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Keith Breslauer: When investing today ‘Keep your duration short’

The founder of London-based private equity real estate firm Patron Capital warned against long-dated business plans for any real estate not classified as ‘super core’ at the virtual annual INREV conference yesterday.

One of European private equity real estate’s highest profile managers warned against investment plans with long duration while the market is in the grips of the Covid-19-induced economic crisis.

In an interview at the annual conference of sector association, The European Association for Investors in Non-listed Real estate, Keith Breslauer, founder of London-based Patron Capital, said any investments with longer business plans should carry low risk characteristics.

“Keep your duration short because you just never know,” he said. “If you forecast three to four years out, what will the world look like? You simply don’t know.”

Patron Capital is expected to soon hold a final closing for the latest in its opportunity fund series, Patron Capital VI. As previously reported by PERE, the firm had collected €650 million of an €800 million target for the vehicle, €720 million of an anticipated €900 million, including co-investment capital.

Breslauer said the firm had, to date, invested only 1 percent of the capital raised leading into the crisis, but was “looking at a lot of the traditional stuff we were looking at before, only a lot more of it.” Since its inception in 1999, Patron Capital has invested in a variety of non-core and distressed property, operational real estate and via complex capital structures, across asset classes and in credit positions.

Breslauer said any outlays made now would have short investment lifespans. “Owning something very long dated has to be super-core or super-prime. Anything else and you have to time it quick.”

When asked for what he regarded to be today’s best opportunities, however, he pointed towards the listed sector for an answer. “The immediate issues are with capital market effective investments. Public markets have not been kind to real estate.”

Breslauer’s view here is shared by various of his private equity real estate peers including Brookfield Asset Management, which has been built up a 9 percent position in the UK REIT British Land, and KKR, which purchased more than 5 percent in London landlord Great Portland Estates, in two examples. “Anything within the public markets space is definitely attractive. The trick is to get something at those prices and to have control positions. That’s not obvious.”

“Owning something very long dated has to be super-core or super-prime. Anything else and you have to time it quick”

Elsewhere, he said retail opportunities could materialize amid current e-commerce headwinds and the Covid-19-induced downturn, but most likely in emerging markets. Referencing recent comments made at another conference by Equity International chairman Sam Zell, he said: “You have to have a culture that’s credit card-based. And you need an established logistics deployment system to deliver goods. If you have neither, then retail is actually not bad if it is well located.”

Converting retail property also made sense in theory to the Patron founder, but he said in practice it would not fit with his view on short-duration investing: “The concept of alternative use was a great idea but a long-dated idea. You have to convince a local council to give you planning permission, then build residential. This summer, new regulations will hopefully accelerate that. But then, that said, it’s difficult to figure out where online shopping will end up.” Meanwhile, Breslauer also reconfirmed a keenness to buy in the residential sector, particular housing classified as “mid-market and affordable.”

Patron’s primary investment strategy, which is focused on Western Europe and comprises 87 percent of invested equity, was generating a gross internal rate of return of 16 percent and 1.56x multiple as of March 31, according to a company presentation in June. Post-global financial crisis, Patron has yielded a 20 percent gross and 1.75x equity multiple, the presentation showed.

As of this summer, PERE understood that predecessor Fund IV was generating a 24 percent gross IRR and a 1.9x gross multiple, while Fund V was producing a 17 percent IRR and 1.7x multiple.