You always want to leave the party before the lights come on (this was not always the case for PERE at MIPIM this week) and right now it’s definitely past midnight. This was the analogy used by one European real estate fund manager to describe his fear that the flood of capital entering the European private equity real estate marketplace will force managers to make bad investment decisions.
He was certainly not the only market source at MIPIM to voice this concern. In fact, the vast majority of conversations between PERE and the industry in Cannes centered on whether or not the increased investor appetite to deploy capital into real estate is putting pressure on fund managers to do deals, and quickly.
The driving force behind this is obvious: managers have a fixed period to make investments and right now the markets are getting hot as more and more equity is available for deployment, causing prices to rise as demand outstrips supply. The fear then is that in order to meet investors' expected returns fund managers will be required to either move up the risk spectrum – to a level which the investor has not agreed to – or to diverge from the planned investment strategy while on the hunt for attractively priced assets.
A large global real estate secondaries fund manager was licking his lips at the prospect, as he says his firm would be in a prime position to do fund restructurings and take control of property portfolios if managers move away from their strengths and take on assets they do not know how to effectively manage.
The secondaries fund manager adds that he expects to see fund managers make these bad decisions as they will not want to be honest with their investors explaining why the high pricing should lower return expectations, or simply be too impatient to wait for the right asset to become available.
A separate pan-European fund manager agrees that the chances of investors being burnt on real estate again is high, but for a different reason. He says that when there are good times in the real estate industry investors are blind to past failings. Managers that he says should have been killed off for poor performance during the last downturn have been able to sit on the sidelines and bide their time before making a reemergence on the fundraising trail, and they are able to collect capital.
So while demand for real estate increases as equities remain volatile and bonds offer little yield there will always be fund managers happy to accept the cash. Whether they can all invest wisely is something we will have a better idea about by the time MIPIM rolls around again next year.
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