory firm Hodes Weill & Associates. “ The fear is of having a forced liquidity event in four to eight years.”
Managers go it alone
Rowson added that while more managers were leaving “bigger shops” to go it alone, “this can be misguided, because unless you take a verifiable track record with you, raising money is near impossible. A good investment thesis alone won’t cut it like it did before the global financial crisis.”
Despite the general positivity about fund raising, not everyone agreed it is easy to get capital support, as the market remains split between the ‘haves’ and ‘have nots’. The most successful managers continue to be the biggest, not least Blackstone, which aimed to raise $13bn but ultimately raked in $15.8bn for its last fund earlier this year.
These mammoth fund raisings were typically for global or pan-regional strategies. “The biggest funds are great for investors, as they know they’ll get the money out of the door, they aren’t niche and driven by markets as much and they are able to chase the opportunities,” said C&W’s Hutchings.
Paul Hastings partner David Ryland pointed to the perennial complication with fixed-life funds in that capital raising periods can eat into an investing window, particularly if they are short; by the time money is raised, the opportunity is gone.
“For example, the sponsors of one senior debt fund felt they couldn’t achieve their 4% target returns because the lending market was so competitive, so they gave investors three choices: lend at that level and go slightly up the risk curve; we return the money to you; or you keep the same risk profile but accept a slightly lower return. In that case the investors decided to take the lower return.”
However, Mark Evans, director, equity placement at CBRE, said it is actually a good time to be a niche fund manager. “The bigger houses are where most of the investors go unless they want niche; it’s the squeezed middle where there is no specialism who struggle.”
But Evans added there was still more equity than quality managers in the market. So the trend for investors piling into real estate shows no signs of abating.
Hutchings’ EXPO report anticipates 2016 will be another stellar year for investment. It forecasts a 17% rise in global volumes for the year to mid 2016, to reach a new high of $1.1tn, led in part by growth in Europe. So expect more ‘speed dates’ at an even more crowded EXPO REAL next year. n
“Deals wobbled during the China stock market volatility
and Asian investors were more cautious. We did see some big deals completed during this time, but they were already a really long way down the track”
Timothy Horrocks, head of Continental Europe at TH Real Estate
“The biggest funds are great for investors as they know they’ll get money out of the door; they aren’t niche and driven by markets as much, they are able to chase the opportunities”
David Hutchings, head of EMEA investment strategy at Cushman & Wakefield
“I expect that some of the bigger players will start selling off their non-performing loan portfolios and breaking them down a bit, which could create more activity for the smaller PE shops”
Jonathan Banks, director at real estate loan servicer Mount Street
“Big investors coming into the Nordics is good for us, as other investors will follow them in; it acts as an endorsement”
Anneli Jansson, director, Nordics, at Grosvenor Fund Management