Blueprint: APG’s early movement in AI, ADIA takes advantage of current China opportunity, PERE’s Expo Real takeaways

Expo Real 2023: Three things we learned:

1. Carbon is clashing with returns
Sustainability was touted as a key theme at this year’s conference in Munich, but in the opening panel, moderated by PERE, real estate managers’ role in decarbonizing the built environment was thrown into question. “The business case doesn’t work yet for sustainability,” said Julie Townsend, ESG lead for Europe & Asia-Pacific at manager PGIM Real Estate. The panel agreed that more needs to be done around embodied carbon – unregulated and difficult to understand – because as long as the most valuable building in any city is the newly built, sustainable one, the industry has a problem. Managers with a core responsibility to protect value for their fiduciaries question whether it is theirs to solve. Read more in our analysis.

2. Markets will bounce back
The macroeconomic conditions of the past two years have created huge uncertainty in real estate markets, but the speed and succession of the interest rate rises are the cause of the pain. The occupier market is still strong, meaning it has never been further apart from the investment market. Many attendees PERE spoke with were confident rates may have just peaked, or are about to, meaning that when capital markets catch back up to the positive path of demand and rental growth that most sectors were enjoying prior to the rate hikes, managers will be back in business. Investing in a higher-for-longer environment will look quite different, of course, but as one executive pointed out, “where we are now is a known territory, whereas no one knew how to do business in a 0 percent environment.”

3. Value-add and debt are flavors of the month
“The rationale for why you should invest in real estate has been challenged,” said one chief executive. The past year of value corrections has changed the math behind the asset class and its role in institutional portfolios, diminishing investor appetite for fresh commitments and raising the bar for returns. Managers are responding to this by focusing on strategies higher up the risk curve. PERE met with multiple core or core-plus managers that are currently implementing or have recently implemented a new value-add or debt strategy. “Value-add firms will be the buyers of core real estate for the next 18 months,” said a broker. Managers at Expo Real were adamant that vintages 2024 and 2025 will be the best of the new cycle.

Insurance stability

The ratings of US life insurance companies are not expected to see an impact from their exposure to commercial real estate mortgages, even with the potential for a mild recession in the second half of 2024, according to a report this week from Fitch Ratings. The New York-based rating agency cited diversified, high-quality portfolios, conservative underwriting and the effective management of assets and liabilities. Life insurers’ exposure to the sector is mainly through commercial mortgages, which comprise about 13 percent of portfolios. The average LTV at the end of 2022 was 54 percent. Because of this, insurance company lenders are better braced than other lending institutions, including national and regional banks, which maintain larger exposures. This insulation provides more room to be opportunistic lenders on their own terms relative to other private credit managers.

Data snapshot