FEATURE: Dispatches from la Jetee

The bold and the beautiful budget

There may be a global economic slump, but this didn't stop local municipal authorities funded by taxpayers making the trip to France.

During the build-up to this year's MIPIM, the PERE email inbox swelled as local authorities, cities and regions from the UK and globally dropped invites to events designed to showcase real estate development projects.

But as one opportunistic fund manager attending the event asked: “Who is going to fund these kind of £1 billion (€1.1 billion; $1.5 billion) speculative development schemes in this climate?”

Jetee Albert-Edouard

In the UK, local newspapers have often given negative coverage of municipal authorities spending taxpayers' money on a week of champagne, cocktails and parties. That was in the good times when an authority could more easily justify the public expense by explaining how much investment could be attracted by attending networking meetings while staring out over the sparkling waters of Cannes marina.

With the global economy sliding, however, this is not so easy an argument. Yet it didn't stop government organisations making the flight over and paying thousands of Euros for their exhibition stands, prices starting from €9,000.

The MIPIM bunker, the unofficial name for the Palais des Festivals, was certainly less busy in terms of delegates walking around. However, there was the usual preponderance of models of municipal-backed development schemes, often in the name of regeneration. Among the exhibitors was Leeds and Bradford, two UK cities that combined to show £10 billion of planned private and public sector investment.

There were plenty of other examples as well. In other parts of the exhibition halls, sometimes grouped together, were municipalities, cities and entire regions from Eastern Europe. These had the largest scaled models of projects of any exhibitors.

But as the European Bank for Reconstruction and Development told PERE, there is little or no financing for such projects in frontier markets.

Projects in locations even further afield than Eastern Europe also deemed it worthwhile to showcase their extravagant plans for extremely large buildings. The architect Genlser chose MIPIM 2009 to provide more details of the Shanghai Tower, which is supposed to become China's tallest tower when built in 2014.

While the economic downturn may have put off at least 10,000 people from attending MIPIM this year, it hasn't dented the ambitions of those with grand designs on constructing property.

Lending signs of life

Though many banks are still dealing with fractured balance sheets and nursing multi-billion Euro losses, there are signs that some are returning to lending, albeit conservatively.

Eurohypo, the Eschborn, Frankfurt-based commercial property bank, came to MIPIM with one message: we are going to start lending again.

On a stand draped with the company's red logo, Eurohypo executives sipped coffee and munched on the occasional biscuit with hopeful borrowers and perhaps a few curious participants keen to know how the bank is doing.

Eurohypo's MIPIM stand

The message that Eurohypo delivered is that following several months of inactivity, it is beginning to underwrite new transactions in established markets such as the US, UK, France and Germany.

There is no doubt that the banking fraternity was one of the key areas of discussion among real estate professionals who came to Cannes. Though bankers did attend, it was clear that they were not out in force.

Take Hypo Real Estate, Eurohypo's biggest rival. The troubled bank took no stand this year, perhaps understandably following the German government-led bailout and the subsequent €102 billion of loans and guarantees provided to the bank to ensure its survival.

That's not to say Hypo was not present, though. Its European chief executive Harin Thaker was spotted at the Majestic Hotel on La Croisette on Thursday morning, as much of the event started to wind up.

As exemplified by Bayern LB, another of Germany's banks, most lenders are still sorting themselves out before positioning themselves to restart originations. Assem El Alami, director and head of real estate finance in France, told PERE it was restructuring following a €10 billion capital injection from the regional state of Bavaria.

The impression left at MIPIM though was that some banks that are moving back into the lending field – even those most severely hit in the UK. One lawyer recounted a rumour that Royal Bank of Scotland had signed off two deals of late.

In a way, this was the irony of MIPIM. If there was any year that banking institutions should have been present in Cannes to talk to the market, then this was it. However, with their balance sheets torn to shreds and most nursing large losses, it was never going to be a possibility.

The yachts: fact from fiction

The Jetée Albert-Edouard at MIPIM has been a useful barometer for the health of the real estate market. If this year's event is anything to go by, it is very sickly

In previous years, it has been the eye-popping size of yachts at MIPIM that was discussed over champagne and canapés. This year, however, it was about the cut-price deals available to rent them.

Though berths at the Jetée Albert-Edouard next to the exhibition halls were occupied, it became clear that many firms had been offered big discounts to rent yachts moored there.

Yachts at Cannes

In some cases, firms had little choice but to rent the vessels after signing three-year deals in much better times.

Despite this, there were anecdotes of firms walking away from previously paid deposits. And it wasn't just a case of economics – some firms were also thinking about their image.

Given the pain being experienced by so many real estate organisations, some said it sends the wrong message to be seen quaffing bubbly on a boat in the sunshine when ex-colleagues are looking for work in the cold of London or when clients are still furious at having lost significant amounts of money.

Savills, a London-based real estate property services firm, was among those that scrapped plans to rent a 20-metre-plus yacht, opting instead for a land-based venue. Taking over a cafe near to the MIPIM registration area, a spokeswoman said this was more “cost effective” and attracted more passing trade. It was also, of course, a much more “appropriate image given current market conditions”.

Indeed branding played more of a pivotal role this year as firms rejected the image of high-living in favour of the sobriety of coffee drinking onshore. Invesco Real Estate rejected the yachts in favour of renting a nearby apartment instead.

It shows just how far the downturn has touched real estate for MIPIM, an event synonymous with yachts and champagne, to become synonymous with earnest sober meetings on dry land.

Petro dollars cool on indirect funds

GPs can no longer expect sovereign wealth funds to automatically re-up when they are underwhelmed by the performance of existing vehicles

Tens of thousands of air miles have been clocked by real estate fund managers travelling to the Middle East to land commitments from sovereign wealth funds. However, according to feedback from MIPIM, such flights might not bear fruit any longer.

Speaking with senior executives from two global property services firms, PERE was told that GPs can expect fewer commitments going forward as these petro dollar-fuelled investors lick their wounds from a series of unsuccessful real estate investments made over the last couple of years, particularly in indirect property investment vehicles.

Fadi Moussali, regional director of Jones Lang LaSalle's capital markets team in the Middle East, said sovereign wealth fund managers were now keen to take more control of the management of their investments.

“They are now scared of putting their money into third-party funds and would rather control it themselves by committing to direct ventures,” he explained.

Mike Atwell, Cushman & Wakefield's head of Middle East operations, added: “They are taking stock at the moment and so for now, their preference is to invest either at home or not at all.”

And the strategy shift is already happening. According to sources, one prominent LP has reduced the number of commitments it makes with third-party fund managers from 52 funds in 2008 to just two funds to date in 2009.

The investors have been generally underwhelmed by the performance of some of the largest global real estate funds, the sources added. As Justin O'Connor, chief executive of Cordea Savills, said: “Investing in indirect funds is not necessarily the panacea for everyone.”