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COMMENT: Time for preemptive strikes

A key takeaway from this week's PERE Global Investor Forum in LA was that institutional investors active in the private real estate market should embrace its current flux by being proactive.

It was during one of the last panel sessions at this week’s PERE Global Investor Forum 2014 in Los Angeles that an anonymous delegate posed the following question: “Are there any new issues that might impact the real estate capital markets that you consider to be a potential industry disruptor?”

The query, sent via a mobile app, was one of the most thought-provoking raised during the conference. The response, from William Jackson of law firm Pircher, Nichols & Meeks, also packed a punch: “There’s no question that the entire business is going to change.”

Jackson went on to identify a list of potential ‘disruptors’: the influx of foreign capital targeting US real estate; the shift in the funding of US public pension plans from defined-benefit to defined-contribution; the Dodd-Frank Act; and the rise of crowdfunding platforms.

Against all that change, delegates rightly highlighted the need for preemptive measures. “There will be much more liquidity of capital flows,” said Jackson. “What that means for most of the investors in this audience is that if they don’t adapt to that, they will have more difficulty competing to get their money out or getting the best manager.”

Meanwhile, Christopher Rice-Shepherd, managing director of Cliffwater, drove the point home further. “If you’re reactionary, you don’t get the return. You’re just following the herd,” he said. “You need to shift ahead of the curve.”

Thankfully for them, some investors have indeed taken such an approach. For example, Mike DiRe, head of real estate at CalSTRS, revealed at the conference that the pension plan has been pursuing a number of firsts within its real estate portfolio, including the potential creation of a mortgage lending program, its first investments in core open-ended funds and plans to add real estate investment trusts to the portfolio. With all of these initiatives, CalSTRS has been striving to boost liquidity in the asset class, particularly as fixed-income assets have become more illiquid.

Meanwhile, Edgar Alvarado, group head of real estate equity at Allstate Investments, spoke of the institution pulling out of its core fund investments, in anticipation of rising interest rates and its potentially detrimental impact on real estate portfolios, particularly those on the core end of the spectrum.

Whether it be the impact of a rising rate environment, regulatory changes or myriad other factors, much uncertainty looms over the industry right now. But it is precisely during periods of uncertainty that people should be moved to act. Drifting with the status quo should not be an option.

Remarked one participant at the conference: “These are very unsettling times.” That doesn’t mean the industry needs to be unsettled.