Private equity real estate investors bullish for 2008 in Europe

An informal audience survey conducted at today’s European Private Equity Real Estate Forum suggests that investors see change ahead, but also remain optimistic.

PERE’s third annual European Private Equity Real Estate Forum came to a close today with a panel discussing the factors likely to shape the European real estate industry in 2008. The analysis examined not only the views of the panel, which consisted of Evans Randall director Jeffrey Harris, HSBC Investment Bank director Moreis Scobie, and Macquarie Global Property Advisors director Andrew Wood, but also the predictions of the audience itself.

Using portable voting devices to register their opinions, the attendants showed strong optimism in the face of growing concerns within the industry. For instance, when asked what effect the falling value of the dollar will have on fundraising for European real estate funds, 36 percent said the result would be more capital, while just 17 percent said it was likely to result in less capital. Forty-four percent of the audience said that even if real estate investment performance in 2008 is lower than equities, it will have no effect on capital flows into the sector because real estate operates on a different paradigm. And when asked if real estate investors should be positioning themselves for a downturn like many private equity investors, 39 percent said no and that current levels of leverage and interest are not at alarming levels.

Interestingly, 60 percent of the audience said that concerns over global warming will lead to a big increase in demand for green building in 2008, and only 24 percent said concern over global warming would negatively affect investment returns. Andrew Wood said he agreed, arguing that it will be building occupiers rather than LPs that will drive the trend. “I hear LPs say, if you’re going to make a green investment that’s fine, but I need to see the same return as I would for other investments,” he told the crowd. Moreis Scobie observed, “what these results say to me is that someone should set up a green real estate fund very quickly.”

Andrew Wood, Macquarie

Perhaps the most interesting result of the discussion came when the audience was asked what might have the greatest effect on capital appreciation in 2008. Fifty-five percent of the audience said development or redevelopment would have the greatest effect, while 21 percent said that it would be rental growth. Not a single person in the room said they thought capitalization rate compression would have the greatest effect. Andrew Wood observed, “We’re all chasing yield, and the place where we can apparently make the most money is development.” But he cautioned that if everyone moved into development, it could be quite a disaster, so perhaps the result of the survey stands as a warning bell.

The panelists pointed to increasing construction costs as likely to be one of the major factors in European real estate in 2008, likely causing reduced returns. Jeffrey Harris said that construction costs in Romania, for instance, have risen sharply in the past six months. They also pointed to the maturation of REITs as a major factor, predicting consolidation and rationalization for the future. They predicted increasing pan-European financial regulation, particularly expansion of the pan-European CMBS market, as another important issue next year.

The panelists concluded that going forward, more specialization would be required to achieve significant returns, which would necessarily mean a shift in managers’ focus. As for the audience, they were split over this conclusion. Forty-four percent said that the increase in interest rates in decrease in yields will mean opportunity funds will have to become specialist, while 50 percent disagreed. Andrew Wood remarked that this is probably the sign of a healthy market, because perhaps half of fund managers should change, and half shouldn’t. Citing a dichotomy emerging in investor interest, he said probably as many investors are looking for niche funds as are looking for diverse general funds that invest across all asset types.