For the second time in less than three years institutional real estate landlords have had to dramatically switch gears to review their operations for weaknesses. That is notable for a sector that usually moves slowly, one C-suite executive of a pan-European manager told PERE this week at MIPIM.
Having already had to kick the tires following the start of the pandemic, managers have been at it again. At least half of every conversation we had at the four-day conference in Cannes – returning for the first time since the outbreak of coronavirus in 2019 – was focused on the conflict in Ukraine. Managers and investors alike regaled how the last three weeks have been preoccupied with “look through” activity: essentially scanning their operations for traces of Russian or Ukrainian business.
For the managers, the first box to tick was direct or fund holdings in Russia or Ukraine. Most have none. Second on the checklist is the tenant base. Here, there are instances of lease terminations, but nothing material. Third on the review was exposures to neighboring jurisdictions. Here, we are talking about more meaningful implications; sizeable enough holdings in Poland – especially in logistics – Hungary, Czech Republic and Finland were common. No plans to make exits or shelve future outlays were shared with us, but words like “cautious” and “selective” featured in the rhetoric readily.
Reviewing their capital sources, the major area for scrutiny was within wealth management commitments, which are not always easy to “look through,” yet there was a high degree of confidence from managers that Russian money was not present. Commercial lenders from the country have been unable to finance overseas real estate for years, so that part of the equation was irrelevant.
Financial considerations aside, there was a tangible keenness to discuss what help the sector could provide the victims of the war. At the corporate level, generous donations were highlighted: LaSalle Investment Management, for instance, committed to matching employee donations of up to $100,000 to support charity partners working in Ukraine. Schroders Capital, meanwhile, committed to providing vacant space to house refugees, including in a hotel in Poland. Other managers, including Tristan Capital Partners and AEW Europe, told us they are discussing plans to do likewise.
Individuals are acting of their own accord as well. Anthony Biddulph, head of funds placement at JLL, drove to the Ukrainian border with the aim of bringing supplies only to drive away with a Ukrainian family. Read his account here. Others talked of the refugees they are already housing.
Once the conflict was discussed, however, conversations uniformly turned to the now compounded implications of rising inflation, especially rising energy costs. In particular, a key question was how much of this cost can be passed on to tenants. The rules vary from geography to geography and sector to sector, but tackling this issue will be unavoidable, managers agreed. Those heavily weighted to the living sectors particularly need to determine their strategies around this part of a cap-ex equation as individuals place far greater emphasis on energy costs than companies.
Nevertheless, institutional real estate executives remained upbeat on the concept they operate in a relatively resilient market compared with other financial sectors in times like these. Comfort in describing the asset class as a suitable hedge against today’s inflationary conditions was predictably widespread. Whether such optimism sustains when tenants seek to renegotiate terms in the face of widespread cost hikes remains to be seen.
In the meantime, the sector’s managers and investors were determined to make the most of their return to the world’s biggest property event, even if this year saw lower delegate numbers and was missing its customary and usually conspicuous Russian element. The regular real estate refrain of “cautious optimism” could be heard widely now that most managers can feel their businesses are, so far, largely unscathed by current conditions.