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PERE LA: God’s view on 20% returns

Executives from some of the biggest names in global real estate are seeking to mitigate risk, but are employing different approaches to do so.

During a time of uncertainty in the private equity real estate market, general partners are pursuing various approaches to managing risk, executives said at PERE's Global Investor Forum: Los Angeles on Wednesday.
 
In fact, during the conference's opening panel, one traditionally opportunistic investor commented on historic return expectations: “I'm not so sure God really meant for us to get 20 percent returns in real estate investments.”
 
He followed up his comment with a qualifier: “To [achieve those 20 percent returns], you have to kind of cheat. You have to be an aggressive seller.”
 
Another panelist said his firm's real estate strategies have evolved in tandem with the market. Following the global financial crisis, the firm focused on buying liquid securities, then pivoted to buying, fixing and selling real estate. Now, the firm is more active through its debt fund while it is “more patient” about deploying opportunistic capital, and is not looking in the top six US markets for equity investments.
 
Multiple speakers said they are carefully monitoring leverage and rarely exceeding 65 percent, citing over-levered investment failures as a lesson learned from the global financial crisis. 
 
A third panelist said his firm looks internationally for investment opportunities not linked to GDP growth. Last year, the firm bought a family-owned Italian hospitality company to tap into Italy's recovering tourism business. In a “messy” deal, the firm worked with 20 Italian banks and the controlling family, but he said the difficulty of the deal was justified by a 20 percent IRR. On the dispositions side, his firm is selling Spanish housing, a strategy it entered post-GFC that has since become popular with institutional investors. 
 
Another speaker compared his firm's investment strategy to building “a battleship of assets and cashflow that can hopefully produce those opportunistic returns, and have a level of buoyancy to them.” Such a portfolio, he said, can withstand a major geopolitical or other macroeconomic change.
A future risk mitigation opportunity could be improved data management, the panelists all agreed. 
 
While each firm has its own internal analysis processes, one panelist said he still relies on anecdotes and observations for properties that may have underlying economic tailwinds not immediately visible in data. Another firm has benefited from the 2009 implementation of a loan database and commercial mortgage backed securities web portal that allows the real estate team to examine debt granularly, but the executive said there is still need for better processes on the equity side.
 
“What everyone's talking about up here [regarding technological enhancement] is the holy grail,” one panelist said. “If we could mine our portfolios for insight, that would be invaluable.”
 
The opening panel at the Global Investor Forum featured real estate executives from Oaktree Capital Management, Fortress Investment Group, Cerberus Capital Management and Värde Partners.