INTERVIEW: Practice versus theory

Real estate has become an institutional asset class, however for ING Clarion’s head of research David Lynn more analysis and ‘rigour’ is needed when thinking about property investments. Lynn shares his thoughts about real estate, portfolio theory and where the next best opportunities could be.

The US real estate market has been turned on its head over the past year. And so have the theories that support investments in the industry.

Gone are the days when almost anybody could invest a small amount of equity and make healthy returns. Instead, according to ING Clarion’s research chief, David Lynn, there is a much greater need for rigourous analysis – and indeed thought – when deciding where and what to invest in.

“You can get away with leaping off a cliff only until the market turns,” Lynn, managing director of research and investment strategy, said.

Lynn is set to publish a book in August looking into real estate portfolio theory and how it can be used in assessing the US property markets. Comprised of internal research papers from Lynn and his 12-strong team at ING, the book provides some insight into the New York-based real estate firm’s own analysis and methodology in assessing real estate opportunities. Many of the papers were presented to ING investment committees and used to support fund and asset decisions. The papers cover topics including forecasting, bid-ask spreads, capital markets, and opportunities such as residential land, hotels and senior living.

Here Lynn talks to PERE about the book and the next opportunities he sees for US real estate investors.

Q. What was the thinking behind publishing the book, Active Private Equity Real Estate Strategy?
The general thesis is that we need more analysis and more rigourous thinking in how we invest in real estate as an asset class. Hopefully it bridges the gap between pro forma and general market studies about private equity real estate investing.

Q. Why now?
Lynn: We are now back to a new normal, as it were, where more analysis will be needed. It was extremely difficult to differentiate between strategies over the past few years as you could invest in anything and get a pretty good return purely because of ever-increasing capital flows and appreciation. A lot of people were lulled into a happy stupor with year-after-year of outstanding returns. That’s not the case now.

Q. Can real estate investing really be quantified as a portfolio theory?
Lynn: This is not an either or proposition. At ING we like to do analysis whenever we can and not be so reactive by simply responding to a deal, almost being a deal junkie as it were.

Real estate theory will never take the place of a lot of experience and a lot of mistakes, but there is a place for more analysis and methodology of real estate.

It is already starting to happen and we are increasingly seeing that, however I believe there should be more of it. It should be more widespread. Real estate is an institutional asset class now and more rigour is needed.
It’s about thinking and planning about things before you leap off the top of the cliff.

Q. When do you therefore see US real estate markets recovering?
Lynn: I do think it will be a gradual recovery and that we won’t see a full return until 2012. It will start with the general economy bottoming out, perhaps by the end of this year, and then real estate will start to follow at a slow gradual pace. Key to this though is the return of debt and investor sentiment.

Q. Where do you see some of the best opportunities for real estate investors?
Lynn: Debt will be one in the short-term, particularly AAA CMBS and distressed debt on good property with good underwriting. I do also see selective REITs as being a good investment, again provided its good quality. In terms of sectors, what goes into a recession first is usually the first to adjust so the priority I would look at things is hotels followed by retail, office and then multifamily and industrial.