PERE NY: Going where the capital isn’t

In a highly competitive environment, some real estate investors are staying away from the herd, delegates at the PERE Summit in New York heard yesterday.

With the top global property markets awash with capital, some chief investment officers have opted to invest in areas where capital is scarce.

Tom Shapiro, founder and chief investment officer at GTIS Partners, said that the flood of capital into major property markets across the globe could be an issue. “We’re seeing a lot of money out there,” he said, speaking on a CIOs’ panel at the PERE New York Summit 2014 at the Convene Conference Center yesterday.

“We’re starting to see certain sectors of the market chasing very, very low cap rates,” he added. He mentioned one deal in Europe that had multiple bidders and was expected to trade at a 2.5 percent capitalization rate. But with such deals, Shapiro questioned whether buyers would get paid for the risk.

Instead, the firm has opted to pursue less-crowded real estate opportunities. “I know every time I get turned down by an investor on an idea we have, it means it’s a good idea, because frankly it means a lot of people aren’t doing that,” he said.

GTIS, for example, was an early investor in single-family rental housing in the US, which today is its principal real estate focus in the country. During the depths of housing crisis, the firm worked on a deal that involved a senior mortgage plus an equity kicker to a large public company. None of GTIS’ investors, however, were interested in participating.

“So when you start seeing people pile in, you end up getting people on bad underwriting, it becomes a concern,” he said. “So I think our jobs as CIOs is to navigate away from those areas where the pockets are.”

Simon Treacy, global chief investment officer at BlackRock, however, differed from Shapiro in that he didn’t believe that investors should stay away from the real estate markets that have attracted the most capital. “I’ve seen this movie before where the markets are very competitive,” he said. “People drift to secondary markets, secondary sectors and get the total yield they want for a couple of years, and then something happens in the markets, that’s the areas where they first get soft and your total return gets wiped.”

But while BlackRock has concentrated on the gateway markets, it has focused on less-desirable properties in need of repositioning or lease-up. “Our thing for the next two years is to stay very highly disciplined,” he said.