How to make money in a dislocated market

Private real estate’s top dealmakers have multiple entry points into good investment opportunities during tumultuous times.

This week, PERE unveiled its ‘Dynamic dealmaking’ series, looking at how some of the largest private real estate managers are actively deploying capital when many others have pulled back in the short term. With each of the three firms we interviewed for the series, there was a key element that made them comfortable with investing during market uncertainty: with KKR, it was the firm’s relationships and reputation that provided access to under-the-radar deals; with Heitman, it was the greater pricing clarity and inflation protection of alternative real estate sectors; and with PAG, it was enhanced underwriting to provide a cushion against potential changes in cap rates, costs and construction timeframes.

Below are three additional insights from the dealmakers we interviewed on how they are making the most of opportunities in today’s market.

Be a versatile investor

As interest rate hikes continue, both individual and portfolio asset owners accustomed to historically low rates will get a rude awakening when they try to refinance the properties. “The cost of debt is up because LTVs are down and the actual rates are up, so you’re getting less leverage. The cost of every point of leverage is up,” said Roger Morales, head of commercial real estate acquisitions at KKR. As loan-to-value expectations drop, he expects KKR will be able to help owners address funding gaps by taking on an equity interest in an asset or providing financing for that property. The firm also can operate the asset and drive value through asset management. “We should be able to make money across a whole host of dimensions in the dislocated market,” Morales said. “Because of where we’re funded, we have the right lending relationships, and we have the right positions in our investment teams with operating capability in tow.”

Look to the public markets

There is significantly more dislocation in the public markets currently than in the private markets, spurred in many cases by index-driven funds taking positions off the table, says Tony Smedley, head of European private equity at Heitman. He therefore expects an uptick in public-to-private opportunities in real estate. “A lot of those public entities will find themselves in a position where they’re starved of capital, because they will be unable to raise capital in the public markets.” And unlike at the start of the pandemic, when there was short-lived dislocation in the public markets, market dislocation is likely to persist for longer now that central banks are no longer being accommodative. “This is likely to be a more sustained period of dislocation in the public markets, and that will bleed into the private markets progressively during the course of this year,” Smedley predicts.

Create a new business opportunity

Alongside digital real estate, one of the main conviction themes for PAG, a new strategy has emerged for the Hong Kong-based manager: renewable energy. Even during a time of dislocation, the industry’s focus on sustainability has not waned, especially as demand for data center development has increased. PAG’s co-founder and president Jon-Paul Toppino said renewable energy was attractive not only for its environmental credentials but the significant business opportunity it presents. In April, the firm launched PAG Renewables, a wholly owned company that is expected to invest over $1 billion to develop, build and operate in renewable energy systems in Asia over the next several years. PAG Renewables emerged from the need to address the environmental impacts of developing and operating data centers as well as other property types.