Putting capital to work in global real estate markets right now is a challenge facing every investor and manager as increased competition forces pricing upwards. And while for many would-be sellers of global real estate this is a positive development, for long-term investors keen to maintain, or increase, their exposure to the asset class it can create a problem: what to do with the proceeds from an exit?
AFIAA Swiss Foundation for International Real Estate Investments, the Swiss pension fund investment manager, and M&G Real Estate, the investment arm of the UK insurer Prudential, found a way to get around that problem. This week, they completed a real estate asset ‘swap.’
AFIAA now holds the keys to 628 Bourke Street, an office building in Melbourne, having invested A$181 million ($144 million; €120 million). While M&G Real Estate is the owner of the HQ South office building at 520 Wickham Street in Brisbane, which was valued at A$119 million.
The swap deal came about after AFIAA put its Brisbane property on the market. It selected M&G as its preferred bidder, and, in the negotiation, M&G agreed to sell its Melbourne property to AFIAA as part of the deal.
A rare occurrence in private real estate, the swap deal worked for both parties in this instance as each was looking to reposition existing Australia exposures within their open-ended portfolios.
AFIAA’s chief executive Ingo Bofinger told PERE that the firm’s approach to investing has seen it look to diversify geographically, but, within that overseas investment push, to focus on specific cities. AFIAA had been on the hunt for Melbourne properties to complement its existing exposure to the market, while exiting the Brisbane market where HQ South was its only asset.
Conversely, M&G told PERE earlier this year that the Brisbane office market was an example of where counter-cyclical plays were possible and an area of interest for the firm.
Other such swap deals have occurred in the past, such as in 2012 when Australian property group Stockland traded assets with property development magnate Lang Walker and investment management giant Brookfield. It was also reported back in May that QIC Global Real Estate and Deutsche Asset Management were negotiating an office-for-retail property deal that would see them swap more than A$200 million of Australian real estate.
But while they can make sense in particular circumstances, swap deals remain rare. One reason is sellers lose the competitive tension of a bidding process when entering a trade with just one party. Therefore, each party would rather solicit bids from a larger pool of potential buyers.
Nevertheless, at this lofty point in the market cycle, investors looking to offload properties should pay close attention to the inventory of potential buyers – you never know when a strategic objective can be achieved, as was the case for AFIAA and M&G Down Under. Investing capital sensibly remains one of the industry’s biggest challenges, meaning unconventional approaches to deals like this can make greater sense than they otherwise might have.