Blueprint: Executive remarks on central bank decisions, CDPQ’s new real estate chief, Starwood’s minority stake purchase in ESR, Blackstone’s UK luxury retail play

Executives weigh in on the impact of central bank decisions on real estate investing; CDPQ promotes Rana Ghorayeb, chief executive of its real estate lending arm Otéra Capital, to its new head of real estate; Starwood Capital Group acquires a minority stake in Asia logistics heavyweight ESR Group as the firm seeks to expand in the region, and more in today's briefing, exclusively for our valued subscribers.

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They said it

“Real estate was the biggest beneficiary of low rates. Unless rates can reset and reset quickly, I just don’t see an easy solution”

Drew McKnight, co-CEO of Fortress Investment Group, speaking on CNBC’s Fast Money on why commercial real estate remains a big issue for banks.

What’s new

Powell: expects rate cuts by year-end, but some do not believe lower rates will be enough to meaningfully boost loan origination volumes this year

Weighing in on rate decisions

As the world’s two largest central banks by total assets made closely watched monetary policy decisions last week, the impact of those decisions on real estate investment did not go unremarked.

Last Wednesday, the US Federal Reserve continued to hold off on rate cuts and voted to keep the federal funds rate at a target range of 5.25 to 5.5 percent. However, Fed chair Jerome Powell said during a press conference the rate is projected to reach 4.6 percent at year-end. Despite this, “mortgage rates will not fall enough to drive meaningfully higher origination volumes in 2024,” said Eric Orenstein, senior director at ratings agency Fitch Ratings. “Eventually, mortgage loan volumes should normalize with lower rates, though there are likely several more challenging quarters ahead for mortgage companies.”

Also last week, the Bank of Japan announced the historic decision to raise interest rates for the first time in 17 years and bring its negative interest era to a close. One potential impact of the rate increase is the narrowing of yield spreads, which would lead investors to pivot toward core-plus and value-add strategies that aim for “higher value creation,” said senior director Chinatsu Hani. Read our full analysis on the impact of the BoJ’s decision on real estate investment activity in Japan here.

PIMCO taps into European data centers

An investment drive into European data centers has been on the cards for US asset management giant PIMCO since it established data center development and operating company Apto in September last year.

This week, PERE learned the firm has raised around €300 million against a €750 million target for a dedicated data center fund to tap into the sector in Europe. The closed-end PIMCO European Data Centre Opportunity Fund has no hard-cap and could reach or even exceed €1 billion in size, based on the perceived level of investor interest in the vehicle, per PERE’s report. Investments will be executed via Apto, which is wholly owned by the fund, and will constitute primarily new data center developments.

A report published in February by Morgan Stanley predicts fivefold growth in European data center capacity in the next 10 years, spearheaded by the ‘FLAP-D’ markets of Frankfurt, London, Amsterdam, Paris and Dublin. However, PIMCO will focus the fund’s investments on secondary data center markets throughout the region, which include Madrid, Milan, Berlin, Zurich, Warsaw, Athens and cities in the Nordics. It is understood the firm expects secondary markets to outperform FLAP-D in light of the power supply constraints and land limitations impacting data center investment in a number of the top-tier markets in Europe.

Starwood’s new route to expansion in Asia

Real estate powerhouse Starwood Capital Group has agreed to acquire a 10.7 percent equity stake in Asia logistics heavyweight ESR Group in its latest effort to expand in Asia-Pacific.

In the structured transaction, Redwood Investment Company, controlled by Charles de Portes and ESR co-founder Stuart Gibson, will fully repay an existing debt to Starwood through the sale of the ownership interest.

With $4.5 billion of AUM in APAC, Starwood has been active in both real estate debt and equity investments and launched several takeover bids for regional REITs. With ESR, Starwood has a new potential partner that shares similar growth areas such as logistics and data centers and can provide it with access to new markets and investors in the region.

Trending topics

Investec banks on UK equity

Plenty of real estate managers have moved into the lending space since interest rates began rising in 2022. But for one lender, now is also the opportune time to invest in equity.

Investec, the UK- and South Africa-registered bank, has launched a new strategy to invest in real estate equity in the UK on behalf of global investors. The bank has a loan book of around £3 billion ($3.8 billion; €3.5 billion) in UK real estate, but is looking to complement this with an opportunistic equity strategy.

Through Investec REALIS, the bank will raise capital from institutions, family offices and high-net-worth individuals on a deal-by-deal basis, with a deployment target of £250 million over the next two years.

According to Yon Papageorgiou, Investec’s head of real estate equity investments, the bank sees a “very attractive entry point in the UK real estate market as of today,” thanks to a combination of significant repricing and a “strong willingness” among the bank’s global clients to hedge against currency movements.

First up for the new strategy was a refurbished office building in Guildford, which was backed by private banking clients in the UK, Switzerland and South Africa. Read more in our coverage here.

Blackstone’s London luxury buy

After an absence of almost three years, New York mega-manager Blackstone has returned to acquiring retail properties in Europe. The manager is in the process of buying 130-134 New Bond Street, a retail and office block situated on London’s most upmarket shopping street, in a deal reported to be worth £230 million. The property, which houses retailers Breitling and Smythson, was purchased by Canadian investor Oxford Properties and Swiss luxury goods group Richemont in a joint venture for £197 million in 2014.

For a sector as troubled as retail has been in recent years, and a manager as reputable as Blackstone, this renewed conviction in retail could be a signal the sector is returning to strength. This is particularly true of the luxury subsector, which is enjoying growth tailwinds such as China’s return to foreign travel last year, India’s emergence as a global consumption superpower and the rise in high-net-worth individuals globally.

Indeed, research by Morgan Stanley estimates that Chinese nationals will account for 60 percent of global growth in luxury goods spending through 2030. However, while Blackstone’s last retail acquisition was also in the luxury segment – a property on Via Montenapoleone, Milan’s luxury shopping street, purchased as part of a mixed portfolio in the city in late 2021 – PERE understands the manager is taking an increasingly expansive view on the retail sector as a whole, and is actively screening other opportunities in London, Paris and Milan.

Data snapshot

Unlikely loan extensions

Approximately $214 billion of commercial real estate loans were slated for maturity in 2023 but have likely been extended, according to data from MSCI. Among the loans that are coming due this year but not likely to receive extensions, however, are those backed by office assets, which make up about 20 percent of this year’s debt maturities, the data analytics firm notes in its latest US capital trends report.

People

CDPQ names new real estate chief

Canadian pension fund The Caisse de dépôt et placement du Québec has named its new head of real estate, promoting Rana Ghorayeb from the chief executive role of its real estate lending firm Otéra Capital.

In January, CDPQ announced it would internalize Otera and Ivanhoé Cambridge, a real estate business with C$77 billion ($57.3 billion; €52.9 billion) of assets under management. The idea was to save as much as C$100 million in costs and make the operation more efficient. However, the integration brought about the departure of Nathalie Palladitcheff, who is leaving at the end of April.

“The real estate sector is facing big challenges, but Nathalie Palladitcheff and her team have transformed the portfolio to be better positioned for the future,” Ghorayeb said in a statement on her appointment. “Along with the Ivanhoé Cambridge team, I am delighted to be able to contribute to the next chapter at this pivotal moment for the industry, knowing that we have the key strengths to come out ahead.”

The announcement comes as other major Canadian pension plans shake up their firms and leadership; OMERS and Ontario Teachers both have new heads of real estate, while last week Toronto-based CPP Investments confirmed Peter Ballon, its global head of real estate, will be leaving over the summer.

Investor watch

Ohio BWC stays committed to real estate

The Ohio Bureau of Workers’ Compensation is planning to gradually reduce its allocation to real estate over the next 10 years, according to documents from the pension plan’s investment committee meeting last week.

Currently overallocated to the asset class at 17.9 percent, the investor expects to lower its property allocation to 17.1 percent by year-end and slip below its 15 percent target by the end of 2027. Despite being overweighted to real estate, Ohio BWC still intends to commit $150 million to $250 million to core-plus and value-add real estate during the decade-long period.

Its real estate pipeline this year includes investments in Fairfield Residential’s Fairfield US Multifamily Value-Add Fund V and Rockbridge’s Rockbridge Hospitality Fund IX, whose final closes are slated for Q3 2024 and Q4 2024, respectively.

This week’s investor meetings

Tuesday, March 26

Wednesday, March 27

Thursday, March 28

Friday, March 29

Today’s letter was prepared by Miriam Hall, with Jonathan Brasse, Evelyn Lee, Charlotte D’Souza and Christie Ou contributing.