PGIM’s Adler: Global markets becoming 'decorrelated'

Despite the uptick in cross-border capital flows in global real estate, the world’s property markets are becoming less, not more, linked to each other, the executive said.

Although the recently renamed PGIM Real Estate has witnessed an increasing “internationalization” of its business, it views the global property markets as being relatively unconnected from one another, the head of the business said on Wednesday.

“In the real estate space, we’re finding more decorrelation between regions,” said Eric Adler, chief executive officer of PGIM Real Estate, speaking during a media presentation at the firm’s New York offices.

This is despite the fact that PGIM’s client base has become increasingly international in its real estate investment activities. “Our investor base more recently is doing much more cross-border,” he said. “In the last 2.5 years to 3 years, more than 30 percent of what we have raised is investors investing outside their local markets.”

However, “no matter what these cross border flows do, they can’t move the overall real estate needle,” he added. “Real estate is probably the biggest asset class in the world, if you counted all of the real estate that exists. So the transaction volume, it looks big, but it’s nothing compared to what’s out there and available.”

Meanwhile, the real estate cycles of the world’s property markets have become more distinct, and consequently, more decorrelated, since the global financial crisis. For example, while the UK was on slightly better footing than the rest of Europe four or five years ago, nothing in the region looked very good at the time, Adler noted. “Today it’s a very different story, all of the UK is as advanced as the US. I’d put London with San Francisco in terms of where it is in the cycle. You still have a lot of demand, but you’re starting to get a lot of supply and prices are at a point where it wouldn’t take much to start taking some air out of cities like that. They feel good now, but they’re pretty pricey.”

Although there are still strong demand drivers in the UK, it is in the later part of the real estate cycle, and PGIM has consequently shifted much of its strategy to mezzanine debt in that market. “Mezzanine in a market like the UK feels very safe, you’re coming in at a lower basis, and demand’s still good, so you should still have good income but you’re better off taking it at a lower basis,” said Adler.

By contrast, continental Europe is in a much earlier part of the real estate cycle, having been hampered by the European debt crisis for several years. Because of this, “Europe is a great time for value-added investing right now,” Adler said. “You can find markets that just don’t have a lot of supply, rents are nowhere near their highs, cap rates are low. People are still nervous about Europe, so they’re giving a real risk premium to leasing risk. So if you’re ready to take that risk, you’ll get a much bigger alpha return than you could buying equities in some of these more advanced markets.”

As for Asia, PGIM has been buying into China, where prices for office properties in the major cities are down 30 percent to 35 percent from where they were a year ago. “Are we calling an absolute bottom of the China market? That’s impossible, it’s such a big market and it moves in a way that’s very different from the West,” he said. “There’s potential for growth, even when it’s at a 6 or 7 [cap rate], it’s still multiples of what we’re getting in the West, but we know we’re at a point where it’s pretty smart to dollar cost average there.”

Singapore is another Asian market where office rents have been dropping, and could be “a very interesting play” in 18 months to 24 months, according to Adler. Tokyo continues to have very good supply and demand dynamics, thanks to its demographic growth, and therefore is a market that still has value, he said. “So even within Asia, just like within Europe, you can make much more distinct calls than you could 5 or 6 years ago, when everything was being overshadowed by this crash of the global financial crisis,” said Adler.

PGIM Real Estate, formerly known as Prudential Real Estate Investors, is the real estate investment management business of PGIM, the global investment management business of Newark, New Jersey-based insurance company Prudential Financial. As of March 31, PGIM Real Estate managed $65.4 billion in gross assets and $48.3 billion in net assets globally.