Magazine Issues » February 2018

REAL ESTATE TALKING HEADS: Architects of change

Ahead of the MIPIM real estate conference, Funds Europe talks to property experts about trends they are seeing across geographies and investor types.


PHIL WALKER, SENIOR INVESTMENT MANAGER, AVIGNON CAPITAL

Which new types of property are property fund managers incorporating in their portfolios and which areas are being de-emphasised?
Recently retail has been getting a lot of bad press and funds seem to be favouring the logistics product more as they see technology evolving and online shopping increasing.

Leased hotels are also appealing to many new funds that had not traditionally had exposure to this sector as an alternative for long-let offices and logistics, which are competitively fought after and becoming expensive. Some funds stay away from alternatives, such as student accommodation, care homes and car showrooms, and some have limited exposure.

Both in developed and emerging markets, cities are changing. How can investors capitalise on urbanisation in the developing world and urban renewal in the developed world?
Avignon Capital focuses on developed markets. Ultimately, regeneration and urban renewal takes a long time, so for maximum returns, investors need to be patient and allow rental growth from the developing area to drive returns on existing stock, or take development risk and build new.


EOIN BASTIBLE, REGIONAL HEAD OF REAL ESTATE & PRIVATE MARKETS BUSINESS DEVELOPMENT, UBS ASSET MANAGEMENT

Which new types of property are property fund managers incorporating in their portfolios and which areas are being de-emphasised?
Fund managers need to adapt their strategies to fast-changing environments of how corporates operate and are structured, but also to how people and customer needs are changing. Technological developments are a challenge but also an opportunity for property owners to respond to these changes by providing additional services to the customer.

Fund managers are focusing more on convenience for the office worker because – like in retail – if the end customer is happy, the ultimate tenant is likely to stay in the property. As such, office is likely to become the ‘new retail’ and fund managers’ office strategy should focus on either dominance or convenience [such as in suburban residential areas]. Non-integrated suburban office locations are likely to lose out, like non-dominant retail.

Changing customer and technological developments would also support data centres and urban logistics. Residential may also benefit from the changing environment but might be restricted by politics.

According to Deloitte, cross-border property investment has been on the rise. What is driving this and which international markets are currently in favour?
The development of private pension schemes in the eurozone creates additional sources of capital which view the single currency area as their domestic market; this is the main driver of cross-border investment. Geopolitical uncertainties, in particular in the Middle East and parts of Asia, continue to attract capital to Europe. Despite Brexit, the UK and Germany attract most of the capital.

France may get more in focus but the tax regime is often seen as a barrier to entry. More sophisticated global investors consider smaller markets like the Netherlands and Sweden.


MILAN KHATRI, HEAD OF PROPERTY RESEARCH, ASIA-PACIFIC, ABERDEEN ASSET MANAGEMENT

Which new types of property are property fund managers incorporating in their portfolios and which areas are being de-emphasised?
Fund managers are searching for value and stronger risk-adjusted returns in alternative property types. A particularly appealing feature of alternatives such as student housing, nursing homes and rental apartments – though already well-established in the US and Japan – are that their returns are less driven by the economic cycle and are more a function of demographics, which we see as positive in many leading cities globally. This often means stable cashflows and downside protection at times of economic weakness.

Although not entirely a new asset type, the allocation to logistics property is also rising amid rapid global adoption of online retailing. Logistics property is in some instances replacing bricks and mortar retailing as a distribution channel to consumers.

Not surprisingly, the negative impact on retail is leading managers to reduce their exposure to weaker assets which are unable to offer convenience, or are not offering an attractive mix of shopping and leisure to draw in consumers.

Both in developed and emerging markets, cities are changing. How can investors capitalise on urbanisation in the developing world and urban renewal in the developed world?
Investors can capitalise through residential property strategies, capturing rising housing demand and the need for better quality living space.

We see a strong imbalance between housing demand in many leading cities and the market’s ability to deliver living space that satisfies the aspirations of households as their income levels rise. Higher house prices have supported greater construction, and are leading to urban renewal and intensified land use in developed and emerging markets alike. However, homebuilding is still limited in many densely populated cities.

Investor opportunities are wide-ranging. For equity investors this can be the purchase of income-producing rental apartments, the conversion of low-grade commercial property into housing or the upgrading of low-density housing to high-rise apartments. The market can also be accessed through lending to developers, funding at various stages of the development process, such as financing prior to planning approvals to the construction stage.


MARC BERTRAND, CHIEF EXECUTIVE, LA FRANÇAISE REAL ESTATE MANAGERS

Which new types of property are you increasing exposure to?
We are diversifying our portfolios with managed senior and student housing and hotels. More and more, we are selling or renovating traditional office properties that do meet today’s sustainability and flexible use criteria. We are also pursuing opportunities associated with the Grand Paris project and are broadening our core business to include the purchase of greenfield and brownfield development sites.

According to Deloitte, cross-border property investment has been on the rise. What is driving this and which international markets are currently in favour?
Today’s real investment market is going through an intense process of diversification. Investing across the eurozone allows investment managers to take positions in markets at different stages of the economic and rent cycle, which vary considerably from country to country.

We are diversifying our collective real estate portfolios with office and retail properties in Germany, the Netherlands, Ireland and Belgium. Additionally, we are witnessing an inflow of capital from Asian investors, and more specifically from Korean investors.


SIMON MARX, DIRECTOR OF EUROPEAN RESEARCH AND STRATEGY, LASALLE

Which new types of property are property fund managers incorporating in their portfolios and which areas are being de-emphasised?
The trend towards down-weighting retail in favour of up-weighting logistics is in full force and unlikely to slow down, even with record prices being set for logistics across Europe. The secular trends of e-commerce and changing consumer behaviour are well documented and here to stay. However, with such fierce competition for modern logistics units, investors will need to be cleverer in targeting flexible or future-proofed units in the best locations, rather than take speculative development risk in substandard locations just to drive returns.

For other property types, country-specific factors play an important role. For example, with the exception of foreign investors buying trophy buildings, London offices represent a risk ahead of Brexit whilst the fundamentals will drive strong rental growth in Paris offices. One emerging sector that is seeing increasing attention despite its small size is healthcare, which covers everything from medical offices to care homes.

According to Deloitte, cross-border property investment has been on the rise. What is driving this and which international markets are currently in favour?
With the exception of politics as evidenced by the rise in populism, the world is more interconnected today than it was even before the global financial crisis (GFC).

First the ‘carrot’: in the real estate sector, transparency is improving and, along with an improvement in world economic growth, more investors feel confident in going across borders to invest.

And now the ‘stick’: real estate returns are still modest in most countries, and so some investors will seek out higher returns elsewhere, or indeed wish to be compensated for the additional risk and cost involved in diversifying outside their domestic markets. Diversification is also the principal reason behind the significant sovereign wealth flows from the Middle and Far East in recent years.

And finally, much of the above has been enabled by both the savings glut and low cost of debt that the post-GFC environment has created. The markets which are benefiting the most are those which are large and transparent, namely the gateway cities of the world.


DIRK HOLZ, HEAD OF ORIGINATION AND BUSINESS DEVELOPMENT, PRIVATE CAPITAL SERVICES, RBC INVESTOR & TREASURY SERVICES

Which types of vehicles do private and institutional investors currently favour for property investment and why?
AIFMD [the Alternative Investment Fund Managers Directive] does not permit retail clients to invest in alternative investment funds, so private investors still favour open-ended or semi-open-ended funds. The European Long-Term Investment Fund regime may change this.

We are seeing global institutional investors increasingly prefer AIFMD-compliant structures which are regulated, transparent and provide clear and robust reporting. For example, many are opting for funds domiciled in Luxembourg, particularly since the Brexit vote.

Do you see large differences in investors’ approach to property investment across international markets?
This depends on the experience of the investors. In markets where investors have local market knowledge and insight, the trend is more towards direct investments. Otherwise, we are seeing more passive investment strategies such as fund-of-funds and property fund investments.

Another trend for investors with limited local insight and ability to directly manage properties is to invest in private debt strategies, which have property exposure with more limited risk profiles.

How can investors best incorporate property investment into their overall portfolios?
Investors need dedicated and knowledgeable teams to control, monitor and oversee their property investments and reflect the performance and contribution in the overall investment portfolio.

For some institutional investors, it is still a learning process to understand the characteristics of property investment: illiquidity, valuation frequency, and intensive management requirements.


ANITA LYSE, HEAD OF REAL ESTATE, ALTER DOMUS

Which types of vehicles do private and institutional investors currently favour for property investment and why?
There are exceptions to every rule, but the simple answer is Luxembourg vehicles – regulated or unregulated. Luxembourg funds – including the latest addition, the Raif – bring all the comfort required for international institutional investors. Brexit has reinforced this popularity even more.

Separate accounts tend to be structured in unregulated vehicles, mostly Luxembourg but also via Jersey. Private investors follow the same route, although they will typically favour unregulated vehicles to keep costs down.

Do you see large differences in investor approaches to property investment across international markets?
Many Asian investors have come into the European real estate market over the last few years, quite often via separate accounts with European asset managers. Large core assets in the main capitals have typically been favoured, although we now see Asian money being increasingly spent on other types of assets and in secondary cities.

On the other side of the risk curve, we have seen US investors with a much more opportunistic approach and favouring distressed markets, which continues to be true.

How can investors best incorporate property investment into their overall portfolios?
Real estate is only one of several asset classes in which investors place money to achieve portfolio diversification and seek yields in a low interest rate environment.

Most investors look to increase their allocations to real estate, which is not surprising in a still-growing market. Route to market very often depends on each investor’s own in-house expert resources and capabilities.

To diversify and manage risk, though, many will opt for a mix of commingled funds and separate accounts. Only those with sufficiently strong internal teams will go direct.

MIPIM takes place in Cannes, France, from 13-16 March.

©2018 funds europe