September 12, 2015
The post-2008 period has seen changes across the real estate investment management world, with mergers like Blackrock and MGPA and takeovers like Palmer’s of Invista.
However, it’s fair to say the industry has been less shaken up than most of us expected, and the questions must be “why?” and “where next?”.
Real estate managers have the advantage that the underlying assets are fundamentally complex and illiquid, so it is hard to dispose of the asset. Also, for some time post-credit crunch, the banks tended to try to manage through the impaired assets if they were covering the interest, as it was preferable to ignore the value issues than enforce the sale.
Many managers claimed they were best-placed to solve the issues and investors were seldom united as to what to do. In more recent times, the market recovery has reduced the pressure on managers, with the capital return being driven by the market rather than the management.
In addition to this manager forbearance, over the last three years we have seen new independent value-add-focused businesses spin out of bigger firms in the private equity real estate space – Brockton, Tristan and, most recently, Jack Pitman’s and Joe Froud’s Paloma Capital, to name a few. They have augmented the larger US opportunistic managers who have switched from buying debt to buying assets, from the US through the UK and now into continental Europe –such as Kennedy Wilson, Lone Star and Oaktree. To add to this, we have seen new entrants from other alternative asset classes, such as PIMCO and Stepstone, increasingly flexing their muscles.
The result is a large amount of capital flowing into a crowded marketplace, with strong competition for new mandates. At the same time, the cost of doing business grows, as European managers are hit by regulation and more demanding reporting requirements. The switching of pension plans from defined benefit (DB) to defined contribution (DC) schemes in the UK is also seeing investors looking to get more liquidity and often less risk. In a rising market, managers with profit-based business models – as in the private equity real estate world – thrive, but no one should lose sight of the fact that recurring profits are under pressure.
So what’s next? Firstly, we expect the big to continue to get bigger as investors want to buy into known managers and funds, reducing the due diligence workload and reputational risk, sometimes regardless of the recent track record. Fund managers with core/core plus funds and regular liquidity will continue to attract a high proportion of the investment into real estate, predominantly for market-tracking real estate. If managers are not able to deliver this, investors will drift towards REITS to satisfy their DC needs.
Secondly, many real estate indirect investors and consultants will move up the value curve to maintain margins, often blurring the lines that used to exist between investor and manager. They will want trusted operating partners with strong local knowledge, deep market intelligence and established real estate skills. They will aim to build long-term partnership relationships with these managers, who, in turn, will need to invest both time and capital to make this happen.
Investors will also seek more bespoke or tailored products, often in joint venture with the manager, rather than a passive investment into a collective vehicle. These relationships are more likely to be absolute return-focused than benchmark- related, and are likely to require the manager to demonstrate an ability to add alpha rather than relying on a rising tide to lift all boats.
We expect to see mid-size managers, such as Resolution and Fosun, selling stakes to access growth capital, as they provide a natural fit for the more tactile capital that is currently targeting the UK and Europe from locations such as the Middle East and Far East. For those mid-size UK managers who want to stay independent, they will need a strong track record and stable teams. They will also need to demonstrate a clear and unique strategy, and robust business model, with a flexible approach to how they engage with investors.
The market today is booming – but the only real certainty is that capital market cycles change.
Author: Alex Price, CEO at Palmer Capital
Link: http://www.egi.co.uk/news/alex-price-where-next-for-the-industry/?keyword=wherenextfortheindustry