FEATURE: Tête-à-tête in Cannes

At 8:30 am on Thursday, March 10, the vast throngs of property professionals that had descended upon the French resort town of Cannes for the annual MIPIM conference were just beginning to hit the streets and prepare for another full day of panels, speeches and meetings. It was the first truly nice day since the conference began, with warm sun and no chilly sea breeze to speak of.

The lack of activity around the Palais des Festival could be attributed to the fact that MIPIM organizer had not scheduled sessions to begin before 9:30 am, as they knew full-well that most attendees likely had attended one or more of the numerous parties that took place until the wee hours of the night before – PERE staff not excepted. Still, that didn’t stop myself and Asia editor Jonathan Brasse from appearing bright-eyed and bushy-tailed for a breakfast gathering with winners of the 2010 Global PERE Awards that morning.

The meeting took place aboard the Motor Yacht Alaska on the Jettee Albert Edouard in Cannes harbor, facing the vast exhibition halls of the Palais des Festivals, where most of the official MIPIM program took place. Among the winners in attendance were representatives from Rockspring Property Investment Managers, Aviva Investors, Hines, CBRE Investors, Baker & McKenzie and GE Capital Real Estate, as well as professionals from Apollo Global Management and RREEF, which was kind enough to let us use their boat for this event.

Below are brief outtakes from some of the conversations that took place that morning. Much like the overall atmosphere at MIPIM this year, PERE Award winners were enthusiastic and more positive about the prospects for real estate this year, that despite a difficult lending environment throughout Europe and a scarcity of distressed sales from financial institutions in the UK and on the Continent.

Gianluca Muzzi
Managing Director and Head of Europe (ex Germany)

Although MIPIM participants were questioning the current pace of economic recovery and what assumptions should be made about the speed and longevity of it, Muzzi noted that there was “more business being done” this year than in previous ones. On the investor side, there was no longer just a “wait and see approach,” rather investors were starting to deploy capital across borders. “They feel they have to go beyond their borders,” he said. “Some are starting from zero allocation to overseas property and are looking to reach around 10 percent – that’s a lot of capital to deploy.” He added that, in some cases, there was interest in value-added strategies, although the success of that depends on the strength of the economic recovery.

Jeremy Plummer
Managing Director, Global Multi-Manager
CBRE Investors
Asia Fund of Funds Firm of the Year

“What pension funds have realised is that private equity real estate funds haven’t delivered what they wanted,” Plummer said. Indeed, most pension based their allocation decision on an asset liability modeling study, which uses the unlevered market return (the IPD direct property index or equivalent) as an input, he explained. This is characterised by a high-income yield of about 6 percent, low correlation with equities, lower volatility than equities and long-term growth that keeps pace with inflation – very attractive characteristics for pension funds. However, levered private equity real estate funds didn’t deliver these characteristics. “The fundraising community doesn’t seem to understand this,” he said. “They need to structure products that meet pension funds’ needs, not their own.”

Edmund Craston
Managing Director
Rockspring Property Investment Managers
Europe Firm of the Year and Europe Fundraise of the Year

“Different LPs have different preferences and concerns when they consider their approaches to real estate investment right now,” said Craston. Some of the bigger investors are showing increased interest in separate accounts, joint ventures and club deals, while there is still demand for fund structures from many smaller and medium-sized investors, including some who are new to real estate investing and who recognise that retaining more discretion can create a burden for themselves that is hard to bear, he noted.  “On the whole, we see a continuing preference for lower-risk strategies than was the case before the financial crisis,” he added, “and a real emphasis on the experience, the stability and the breadth of capability of the manager; a focus on property skills rather than financial engineering; and a clear recognition that a fiduciary mindset and the right attitude to communication and governance are of central importance.”

John Gellatly
Head of Europe, Global Real Estate Multi-Manager
Aviva Investors
Europe Fund of Funds Firm of the Year

“The LP universe appears to be relatively bifurcated, split between those targeting core strategies, which comprise the largest element, and those seeking more opportunistic returns,” said Gellatly. The former group comprises those investors who remain in a risk-averse mode and who are generally looking to adopt relatively conservative strategies focused on the mature markets, with low leverage constraints and with a bias to income, he explained. Meanwhile, the other group is seeking to exploit the capital and real estate markets dislocation by way of a combination of buying discounted secondaries, providing refinancing and/or mezzanine finance or focusing on the less developed or emerging markets. “For both groups, the relative lack of suitable product and shift in pricing in recent months, especially for core assets, means that identifying and securing suitable opportunities has become more challenging,” he added, noting that the increased time taken by investors to complete their due diligence also reflects the growing maturity of the indirect real estate investment market.