Private real estate operations look beyond New York

Some of the world’s prominent gateway cities, with their heavy concentration of capital and talent, have long been magnets for private real estate firms. Manhattan’s downtown financial district, the Central and Wan Chai neighborhoods in Hong Kong, Mayfair in London and Singapore’s Marina Bay are all teeming with glossy headquarter buildings.

In PERE’s latest ranking of the top 100 private real estate managers, almost 70 are based within the US. Of these, 21 are headquartered in New York and the remainder spread throughout the two coasts. Doug Weill, co-founder and managing partner of global advisory firm Hodes Weill, finds it surprising how many of the firms based in New York are not even actively investing in New York, or focused on opportunities in the area.

In the US, labor costs have become a key driving factor. Bill Thompson, senior managing director and co-chief executive at New York-based investment bank Evercore’s private capital advisory business, says real estate firms have started to put their back office or asset-management-related businesses in places like Dallas, “not just outside the San Franciscos and New Yorks of the world.”New York’s key draws, like most metropolitan cities, are the scale of jobs, along with an ample workforce, cultural diversity and a relatively business- and tax-friendly environment. But when set against a backdrop of political and regulatory changes, as well as the growth of secondary cities, some of this appeal is ebbing.

Deep disruptions

In other jurisdictions like the UK or Hong Kong, however, the challenges are more profound. Last year, property consultancy JLL termed London as the largest commercial real estate investment market in the world in a list of the 30 cities attracting the most amount of direct capital in the sector. The city had the top spot in both 2017 and 2018. But the ensuing uncertainty around Brexit has since impacted London’s appeal, both as an investment destination and a hub for European operations.

In the PERE 100 ranking, which counts firms in terms of capital raised over a five-year period, Patron Capital Partners is the only London-based firm among its new entrants. But there are five London-based firms in the list of 18 that dropped out of the rankings this year.

“Should you run a pan-European business from a market separate from mainland Europe?” asks Ric Lewis, executive chairman and chief investment officer at Tristan Capital Partners, a London-based manager occupying the 43rd spot in the PERE 100. “As we were going through Brexit, there were people questioning whether you should operate from London.”

Now that Brexit is a reality, this conundrum will only increase further. “I don’t think this is impacting existing managers,” he says. “But for those thinking of starting something in London, given the passporting issue arising from Brexit, this has to have had an impact.”

Meanwhile, in Asia most global managers have operated their regional businesses out of Hong Kong and Singapore, especially given their favorable tax and regulatory structures. Singapore-based developer and manager CapitaLand and Hong Kong-based managers Gaw Capital Partners, BPEA Real Estate, ESR and PAG are in this year’s ranking. But Brian Chinappi, partner and head of Asia at London-based firm Actis, believes these cities’ dominance has been declining over the past decade.

“The most prominent [factor] is that most GPs have established teams in the markets where they are investing, reducing the old ‘suitcase’ investor approach and therefore the dominance of investment professionals in regional hubs,” he says.

For Hong Kong particularly, the unprecedented volatility triggered by the pro-democracy protests in 2019 has also been a gamechanger. According to a survey by the US non-profit organization American Chamber of Commerce in August – a period of peak turmoil in the city – a quarter of businesses out of the 120 responses said they were thinking of leaving Hong Kong. Nine out of 10 firms listed Singapore as their favored place for relocation.Going forward, however, all these global cities will also be grappling with one central challenge: what the future blueprint of an office will be like in a post-covid world. With tens of millions of people working from home in recent months, more firms could end up embracing the concept of remote working, as well as satellite offices, instead of having thousands of workers crammed in one centralized corporate headquarters.