How should institutional investors and their managers operate in a late-cycle environment? That was the central question at PERE’s Europe Summit in London this week. Against a backdrop of sizeable capital piles allocated to the asset class and lower-for-longer interest rates, deploying has become unquestionably challenging. So what is the answer? It lies somewhere in figuring out how to future-proof real estate against dramatically shifting occupier needs. To that end, here are seven talking points that featured:
1.Customer focus: The institutional real estate conversation must switch from an orientation around meeting investor liabilities to prioritizing the employee needs of tenants. Of general consensus was the notion that the staff of today’s most important rent payers hold the most sway as to the future viability of a property. What an institution needs to earn from a property is ultimately moot if its occupiers are unsatisfied.
2.Mixing is hard to do: If you want to discern the most popular asset class these days from an end-user’s perspective, it would be mixed-use property where as much of the ‘live-work-play’ mantra is possible. But the truest form of mixed real estate has plenty of headwinds, at the planning, and also capital level, with equity providers and lenders alike finding it hard to categorize and complicated to capitalize. “Last week, I spoke to an investor who was super happy because he’d finally got a mandate for mixed-use,” recalled Marc Jongerius, co-founder of Zoku, an operator focused on an apartment-hotel hybrid strategy.
3.Introspection is just as important: In a marketplace of record high prices-low yields and prolonged low rates, kicking the tires on portfolios to either jettison decreasingly relevant assets, or retrofit assets with modern-day potential is of key importance. As Aviva Investors Real Assets’ managing director of real estate funds and strategy, David Skinner said: “We’re cognizant the cycle will go on for longer and there’s now a lack of supply, so we’re investing heavily in refurbishing assets.”
4.Add ‘learn’ to ‘live-work-play’: But if you are going to embark on a spending spree, best to do it in places that lack much-needed development. Favor education strongholds, said Jim Garman, co-head of real estate at Goldman Sachs’ Merchant Bank Division. He has been applying lessons learned stateside, where the investment bank has invested in cities like Nashville, Denver and Austin, in European cities such as Porto, where it recently bought into some residential property. “Corporations are moving there, and there’s an undersupply of good quality rentals, so there’s an opportunity to build,” he said.
5.The right co-working: While leasing an entire office block to WeWork or one of the flexible working giant’s competitors is likely to require a haircut on price, get the flexible proportion right and the opposite is also true. As Peter Papadakos, managing director at research firm Green Street, put it: “There was a 50-75 basis point spread on valuation yield [between flexible-working-dominant property and property with no flexible-working]. Now that spread is 0-25 basis points and, where the percentage of flexible working in a property is below a third, there’s even a premium.”
6.Debt is adapting to demand: At PERE’s parallel credit-focused conference, lenders agreed managers are, subsequently, offering a wider range of products to fit their risk appetites. Critically, as more real estate becomes service-centered, lenders are recognizing their role in enabling this to happen. Jeffrey Rubinoff, partner at law firm White & Case, noted a trend towards ‘cap-ex-heavy’ loans – hybrid investment/development facilities for properties in need of some added value, for instance. His panel also reflected on a wider acceptance that ‘core’ real estate is nowadays being repurposed on a more operational basis and the evolution of standard fixed-office leases to a more flexible model.
7.Ultimately, it is down to the arithmetic: As conference chair, the Abu Dhabi Investment Authority’s former global head of real estate, Bill Schwab, maintained: in the current marketplace, where private equity or asset management strategies can be the difference between producing a 6 percent or 8 percent core yield, investors need to run the numbers before taking a view on whether the risks inherent in obtaining that yield in this changing environment are worth it. Ticking the progression box is great, but not worth it if numbers do not stack up.
Write to the author at jonathan.b@peimedia.com
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