This week, PERE hosted its first-ever all-regions, simulcast event, the 2021 PERE Global Summit, to take a comprehensive look at the private real estate industry more than a year into the pandemic. With vaccination efforts now having a positive impact, the event provided an early retrospective on the sector’s most trying period to date and shined a light on what is to come as the global economy begins to recover.
Below are the top takeaways from our round-the-clock sessions, which tackled monetary policy in real estate’s biggest markets, macro-economic concerns at global and regional levels and the trends shaping property type allocations and capital formation.
The end of government support
Delegates were less concerned about banks, which have continued to show flexibility on debt payments, and more worried about governments ending support programs, on which many Main Street businesses still rely heavily. Despite initial optimism about vaccine rollouts ending the crisis, “I also see a lot of governments being under pressure to stop some of these programs,” Robert-Jan Foortse, head of European real estate at APG Asset Management, remarked during one session. “At some point somebody needs to pay back all that money they’ve been borrowing.” Fellow panelist Neil Slater, global head of real estate at Aberdeen Standard Investments, said a reduction of government support could lead to more borrower defaults and result in more distress in 12 to 18 months.
The topic of inflation sparked a bit of debate. On a day in which many of the world’s main stock exchanges tumbled by triple-digit basis points on inflation concerns, Slater said he did not see any real inflation in some of the world’s major economies at present. But it could become a concern if governments began raising interest rates, which would then change discount rates and real estate’s relative value versus other asset classes. Foortse, meanwhile, expected a spike in inflation over the next six to 12 months, given the anticipated surge in consumer spending post-lockdowns. He also said a shortage of workers and raw materials have been driving up construction costs, which will also increase replacement costs and, in turn, have an impact of the pricing of existing buildings.
Is Europe the new Japan?
Another speaker, Andrea Orlandi, head of European real estate at CPP Investments, likened Europe to Japan in that both were wealthy and have been low-interest-rate, low-growth environments. Jose Pellicer, M&G Real Estate’s head of investment strategy, said Japan had benefited from being seen as a highly productive and competitive exporting economy, despite its low growth and massive debt to GDP. Europe, on the other hand, had been viewed as a set of countries split into the “exporting north” and the “consuming, lazy south,” he said. However, he noted the European Commission’s announcement last month to issue debt secured by all the European Union’s member states for the first time was a “massive step” toward having a more unified fiscal and monetary policy like Japan.
Pumping the brakes on life sciences
The booming life sciences sector has been a saving grace for US office markets in major cities like Boston, San Diego and San Francisco to rising metros like Raleigh-Durham in North Carolina. But has the gold rush gone too far? Jonathan Pearce, executive vice-president of leasing and development for offices and industrial for the Canadian pension investor Ivanhoe Cambridge said the space has been swamped with would-be developers. His worry is that inexperienced hands will not be able to meet the highly specialized needs of these properties. “There are a lot of people on the sponsorship side who really have no track record of execution and they’re wading into very complex, very technologically advanced buildings that are different from office, they’re more akin to a hospital,” he said. The topic also arose during our Asia-Pacific office panel, in which the consensus was the research and development sector is promising, but still too reliant on government funding to be a scalable investment opportunity.
As part of its ongoing effort to dial up direct exposure to real estate, Teacher Retirement System of Texas, the $176.9 billion US pension fund, is pursuing ‘opco-propco’ types of transactions to expand its international investment exposure. Craig Rochette, director for real estate at the Austin-based fund, said in a keynote interview that TRS has made three to four operating or property company investments in Europe in a range of sectors and markets, including in UK residential and French offices. While TRS would like to do something similar in Asia, Rochette talked about how propco transactions were harder to find in the region because of the huge competitive demand for such deals. “What we want to see are groups that are entrepreneurial and want a partner like us to build their business,” he said, describing the firm’s objective behind such investments.