Sovereign wealth and pension fund delegates at the MIPIM RE-Invest summit heard that the global real estate sector is continuing to benefit from economic headwinds but with a good measure of caution.
Robert White, president and founder of Real Capital Analytics, said that, with negative interest rates now a reality in a large part of the Western world, 鈥渏uicy spreads鈥� in property are leading to a continued 鈥渄igging in鈥� to core markets. The top 25 global cities accounted for two-thirds of all property investment in 2015, he said, pointing to a focus in liquidity and a 鈥済rowing array鈥� of property sub-sectors and an exploration of peripheral areas of core cities.
White also warned of a slowdown in investment in recent months as investors pull back due to a range of uncertainties including commodities prices, fears of a US recession, and political uncertainties such as the UK鈥檚 referendum on EU membership and Donald Trump鈥檚 presidential campaign.
Perhaps unsurprisingly, 2015 saw large outflows from Asia. Currency volatility also meant investment volumes were 鈥渇lat to down鈥� in dollar terms in 2015, White told the 53 institutional investors with global real estate assets representing of more than $500bn.
Summing up a series of investor roundtable discussions at the closed-door summit for investors, Jason Oran, partner and head of southern Europe at Europa Capital, said: 鈥淭hose pricing [real estate] from within the industry are struggling to reconcile appropriate returns, even over the long term, but on a relative basis to other asset classes still suggests a strong case for real estate.鈥�
Andy Pyle, UK head of real estate at KPMG, observed: 鈥淒oes the cycle actually matter when you鈥檙e a long-term investor, looking to recycle capital when fundamentals make sense?鈥� He added that there were some concerns about build-to-core strategies because prices and risk may not justify returns.
Anne Kavanagh, global head of asset management and transactions at Investment Managers-Real Assets, noted that the majority of the roundtable participants said they were going to be net-buyers in the coming year.
鈥淭he consensus was that pricing is seen as very hot in core investments and half are building to core,鈥� she said. 鈥淚n terms of markets, some investors are in the top five, 10 or 20 cities, but very few are in the top 30. More investors are building in home markets and looking to deliver risk-adjusted returns.鈥�
Summing up the roundtables on sectors, Isabelle Scemama, head of the funds group at AXA Investment Managers-Real Assets, also pointed to an air of caution among investors. 鈥淒on鈥檛 do what you don鈥檛 know,鈥� she said. Nevertheless, some investors were considering new sectors, including student housing, senior housing and healthcare, she said.
Russell Chaplin, CIO for property at Aberdeen Asset Management, said three factors were holding investors back: scale, where it will be tough for large volumes of capital to access niche sectors; scarcity of assets, and a need for specialism in areas like underwriting and management.
Erwan Quintin, associate professor at Wisconsin School of Business, said liquidity was a concern, as were a shortage of opportunities. Nevertheless, conviction plays a role, he said: 鈥淧eople are investing in those sectors because they feel that the sector has a future that justifies investing in it.鈥�
Deitrich Heidtmann, managing director, head of international capital markets at , said there had been a lack of focus on emerging markets despite there being significant opportunities to take advantage of positive demographics.
鈥淭here is an economic dividend and it can be very profitably exploited, but [it can be] too off-piste for people to head out there,鈥� he said. 鈥淛ust as we look back at 2009 at our own real estate markets, opportunities never look super appealing and safe at the moment you look at them.鈥�
Some investors perceive emerging markets to come with 鈥渃areer risk鈥�, he said. 鈥淚t makes a small difference to your portfolio but a big difference to your career if you get it wrong.鈥�
The UK鈥檚 EU referendum was another concern for the participants: 鈥淔or investors hedging sterling from the outside, Brexit adds another degree of volatility and another reason to hold out for another six months,鈥� said White.
Simon Mallinson, executive managing director, EMEA and APAC at Real Capital Analytics, said there seemed little point in making investment decisions before the referendum is held on 23 June. 鈥淭here are advantages and disadvantages but no benefit until a decision has been made,鈥� he said. 鈥淭here was a clear feeling that from a business and commercial view that [Brexit] is a bad idea.鈥�
In a keynote speech, Peter Beckett of KPMG pointed to the OECD鈥檚 base erosion and profit shifting project, where real estate investors could be affected in three areas. One is hybrid structures where receiver and issuer are treated differently for tax purposes across jurisdictions; a second is in tax deductibility of interest expenses.
A third area is the general requirement to prove substantial operations in the particular jurisdiction is domiciled for tax purpose, which can be difficult for real estate entities. The OECD is understood to be looking into ways to accommodate this requirement for long-term investors such as pension funds.
