Blueprint: PIMCO’s Trausch warns of looming ‘tsunami’ of debt, AXA’s Scemama takes on the ESG critics, the ECB strikes note of calm on banks’ CRE exposure

A new take on the risk-return dynamic

Higher returns have been commonly associated with higher risk and lower returns with lower risk. Now, real estate investors are looking for higher returns with lower risk. Daniel Oh, director, Europe and global real estate at Korea Investment Corporation, told members at PERE Europe on Tuesday he believes it is now a “buyer’s market” with more supply than demand compared with this time last year. For the past six months, the sovereign wealth fund has been able to be more selective and find investments with more favorable risk-adjusted returns, Oh said, speaking during an investor panel on day one of the conference.

Meanwhile, Nael Mustafa, chief executive officer at Middle Eastern investment firm GFH Partners, noted his investors have asked for value-added returns for core-plus risk. While such a risk-return expectation is challenging to meet, his approach is to focus on portfolio composition, such as investing in assets that require development work rather than stabilized assets, he said on a separate keynote panel.

A note of calm

In recent months, noises from the European Central Bank have suggested concern about commercial real estate’s potential to destabilize the eurozone financial system. Earlier this month, property finance industry bodies had their say, telling affiliate title Real Estate Capital Europe the ECB’s concerns did not reflect the situation as they saw it. But on stage this week, a senior economist from the ECB, Livio Stracca, struck a note of calm about the central bank’s take on real estate.

Stracca, deputy director general, macro-prudential policy and financial stability at the ECB, told REC Europe editor Daniel Cunningham in a fireside conversation the central bank does not generally view bank lenders as overexposed to the sector, although it has an eye on some institutions in which exposure is concentrated. An area of greater concern, he went on to say, is open-ended real estate investment funds, in which he described a liquidity mismatch. “It’s a sector [of] over €1 trillion, so it’s not a marginal one,” he added. Read more here.

Rate hikes… the series?

Francois Trausch, the chief executive officer and chief investment officer of PIMCO Real Estate, likened the level of drama in the commercial real estate market to a Netflix series. On Tuesday, he told members: “Right now, we are in the middle of Season 2, which started well as the central banks in the US and Europe signaled the rate hiking cycle was over.” The executive added this clarity on debt costs has now “got people talking to one another.” However, Trausch predicted trouble in forthcoming episodes, with the refinancing challenge as a key protagonist.

“If rates stay where they are and do not come down as quickly as expected then of course, you are going to have another issue… which is the funding gap,” he explained, predicting the season finale will show borrowers struggling “in large numbers” and higher debts costs create a “tsunami” of refinancing requirements. You can listen to his conversation with PEI Group’s Jonathan Brasse on the Spotlight podcast here.

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