They said it
“You can’t paint commercial real estate with one brush.”
Stephen Schwarzman, chairman, CEO and co-founder of Blackstone, in a LinkedIn post this week, notes the dispersion between sectors as a reason real estate will likely not play the same role in this crisis as it did in 2008.
PERE Europe Forum 2023
The private real estate sector is facing unprecedented levels of unpopularity across financial markets in the wake of spiking inflation and interest rates as well as accelerated secular trends. Finding a secure footing has therefore become a palpable concern for industry participants. This was one of the overarching takeaways from the first day of PERE’s annual conference in London yesterday. Here are three more items arising from the event, which attracted approximately 300 delegates:
Alignment issues: Want to know what Nathalie Palladitcheff, the chief executive officer of Ivanhoé Cambridge and the latest recipient of PERE’s prestigious Lifetime Achievement Award, is most worried about these days? Misalignment, she told the Forum yesterday. And, for her, at the heart of the issue is the people in the industry. For the steward of the real estate business of Quebec state pension Caisse de dépôt et placement du Québec, today’s private real estate market brings with it more misalignment than ever before. She listed the “different agendas” of managers, operators and lenders.
“The most difficult thing we have to do is construct a portfolio with the right people who we are completely aligned with,” she told delegates. “I have a lot of friends inside and outside this room, but everyone has an agenda which is very different from mine.” She referenced managers seeking to mix institutional capital with retail capital and developers trying also to run funds as two examples where misalignment has been an issue for the investor, which currently manages almost $60 billion in assets.
A contrarian voice on real estate debt: There was a chorus of PERE Europe speakers that sang the praises of investing in real estate debt during a time of high interest rates and heightened market risk. One such speaker was Stephane Jalbert, head of Europe and Asia-Pacific real estate investments at Canadian pension plan PSP Investments. “The best risk-adjusted [return] if you price something right now is probably in the debt space,” said Jalbert. Karim Habra, head of Europe and Asia-Pacific at fellow Canadian investor Ivanhoé Cambridge, agreed that debt deals are likely more attractive than equity deals, but only in one respect. For more on what Habra said about debt investments, check out our coverage here.
If you were given $100 million today, where would you invest it? This was a question posed to speakers on the keynote panel at day one of the forum. Common to their answers were in-demand operational real estate assets that drive long-term income, such as high-quality London office, student housing and senior living across Europe. Jay Kwan, managing director at Canadian manager QuadReal, said he would split his evenly between UK build-to-rent and UK logistics, where he would “call the bottom” on value declines. One sector he is steering clear of, however, is retail. Others held a candle to opportunities in the sector, Kwan said there was too much risk, effort and time involved in generating a similar return to other sectors: “If I had just one dollar, I’d probably put it in credit versus a retail project.” He was not the first, nor the last, speaker to suggest real estate debt was a more attractive risk-return proposition than many equity plays in today’s market.
Blackstone continues India REIT odyssey
Blackstone is adding to its Indian real estate investment trust platform by launching the country’s first pure-play retail REIT this week. Nexus Select Trust plans to raise 32 billion rupees ($391 million; €357 million) from the flotation. The initial portfolio composed 17 mall properties across 14 cities in India, according to a statement. Blackstone is understood to have began accumulating the portfolio in 2016 and it currently owns a 60 percent stake. The firm launched its first India REIT, Embassy Office Parks, in 2019 after working with the country’s regulators for more than 10 years. This would be its third REIT in the region, having also launched Mindspace Business Parks REIT in 2020. Look out for our exclusive coverage later this week.
More risk, more reward
Dallas-based Invesco Real Estate has closed its largest US non-core real estate fund to date, Invesco Real Estate US Fund VI. The firm raised almost $2 billion in a challenging fundraising environment, a higher amount than for prior funds. Invesco Real Estate is also predicting it will generate higher returns in this iteration. The firm is targeting between 13 and 16 percent for Fund VI, compared with Fund V for which it targeted between 11 and 14 percent, according to documents presented to Fresno County Employees’ Retirement System, an investor in both funds.
“Our clients are interested in value-add and opportunistic strategies given where we are in the market today,” Max Swango, managing director and global head of client portfolio management at Invesco, told PERE. “We are seeing interesting opportunities to invest at the higher end of the risk-return spectrum.” The higher return targets are being driven by discounted pricing, higher cap rates and limited competition, he added. Read the full story on the fund close here.
Open-ending the risk
Invesco Real Estate are not the only firm making moves based on a higher risk profile. Boston-based AEW has rebranded its open-ended UK fund from UK Core Property Fund to UK Core Plus Property Fund. The fund, which has a net asset value of £336 million ($423 million; €385 million) has been in the market since 2012. The increased risk tolerance allows the firm to increase its maximum leverage in the fund to 30 percent, Richard Tanner, managing director and chair of AEW UK’s investment committee, told PERE. He added that the original vehicle’s only leverage was in a revolving credit facility to bridge deals, typical of UK funds similar to this one. The rationale for the change was to be more appealing to international investors, as Asian and North American pensions were more interested in a levered strategy that leads to higher returns, Tanner added.
Secondaries comes of age
A key theme of PERE’s 2023 Secondaries & Recapitalizations report is the market’s continuing maturity. “There will eventually be funds for every flavor of investing – mega-cap down to small deals,” David Kamo, secondaries and M&A partner at Goldman Sachs, told PERE, adding a narrowing of the supply-demand gap is a similar path to that taken by traditional private equity when that market found its feet.
Real estate secondaries’ future growth will be driven by the LP-led side of the market, a section of the market that comes alive during periods of volatility. “There are lots of LP stakes in the market right now,” Sarah Schwarzschild, the former co-head and managing director of BGO Strategic Capital Partners, the secondaries arm of BentallGreenOak, said of the idea that this could be a banner year for LP-led secondary transactions. Elsewhere, the maturation of the market segment has regulators circling as well as causing its own nuanced view of ESG considerations. Download the full report here.
Listing strikes twice
German listed giant Vonovia has sold another part of its portfolio to a private buyer. After giving up a minority stake in a 21,000-unit residential portfolio for €1 billion to Apollo Global Management in late April, the residential-focused real estate investment trust has generated another €560 million from a sale of five assets to New York-based private manager CBRE Investment Management. CBRE IM used “several investor solutions sponsored by the firm” to make the purchase, according to an announcement. For Vonovia, it marks more than €1.5 billion in sales this year, against a target of €2 billion. Both transactions in a matter of weeks give hope to a market that is waiting for some lights to go on in the dealmaking department. “After a very difficult first quarter 2023 with little movement, the market is cautiously opening. Buyers and sellers can come to an agreement again,” Rolf Buch, chief executive of Vonovia, said via a statement. “This in itself is a cause for optimism.”
Mind the gap
Major markets in Asia-Pacific are bracing for significantly more expensive loans on refinancing, according to a CBRE Asia-Pacific funding gap report published last week. In Singapore, Australia and Korea, the interest costs on refinancings this year and next are slated to be at least two times higher than the loans issued during the pandemic.
In yet another example of a well-established real estate capital raiser opting for a new challenge, Detrich Heidtmann [his LinkedIn here] has left New York-based GTIS Partners after an almost nine-year stint as its managing director and head of international capital markets. Heidtmann is moving to Ariem, a Stockholm headquartered Nordics-focused manager, to be its head of global capital formation, according to a LinkedIn post. During his time, Heidtmann worked with global investors across capital structures including California State Teachers’ Retirement System, APG Asset Management and PGGM, among others, according to PERE data. He will remain near his home in the south of France for the role, according to LinkedIn, where he has spent most of his career. Other stops have included similar capital formation roles at firms like AXA IM Alts and Grosvenor.
Benchmarking the niche sectors
South Korea’s National Pension Service has partnered with data provider FTSE Russell to launch an index it will use to benchmark part of its portfolio. The FTSE EPRA Nareit Developed Extended Opportunities RIC 6/45 Capped Index includes both developed REITs and non-REITs focused on niche and non-core property sectors, according to an announcement. NPS will use the index to benchmark part of its portfolio, committing an initial $1 billion. Won-Joo Seo, chief investment officer at NPS, said that the index will “provide immediate access to a broader set of specialty sector opportunities but will also greatly enhance the risk-adjusted return of the entire real estate portfolio in the long run.”
This week’s investor meetings
Wednesday, May 10
- Los Angeles Water & Power Employees Retirement Plan
- ORIX Life Insurance
- Sumitomo Life Insurance
- City of Fort Lauderdale Police and Fire Retirement System
- City of Fresno Retirement Systems
- Connecticut Retirement Plans and Trust Funds
Thursday, May 4
- State of Michigan Retirement Systems
- Mitsubishi Estate
- Shimizu Corporation
- SoftBank Group Corp.
- City of Fort Lauderdale General Employees’ Retirement System
- Maine Public Employees Retirement System
- New York City Employees’ Retirement System
- Seattle City Employees Retirement System (SCERS)
Friday, May 5
- Asahi Mutual Life Insurance Company
- SBI Holdings
- Tokyo Star Bank
- San Diego City Employees’ Retirement System
- Tacoma Employees’ Retirement System
Today’s letter was prepared by Peter Benson with Jonathan Brasse, Evelyn Lee, Charlotte D’Souza and Christie Ou contributing