Let there be light
With real estate still in full price discovery mode, deal volumes are tepid. However, the industry is largely optimistic that appetite for key property segments remains strong, so when will transactional activity return to a meaningful level? This is the question PERE set out to answer in its April cover story.
“There is a real thought process of: the quicker prices correct and we can get back to a normal operating market with a sufficient number of transactions occurring, the quicker that recovery can come,” said Jonathan Kendrick, senior director of valuations in Europe and Asia-Pacific at real estate service provider SitusAMC. Willing buyers, however, are biding their time, with many waiting for existing owners to accept today’s asset pricing. To understand what may help close the bid-ask spread, check out our cover story here.
Nearly a month after the failure of three US regional banks, the White House last week called on regulators to consider a set of reforms that will reduce the risk of future banking crises. The reforms include reinstating rules that were rolled back during the Trump administration for banks with $100 billion to $250 billion in assets. Among these rules are requirements for medium-sized banks to hold sufficient high-quality liquid assets to cover expected net outflows during a stress period; and to undergo stress tests once every year or two years.
The regional bank failures posed myriad risks for real estate, given the exposure of smaller lenders to the sector. Regional and local banks made up 27 percent of new loan originations in 2022 – the largest lender group in the real estate financing market last year, according to MSCI’s US Big Picture report, while Oxford Economics attributes 80 percent of commercial property loans held by lenders to regional banks.
Some private real estate firms, however, are dismissing the notion that commercial real estate debt presents a systemic risk for banks. In a new research piece, Cohen & Steers’ head of real estate strategy & research Rich Hill said the diversity among lenders for commercial real estate mortgages helps to mitigate such risk. For example, the 25 largest banks by total assets account for 13 percent of all commercial real estate mortgages, and the property exposure of those institutions is only 4 percent of their total assets. Meanwhile, the 4,600 banks outside the largest 100 hold 15–20 percent of all commercial real estate mortgages.
“We anticipate increases in delinquencies and distressed sales, but the risk of loss to commercial real estate lenders may be smaller than many believe,” Hill wrote. Prices would need to fall 40–50 percent before the loans would realize losses, he added.
Asset management’s moment
As high interest rates drive down valuations, and therefore returns, professionals able to extract extra value from investment properties will be in high demand. This notion shows up in PERE’s latest compensation report, in partnership with private real assets executive search firm Sousou Partners, as asset management professionals are seeing higher median growth in their total salaries than their acquisition counterparts.
“The likelihood is that it’s all about value creation, and less about doing new deals,” Ghada Sousou, co-founder of the firm, said. “That must have bumped up demand for asset managers, and, more importantly, for workout skills, which falls within asset management.” The 7 percent increase for asset management managing directors and 3 percent growth for directors came during a year when compensation was mostly muted. Read our full coverage here.
UK platform deals emerge amid price corrections…
On the subject of valuations, we saw a notable pickup in UK dealflow over the past week on the back of price corrections in the country’s property market. On Monday, Blackstone and Aware Super both announced deals to acquire full or partial stakes in sizeable UK real estate platforms. The former agreed to pay £500 million ($620 million; €569 million) for listed industrial estate specialist Industrials REIT. The private equity giant has purchased two other UK industrial REITs since 2019: Hansteen and St Modwen.
Meanwhile, the Australian superannuation fund entered the UK buy-to-rent sector with the purchase of a 22 percent stake in developer Get Living – which has a £3 billion portfolio of 4,000 operational homes – from Qatari Diar. In the UK, capital values have fallen about 21 percent from their peak in June 2022, according to a report from Schroders.
…as do regional asset-level acquisitions
Also in the UK, two other foreign investors have added to their portfolios in the country’s regional markets. Chicago-based Harrison Street has expanded its partnership with London-based investment manager Apache Capital and NFU Mutual to fund the development of Great Charles Street in Birmingham. The planned £302 million ($374.6 million; €343.8 million), 722-home community will be the UK’s biggest single-asset funding deal outside of London, overtaking The McEwan in Edinburgh, which was priced at £215 million in 2020.
Meanwhile, ARA Asset Management, a Singaporean manager purchased by ESR last year, is also making its mark on the non-London scene. ARA is in late-stage discussions to buy London & Scottish Property Investment Management, the asset manager to UK office real estate investment trust
Regional REIT. The REIT invests in office properties exclusively outside of the M25 ring road, with some of its top assets in Manchester, Birmingham, Glasgow and Leeds, among others. Both deals give an international stamp of approval to markets that previously did not attract huge amounts of institutional capital.
In other UK news, commercial landlords in England and Wales faced a change to the legal requirements for Energy Performance Certificates over the weekend. Where previously it was prohibited to grant a new tenancy to a commercial property with an EPC rated lower than E, as of April 1 landlords now cannot legally continue to rent a property to any tenant if it has an F or G rating. For UK residential properties, which have faced this requirement since 2020, an upgrade is just around the corner. From 2025 the minimum EPC requirement will be lifted to grade C for new lettings, extending to all tenancy agreements from 2028.
With other European countries such as France similarly tightening EPC rules, global manager AEW says the shortage of rental housing will become even more acute, increasing investment opportunities in the sector. In a research report published last week, the Boston-headquartered firm forecast European prime residential rental growth of approximately 3 percent per annum in 2023-27 as a result of this decision tightening supply.
At least one group of investors expects real estate equity to be an abysmal performer. According to Goldman Sachs Asset Management’s Insurance Survey Report, which was released today, insurers considered the asset class to be second only behind cryptocurrency as the most likely to produce the lowest returns for the next 12 months.
CapitaLand hires GPIF’s Yamada
Singaporean landlord CapitaLand has hired Government Pension Investment Fund’s former real estate boss Hideto Yamada to lead its Japan expansion. Prior to this, Yamada led GPIF, the world’s largest pension fund, to grow its private real estate allocation. In his new role as a managing director at CLI, he will be focused on expanding the firm’s partnerships with domestic capital partners in Japan, increasing its private, public and lodging funds under management, and identifying strategic merger and acquisition opportunities. On the same day as Yamada’s hire announcement, CLI’s regional core-plus fund CapitaLand Open End Real Estate Fund also bought six multifamily assets in Osaka.
Florida SBA seeks higher-risk real estate
Tallahassee-based State Board of Administration of Florida is planning to increase its exposure to higher-risk real estate. According to documents from the investor’s March 28 meeting, Florida SBA is targeting a non-core real estate exposure of 15 percent for its $21 billion portfolio, up from 10 percent at the end of last year. Over two-thirds of the pension plan’s portfolio is made up of principal investments – meaning direct investments, joint ventures and separately managed accounts – and only 3 percent of that portfolio consists of non-core investments. Additionally, the investor is looking to increase its exposure to the apartment, industrial and alternatives sectors, while also seeking to lower its allocation to office, according to the documents.
This week’s investor meetings
Tuesday, April 4
- Dallas Fort Worth International Airport
- Wisconsin Board of Commissioners of Public Lands
- Ontario Municipal Employees Retirement System
Wednesday, April 5
Thursday, April 6
Today’s letter was prepared by Peter Benson with Evelyn Lee, Charlotte D’Souza and Christie Ou contributing