The atmosphere at MIPIM was described as “buoyant” by more than one of the industry executives who attended the world’s largest real estate conference on the sunny shores of Cannes.
The same professionals might then have been surprised when real estate agent Cushman & Wakefield revealed that global real estate investment had actually fallen for the first time in five years by 6.3 percent to $1.21 trillion in 2014. But, in the analysis behind the numbers it was easy to see why the chink of champagne glasses could be heard all along the Boulevard de la Croisette.
Looking back to 2014, the report stated that while excess capacity in some parts of the property market and previous policy tightening had a negative impact on Chinese investors and developers. However, excluding China land sales, global volumes rose 9 percent. Further, ignoring China, global investment levels are set to rise an additional 11 percent in 2015 to $1.34 trillion, led by Europe and the US.
“The 2014 pick-up was better than many predicted this time last year but the 2015 outlook is stronger still, with the brakes now coming off the market,” said David Hutchings, head of EMEA investment strategy at Cushman & Wakefield. “Not only do we have strengthening global liquidity thanks to low interest rates and an expansion in quantitative easing, we also have the start of stimulus measures by China, signs of deeper reform in more markets and an improvement in the fundamentals for the occupier in many areas.”
Yet, in spite of the optimism that was prevalent throughout the week one common theme that was on everyone’s lips was whether all of this investment was “sensible”?
“There is a worry that core pricing is becoming too hot. There is pressure on investors to allocate, and managers to invest, and this can ultimately lead to bad decisions,” said Will Rowson, partner at the New York-based capital advisory firm Hodes Weill & Associates. “There are still real opportunities in the European market for skilled knowledgeable managers but the low hanging fruit has definitely gone.” The former CBRE Global Investors’ chief investment officer for Europe, says that when the marketplace reaches this temperature it can force managers up the risk spectrum.
Rowson’s contention that managers might start looking at more opportunistic and value added strategies bears out in some research conducted by CBRE that was also released at MIPIM. The attractiveness of the two strategies has risen 10 percent among real estate investors since last year, according to the survey.
The survey of 280 real estate investors said that access to competitively priced stock was the biggest problem for investors today. Nearly all – some 91 percent of 280 investors – cited one of ‘availability of assets’, ‘asset pricing’ or ‘competition from other investors’ as the biggest obstacle to investing.
“Investors are constantly having to evolve their investment strategies, in their pursuit of yield and returns, as demand for European commercial real estate shows no sign of abating,” Jonathan Hull, managing director of EMEA capital markets at CBRE, said. “This diversification is leading investors into new markets and sector. However, there is still significant demand for core locations and assets, particularly from the growing influx of capital from outside the region.”
One group conscious of not moving up the risk spectrum in order to maintain deal volume is Rockspring Property Investment Managers. Flavio Casero, partner at the London-based real estate manager, said: “For real estate investment management firms this is a buoyant environment in which to operate, given the general and increasing availability of equity and debt capital. However, as the underlying economy remains fragile, this comes with the challenge of sieving through a growing supply of stock which, in good part, will not match our investment risk-return requirements.”
The firm has had a busy start to 2015. It reached a final close on its UK core-plus offering, UK Value 2 LP, on £342 million (€475 million; $503 million) back in February which has made seven acquisitions, taking the current total aggregate value of the assets to more than £200 million. “The key will be having patience, acting quickly when the right deal is identified, and the ability to keep investors abreast of how the market evolves over time.”
One outcome of the pressure to invest is that there will be more package deals, said Olivier Piani, chief executive of Allianz Real Estate. “Expect to see lots more portfolio deals, €1 billion-plus, which will be driven by funds and provide a good way of getting the necessary volume of capital to work.” Piani adds that while there is a lot of money looking for deals he still expects his firm to hit its target of deploying €2 billion in 2015. “We invested €2.5 billion last year with a €2 billion target, this year should be no different.”
Some of the portfolio deals that Piani is expecting may hit the market from AEW Europe, the Paris-based real estate investment management firm. Russell Jewell, head of private equity funds for AEW Europe says that the firm’s exit strategy for its value-added and opportunistic funds is building portfolios of assets with stable cash flow to sell to institutions.
“We are developing logistics assets rather than buying highly competitive portfolios. We are trying to get at core real estate but with better pricing,” adds AEW chief executive Rob Wilkinson, whose firm has been busy on the fundraising trail reaching a €235 million second close on its Europe Value Investors Fund in last month and closing on €820 million for its core industrial and warehouse platform, logistics in December.
In fact, when quizzed as to whether or not the vast amount of capital allocated to real estate would cause return expectations to go down (as pricing gets higher), Wilkinson says this is only the case for the most core strategies.
Not everyone at MIPIM agreed with Wilkinson that core return expectations should be lowered, and this say others is where the “stupid behavior” may start. The driving force behind this is obvious: managers have a fixed period to make investments and right now the markets are getting hot as more and more equity is available for deployment, causing prices to rise as demand outstrips supply. The fear then is that in order to meet investors’ expected returns fund managers will be required to either move up the risk spectrum – to a level which the investor has not agreed to – or to diverge from the planned investment strategy while on the hunt for attractively priced assets.
One pan-European fund manager said that the chances of investors being burnt on real estate again is high, but for a different reason. He says that when there are good times in the real estate industry investors are blind to past failings. Managers that he says should have been killed off for poor performance during the last downturn have been able to sit on the side lines and bide their time before making a re-emergence on the fundraising trail, and they are able to collect capital.
Yet, while equities remain volatile and bonds offer little yield, demand for real estate looks set to increase in 2015 which only increases the pressure on managers to deploy and come back to market with new offerings.
How wisely will the fund managers be in deploying this capital? Well according to at least one source, not very. “There is no memory on the fund side. Pressures mean they have no choice but to invest and take more risks,” said one global secondaries player. “It’s human nature, ego, testosterone – people will take risks.”
My first MIPIM
Experiencing the weird yet wonderful MIPIM conference for the first time was a real eye-opener for PERE’s newest European reporter. Writes Thomas Duffell
Unfamiliar with Cannes, and the real estate industry, one can easily be led astray and spend hours wandering Boulevard de la Croisette or stuck in the rather aptly nicknamed ‘bunker’ that host the largest global real estate conference – MIPIM.
However, PERE would never let a reporter go in unprepared and the industry was quick to provide help when needed. “The white sausages of the Munich stand are to be avoided at all costs, especially on a hangover,” was just one (unheeded) piece of sage-like advice that this PERE reporter picked up within hours of landing on the Cote D’Azur.
Another tip, and one that many of the industry professionals PERE spoke to, was take note of who is propping up the bar of the Martinez Hotel in the early hours. Many suggested that when it was full of under 30s brokers then the market is hot. With this as the barometer the temperature in real estate is certainly rising.
The importance of getting invited to the right MIPIM parties was also, thankfully, something this reporter did not need to learn the hard way. With around 25,000 real estate professionals in attendance targeted networking is not made easy without knowing where the great and good of private equity real estate are spending their evenings.
But, despite being a fun and generally quite a boozy affair MIPIM is certainly not frivolous. The real estate executives are there to work and work hard. Diaries are full and always changing, and if you are not careful you can get far less face time with the people you really need to see.
As a first-timer in Cannes, this PERE reporter had to make sure the diary was packed full of meetings with the great and good of real estate. It is not merely enough to prop up the bar at the Majestic Barriere or grab lunch at the Miramar Plage, one must also make time for some boat parties.
Day One – Monday – 3/9/2015
14:00 – Heathrow Terminal 2
Flight cancelled! MIPIM got off to the worst possible start for this PERE reporter who then spent the remainder of Monday working out of the nearby Ibis Hotel.
Day Two – Tuesday – 3/10/2015
06:00 – Heathrow Terminal 2
And PERE is off. An early start to the day but PERE heads to Nice, via Brussels, after having to cancel all of its Tuesday morning meetings. Apologies to Valad Europe, Cornerstone, Colliers and APAM.
15:00 – The Munich stand – Will Rowson, Hodes Weill & Associates
Meeting Will Rowson after a well-meaning (or practical joke) suggestion from a colleague that the Munich stand is a good place to meet for a quick chat. We discuss his recent move to Hodes, the capital raising market and the pressure to allocate capital to real estate.
17:15 – Grand Hotel – Flavio Casero – Rockspring Property Investment Management
A coffee with Casero during which we discussed, among other things, how MIPIM is logistically great for groups like Rockspring. We talked about how you can meet many global real estate players in a week, whereas usually it would take you a month or two to do so from London.
18:30 – Plage Royale Beach Restaurant – FTI Consulting
Drinks with the team at FTI Consulting. Managed to meet a wide variety of real estate professionals including Claire Freeland from UK-based development company Landid who has been working on the Thames Valley portfolio with Brockton Capital.
Day Three – Wednesday – 3/11/2015
08:15 – Majestic Barriere – CBRE
An early start for CBRE’s annual Global Investment Forum. Standing room only at the breakfast briefing which saw the firm release its EMEA investor intentions survey. Key findings of the survey revealed that investors are looking at moving up the risk curve in order to meet return expectations.
10:30 – Allianz Lounge, 2, rue Bivouac Napoléon – Olivier Piani – Allianz Real Estate
PERE caught up with Allianz’s chief executive to discuss the firm’s 2015 investment strategy. Piani says Allianz is targeting €2 billion of deals in 2015, although he says he would not be surprised if they surpassed that number as they did in 2014.
13:00 – Miramar Plage – Ric Lewis – Tristan Capital Partners
A diet coke with Tristan’s chief executive officer to discuss his firm’s now legendary MIPIM party as well as the opportunity in Germany. Tristan is set to make five investments in Germany for more than €450 million in the country.
15:30 – Villa Bernard Building – Pieter Hendrikse and Pieter Roozenboom – CBRE Global Investors
CBRE Global Investors’ EMEA chief executive, Hendrikse, explained the reasons behind the firm’s fundraising success and we discussed the impact of political risks in Europe and how they might impact on real estate investing. Roozenboom, who has just taken on the newly-created role of head of global separate accounts, described the rationale behind the firm’s enhanced separate accounts infrastructure.
17:00 – LaSalle’s boat – LaSalle
Drinks on the good ship LaSalle where PERE managed to grab five minutes with Jon Zehner, global head of the firm’s client capital group. Mostly discussed the excellent food that LaSalle had put on for guests!
Day Four – Thursday – 3/12/2015
10:00 – Majestic Barriere – Christian Delaire – Generali Real Estate
After 12 months as chief executive of one of the largest European real estate investors, Delaire discussed the move from AEW Europe, as well as outlining his intentions for the Generali’s real estate strategy going forward. Expect a more direct approach.
11:30 – AEW Europe’s boat – Rob Wilkinson, Russell Jewell and Schalk Visser – AEW Europe
The Paris-based firm has had an incredibly busy start to 2015 and just after holding a €235 million closing on its latest value add fund it revealed to PERE that the firm had hired Alexander Strassburger and Nikolas Koulouras, and set up a €150m German retail platform.