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FEATURE: The breakfast club

At a special breakfast meeting, PERE assembled a cross-section of industry participants to swap notes on MIPIM and their businesses. By Robin Marriott and Jonathan Brasse. PERE Magazine, April 2009 issue

For real estate veterans who have attended MIPIM from its inception, MIPIM 2009 felt like 1991. The global property show on France's C^te d'Azur was far less crowded, the yachts were cheaper to hire and it was possible to get a table at a restaurant without booking the whole venue first.

With the price of a MIPIM party trading at historic lows, the PERE edit team opportunistically booked a venue of its own. Five minutes' walk in the sunshine from the main La Croisette strip and the Palais des Festivals exhibition hall, PERE hosted the first-ever MIPIM Breakfast at Le Pistou restaurant. The mix of guests was eclectic but our goal was to exchange orange juice, croissants and congeniality for market intelligence.

Over the next three pages you will find distillations of this intelligence from our croissant connection. There is a recurring theme: these players are in real estate for the long-term. Cycles will continue to cycle, prices will fall and rise, credit will tighten and ease, firms will shrink as well as grow, but from the creative destruction will emerge a reenergized private equity real estate industry, toughened from its tribulations and hungry for more growth.

The LP and the GP

Rickard Backlund

Aberdeen Property Investors faces issues as both an LP and GP with €28 billion in direct and indirect property investments, including separate accounts and commingled funds. Chief executive Rickard Backlund says as an investor the issue of LP defaults was important.

“We have seen some examples where we could take over other LP commitments or ask the GP to reduce the target of the fund.

“Whether we want to share the commitments others aren't able to fulfil with other LPs depends on the quality of the fund.”

LPs who doubled as fund managers, he adds, might also be approached by fellow investors to take over the management of underling funds, if some are unhappy with their current fund sponsor.


The European LP

Before hot-footing it to a seminar hosted by INREV, Michael Nieslen stopped by at Le Pistou restaurant to confirm why many

Michael Nielsen

GPs are finding it tough to raise money.

The managing director of ATP Real Estate – one of the biggest limited partners in Europe – says: “I cannot guarantee 100 percent that no commitments will be made as we still have money to commit but we are very cautious.”

The subsidiary of Denmark's largest pension fund has 60 percent of its €4 billion real estate portfolio with indirect real estate vehicles. “If an extremely attractive deal suddenly showed up then we are ready to deal with that. I can say however that we will not spend too much time on standard products right now.”

The Lender

Like so many banks, Bayern LB is not yet ready to return to the market. However Assem El Alami, who heads up Bayern LB's

Assem El Alami

lending book in France, is optimistic.

Bayern LB took receipt of a €10 billion capital injection from the regional state of Bavaria last year.

“At the moment we are on standby but I'm quite confident that we are going to be back to business soon,” El Alami, director and head of Bayern's real estate finance division in France, says.

“When we come back depends on the outcome of the restructuring process. As far as French real estate is concerned, the fundamentals are still quite healthy but we have to be conservative about how much could safely be lent.”

The Mid-Cap European Fund

Benson Elliot, a mid-cap firm which raised €510 million earlier this year to deploy in Europe, is excited by opportunities in the UK.

Phil Irons

Phil Irons, head of the UK business, says: “It could become a phenomenal buying opportunity.”

The firm is looking at potential deals where it is possible to generate 15 percent cash-on-cash returns from good quality core assets with relatively low gearing levels.”

However, Irons notes that one big issue for opportunity funds is that banks are currently tending to offer three-year debt facilities on an asset which might be a fve-year income play.

“That can leave you with a big black hole in three years' time,” he says. The banks are talking about three-year facilities because they themselves are only able to borrow for that length of time.

The Third-Party Fundraiser

An 18-year veteran of MIPIM, Christophe de Taurines noticed there was only one row of yachts at this year's event and that the

de Taurines

parties were toned down.

“It's not party mode here but lots of serious talks,” the founder and chief executive of Capital & Marketing Group says. “Generally people are concerned,” he adds, with much of the liquidity gone from the banks.

But the impact on his business, which focuses on raising money, comes partly from other issues such as valuation policies.

“If you are a fund manager subject to mark to market you are much more hit than if you take the actuarial view. Some pension funds have also been affected by the economy and cash is being sparsely invested and the fundraising processes are taking longer.”

The UK Fund Manager

Joe Froud, who started Columbus in 2007 with UK asset manager Schroder Property, is on the fundraising trail. He paints a

Joe Froud

picture of LPs being hotter on issues such as leverage and alignment of interests.

“Investors are now very against paying fees on gross asset value because they are concerned that this has encouraged high leverage in the past,” the managing partner says.

Investors also want to discuss the size of the GP co-investment relative to the net worth of the sponsoring organisation.

“They are also very focused upon co-investment capital. If managers are going to take a share of the upside then they will have to take a share in the downside too.”

The Central and Eastern European Financiers

“I haven't really seen the banks here in any numbers, only investors who are waiting for real estate prices to fall further,” says

Gansser-Potts and Sergei Gutnik

Sylvia Gansser-Potts, director of property and tourism at The European Bank for Reconstruction and Development.

The multi-lateral bank doesn't have the constraints of commercial banks because it has been conservatively operating in Central and Eastern Europe in past years.

Gansser-Potts says financing has now dried up for frontier markets.

“We are much more in business now because there is no one else around in terms of commercial banks looking at places such as Russia and Ukraine.”

The British Lawyer

“I have been coming here since 1991 but I have never seen the atmosphere as uncertain,” says Chris Morris, head of law firm Freshfield's real estate group. His firm's

Chris Morris

workload is increasingly involving restructuring transactions.

“That sort of activity is rather different to the deal-doing we were doing 18 months ago. We are analysing deals that we were involved in previously.”

He also notes another trend, that of personnel turnover.

“Clearly there has been a high turnover of people at some funds and property firms,” he said.

“Indeed on some transactions, the person who originally did the deal has gone, and sometimes you can find that the people with the longest-standing involvement are the lawyers.”

The France Investment Director

The global real estate arm of US firm Invesco has a handle on the world's most established property markets.

Tom Emson

According to Tom Emson, who heads up transactions in France, it is the strength of the occupier that has become one of the first issues up for discussion with those Invesco is doing business with.

However, such discussions are not always straight forward.

“How do you assess covenant risk?” he asks.

“I'd love to say we have a bullet-proof process in place but because of current market conditions we are having to work to improve the way we analyse the financial strength of occupiers.”

The Business Development Manager

2009 is Penny Ransom's first time at MIPIM, so she cannot benchmark it against previous events.

Penny Ransom

After spending the week talking with UK and European investors, Ransom, head of equity raising and investor relations at Lend Lease Investment Management, has got an idea of where they are planning to invest globally over the next couple of years.

“I am finding that there is appetite for investments into more mature markets such as Australia and the UK, as well as demand for infrastructure.”

She says investors are interested in exposure to core assets in markets that might be purchased at opportunity prices.

The Asset Manager

For the first time, South Africa-based asset manager Old Mutual Investment Group Property Investments registered at MIPIM as an investor rather than an exhibitor.

Colin Young

Colin Young, head of fund management, says: “I must have got 25 emails a day from people surfing the MIPIM database asking if they can meet because they have a project that needs finance.

“Just with our classification change, you can just tell people are desperate for capital.”

Like many others, the economic turmoil has slowed down certain plans at Old Mutual – including an opportunistic closed-ended development fund which struggled to get off the ground last year.

However, there is interest in funds which already have iconic assets in them. “Investors seem to like that.”

The European Fund Director

Surveying the European market place, Peter Todd, director of Resolution Property in the UK, says the firm is very cautious about investing.

Peter Todd

“I wouldn't say people are focused on capital values so much as rents and what is going to happen to occupiers,” he says. He also notes there is interest in “safer” investment such a food stores paying fixed uplift rents. But firms have to be very careful on stock selection.

“In the short-term, an asset has got to have defensive characteristics as well as opportunity in the medium term. This is one of the reasons you are not seeing a raft of deals,” he tells PERE.

Resolution has not invested in recent months, indeed not since the collapse of Lehman Brothers. However, Todd says it is looking at transactions as well as spending a lot more time with investors.

The In-House Client Manager

Unlike many European fund managers, Rockspring Property Investment Managers decided it should be business as usual at MIPIM, according to Kathryn Dixon,

Kathryn Dixon

partner responsible for sales and client services at the London-based firm.

Rockspring, which manages a number of closed and open-ended UK and European vehicles, scheduled one-on-one meetings and investment updates with at least 20 investors throughout the week-long event.

“The questions that investors are asking are deeper and more intense than ever before,” she notes. As an added footnote she says the firm is trying to raise money.

“It's challenging, but possible,” she concludes. Expect a new UK-focused fund to be launched soon.