They said it
“The current misery is clearly self-inflicted”
Thomas Kallenbrunnen, managing director at GARBE Institutional Capital, commenting in a blog post how managers’ prior positioning of real estate as a fixed-income alternative has created many of the issues the sector is facing now
What’s new?
Talk of the town
Interest rates dominated many private real estate discussions last week, including at the PERE Network Tokyo Forum 2023, where one speaker highlighted the importance of risk mitigation in the face of a potential rate hike in Japan. Indeed, interest rates were cited as one of the greatest investment risks today by 37 percent of respondents in Goldman Sachs Asset Management’s 2023 Private Markets Diagnostic Survey, which was conducted in June and July and published on Monday. Those respondents could breathe a collective sigh of relief as multiple central banks – including the Federal Reserve, Bank of England, Bank of Japan and Swiss National Bank – opted to hold rates steady last week. On the BOE’s rate decision, Investec Real Estate executive Gordon Milnes said he hoped interest rates in the UK had hit a peak. “Now we need some further visibility on potential interest rate cuts, which should act as a catalyst for a rapid bounce back in real estate activity levels,” he said. In the US, however, unchanged inflation projections point to higher median expected Fed funds rates for year-end 2024 and 2025. “There would only be scope for modest rate cuts in 2024,” Schroders chief economist Keith Wade wrote in a post on Friday.
Harrison Street beats the fundraising odds
Despite a challenging fundraising environment, plenty of managers are still seeking capital for North America strategies. In fact, the top 10 largest funds in market focusing on the region have an aggregate capital raising target of more than $33 billion and an individual equity goal ranging from $2.5 billion to $5 billion. With a $3 billion target, Harrison Street’s ninth US opportunistic fund, Harrison Street Real Estate Partners Fund IX, falls in the median of this range. But raising capital has proven to be no easy feat. Indeed, of the top 10 funds in market, Fund IX is only one of five with capital closed to date, and of those five, Harrison Street’s fund is the closest to reaching its target, according to PERE data. To find out more about Harrison Street’s latest US opportunistic fundraise, check out our story here.
WP Carey plans bulk office ditch
Should offices feature as part of a net lease structure? No, says WP Carey, the private equity real estate firm-turned-net lease REIT manager. The New York-headquartered manager, which became a REIT in 2012, announced Thursday the strategic spin-out of 59 office properties into Net Lease Office Properties, a separately traded public REIT. An additional 87 office properties – not included in the planned REIT – will be subject to a fast-track sale program expected to conclude early next year. With the REIT spin-out, slated to complete around November, the firm will receive around $350 million and relinquish responsibility for more than $600 million of existing and new debt. Chief executive officer Jason Fox said the strategy was a culmination of existing plans to reduce the firm’s exposure to the now-toxic asset class. Scott Merkle, managing partner for real estate adviser SLB Capital Advisors, lauded WP Carey’s strategy for providing “a clear path to removing what investors may have perceived as a drag on the REIT’s portfolio.” Shareholders, however, are yet to be convinced; WP Carey’s share price fell by more than 11 percent to $56 as of yesterday.
Trending topics
Goldman readies for a ‘collision’ opportunity
Institutional real estate investors should brace for a “front-loaded cycle of activity” as a result of a “collision” between a “much higher rate environment” than before and “huge wall of loan maturities in the next 12 to 18 months.” So said Jeff Fine, global head of real estate client solutions and capital markets at Goldman Sachs Asset Management last week. Presenting at the bank’s Alternatives Survey webinar on Thursday, Fine predicted “an incredibly attractive vintage, with markets adjusting to higher rates and a rapidly evolving economy.” But he warned how investors, many of which have needed to adjust to rapidly shifting valuations, are hesitant to be among the first movers in the new cycle. “LPs remain cautious. They have existing exposures they need to work through, they want to see more actionable evidence of dislocation-driven situations and their returns expectations are rightly very high,” he said. His comments chimed with the webinar’s opening slides, which demonstrated how the majority of respondents felt real estate was overvalued, more than for any other alternative asset class apart from private equity. Click here to access the webinar.
A storm is brewing
In Germany, where the decline in transaction volume has been steeper than any other major market in Europe, distress is yet to manifest to any meaningful degree. But market participants tell PERE this is the calm before the storm and they expect a wave of heavily discounted assets to come to market if conditions continue. The wide bid-ask spread, the deep yield compression and low loan margins of the past decade, developer insolvencies, the mature investment programs of the country’s investors and their higher-than-average allocations to the asset class are some of the key reasons why Germany is thus touted. Lenders say they are ready to support borrowers when debt maturities bite. Not everyone is convinced this will be possible. “The numbers just don’t add up to a long-term hold for some owners,” says Marcus Lemli, CEO Germany and head of investment Europe at broker Savills. Read more in our latest analysis.
Getting serious about climate risk
“One of the bigger long-term issues is that certain properties in certain areas simply become uninsurable, because the risk is too great or too unpredictable because of climate change,” Alex Bernhardt, then the head of the US responsible investment team at New York-based consulting firm Mercer, said in one of PERE’s first articles covering climate risk back in 2017. Fast forward to today, and Bernhart’s prediction about uninsurable areas has indeed become reality. With insurance costs now skyrocketing, “I think insurance could be one of those shocks and stressors that, as an investment manager, if you haven’t taken this seriously, this could make you take it a lot more seriously,” says Laura Craft, global head of portfolio sustainability strategies at Heitman. Given the longer-term hold periods for real estate assets versus the annual resetting of insurance costs, the burden of understanding the true risk to property portfolios falls on managers, she says. For more on Craft’s views on climate risk, check out our coverage here.
Data snapshot
Sign of recovery
European non-listed real estate continued to correct in Q2 2023, albeit more slowly than the previous quarter, according to INREV’s latest Market Insights report, published last week. When isolating the total returns from the region’s main geographies, however, the UK offers the first sign of a recovery: its return of 0.08 percent is the country’s first positive performance since Q2 2022.
People
Nordic’s Areim appoints next CEO
Stockholm-headquartered manager Areim has appointed industry veteran Henrik Landelius to succeed long-serving chief executive officer Therese Rattik, according to a statement. Rattik will continue to be a partner and sit on the board at the firm. Prior to joining Areim, Landelius was most recently the head of NCC Building Sweden at Nordic construction and development company NCC. In his new role, Landelius will lead the expansion of Areim as the firm looks to broaden its product range, founder Leif Andersson said in a PERE interview. The appointment follows that of New York-based GTIS Partners’ former head of international capital markets Dietrich Heidtmann as head of global capital formation in May. They join amid a successful fundraising year for the firm: it closed its fifth Nordic value-add fund Areim Fund V at €877 million, and Areim DC Fund at €446 million.
Investor watch
Overallocated no more
The denominator effect has been blamed for negatively impacting the ability of many investors to make new real estate commitments. Maryland State Retirement and Pension System, however, is no longer one of those investors. In a real estate program review published last week, the pension noted how the denominator effect has ceased to have an impact on its real estate business. With a market value of $6.9 billion, the investor’s real estate allocation returned to its target of 10 percent of total plan assets as property prices corrected, the program review stated. In 2022, MSRPS was overallocated to real estate, with its exposure to the asset class peaking at 12 percent under the denominator effect. As pricing recovers in other asset classes first, the investor expects its allocation to real estate to drop slightly below target in 2024. Meanwhile, the pension is seeking to diversify its core portfolio as well as reduce investment management fees for its real estate program.
This week’s investor meetings
Tuesday, September 26
- Merseyside Pension Fund
- Plymouth County Retirement Association
- Los Angeles City Employees’ Retirement System
- San Antonio Fire and Police Pension Fund
- Kent County Council Superannuation Fund
- State of Wisconsin Investment Board
- Worcester Retirement System
- Barnstable County Retirement System
- Los Angeles County Employees’ Retirement Association
- San Mateo County Employees’ Retirement Association
- Pennsylvania State Employees’ Retirement System
Wednesday, September 27
- Lothian Pension Fund
- Buckinghamshire Pension Fund
- Ohio Police & Fire Pension Fund
- Alaska Permanent Fund
- Illinois State Board of Investment
- Los Angeles Water & Power Employees Retirement Plan
- Santa Barbara County Employees’ Retirement System
- Tulare County Employees Retirement Association
- Marin County Employees’ Retirement Association (MCERA)
- Arizona Public Safety Personnel Retirement System
- Arizona State Retirement System
- Contra Costa County Employees’ Retirement Association
- The Fire and Police Pension Association of Colorado (FPPA)
- Iowa Public Employees’ Retirement System
- Alameda County Employees’ Retirement Association (ACERA)
- Iowa Public Employees’ Retirement System
Thursday, September 28
- City of Gainesville General Employees’ Pension Plan
- The Fire and Police Pension Association of Colorado (FPPA)
- Greater Manchester Pension Fund
- MWRA Employees’ Retirement System
- Chicago Transit Authority Retirement Benefits
- Kentucky Public Pensions Authority
- City of Philadelphia Board of Pensions & Retirement
- Metropolitan Government of Nashville and Davidson County Employees’ Benefit Trust Fund
- New Mexico Public Employees Retirement Association
- Texas Municipal Retirement System
- The University of Texas/Texas A&M Investment Management Company
- Louisiana State Employees’ Retirement System
- Chicago Policemen’s Annuity & Benefits Fund
- Merced County Employees Retirement Association
- Seattle City Employees Retirement System (SCERS)
- Sonoma County Employees’ Retirement Association
- Southeastern Pennsylvania Transportation Authority
Friday, September 29
- Delaware Public Employees’ Retirement System
- Hartford Municipal Employees Retirement Fund
- Municipal Fire & Police Retirement System of Iowa
- Tennessee Consolidated Retirement System
- Hampshire County Council Pension Fund
- Tennessee Consolidated Retirement System
- West Virginia Consolidated Public Retirement Board
Today’s letter was prepared by Jonathan Brasse , with Evelyn Lee, Charlotte D’Souza and Christie Ou contributing