On the first morning of the conference, John Carrafiell, the global co-head of real estate investing at Morgan Stanley, gave a key note address in which he warned “there will clearly be winners and losers” in the global property markets going forward. The “easy wins are over,” he said, and “performance will deviate massively from the mean.”
By easy wins, Carrafiell was referring, of course, to the significant yield compression witnessed worldwide. But the dangers are not just linked to excessive liquidity in the market. Other risks include ignoring the lack of data and transparency in emerging markets, poor performance of secondary assets and markets, global warming, terrorism and changes in regulatory and tax regimes. And that’s all before you factor in a general slowdown in economic growth.
Carrafiell’s address, though, was far from downbeat. Capital inflows, he noted, are at an all-time high, the weight of capital will increase and fundamentals are recovering.
There were also some clear opportunities from Morgan Stanley’s perspective. Buying vacant buildings or those with short leases looks a good bet as demand for space is generally outpacing supply in most markets. Hotels, development projects and plays on the aging population in Europe and young population in emerging markets should also figure somewhere in your thinking, he noted, as should transportation nodes and even farmland. His biggest call in Europe, by the way, is office and retail property in Germany. (Globally, look at office and residential in Japan.)
Most of the delegates and speakers echoed the sentiments in Carrafiell’s speech, noting that while the risks are great, the current state of the market bodes well for the future. As they sipped coffee and later enjoyed cocktails, many remarked that this is certainly a good time to be investing in private equity real estate. In an interview, Noel Manns, a principal at Europa Capital, said: “The cycle is not dead.” On a fundraising panel Dominic Field, a director at Credit Suisse, noted: “New money doesn’t seem to be drying up at all.” Keith Breslauer, the founder of Patron Capital, which just closed a $1-billion opportunity fund focused on Europe, called it a “wild and crazy market” but later told delegates real estate continues to be the asset of choice.
What is clear from the forum is that investors in Europe have reached a crossroads with no obvious route map to follow in order to deliver those two-times equity multiples. They can turn right for New Europe with its associated risk/return profile or keep left for the tried and tested Western European markets such as Paris and London. Or they can go north to Scandinavia, which is seeing an influx of private equity real estate investors. Of course, there’s always southern European markets such as Spain and Portugal, which are benefiting from the demographic changes shaping the continent.
Despite the uncertainty, it was interesting that optimism resurfaced in the final session, which promised to reveal the “Ten factors set to shape European real estate in 2008.” Using hand-held devices, 44 percent of the audience said that even if real estate investment performance in 2008 is lower than equities, it will have no effect on capital flows into the sector. And when asked if real estate investors should be positioning themselves for a downturn, 39 percent said no. The same percentage of delegates added that current levels of leverage and interest are not at alarming levels.
As a parting shot, the panel concluded cap rates will not compress at the same rate, construction rates will reduce returns in some parts of Europe, more specialization will be required to achieve returns and Central and Eastern Europe will move into the mainstream. Global warming and awareness of environmentally friendly real estate will have an impact, too.
On this last point, Carrafiell was clear: Ignore global warming at your peril.
Given President Bush’s announced change of stance towards global warming at this week’s G8 summit, the environment is at the top of many agendas. It will be interesting to see if climate change figures as much in PERE’s next forum in New York, to be held on November 13th and 14th. There, we’ll see if the optimism that previals in Europe is shared in America. Join us and find out.
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