MIPIM 2011 – WRAP-UP
Real Estate Investment Post-Crisis: What have we learned? What is next? •
Philippe Tannenbaum Senior Advisor, IEIF
•
François Ortalo-Magné Robert E. Wangard Professor of Real Estate Wisconsin School of Business
Risk aversion at a peak and the consequences of it • A Two-Tier market • Financing more difficult • Looking for the lowest volatilities • Regulation reinforced and becoming a real threat
A Two – Tier market •
Due to uncertainty about the economy and a high aversion to the risk, the recovery has focused on the prime segment solely
•
This is true for all the markets which performed strongly - The US - The UK as well
« Secondary property defined as the top quartile of regional offices by yield, as measured by IPD has been left behind in a recovery that has lifted the value of prime UK residential and commercial real estate: prices of secondary properties are 48% below peak levels, with no recovery in sight » Wall Street Journal – Feb 2011
A two- tier market -
And France
5,000 INDICES BRUTS 4,500
4,000 Which offers a complementary 3,500 approach through the 3,000 stock market
IEIF SIIC Commerces, h么tels et loisirs
IEIF SIIC Logistique et locaux d'activit茅s IEIF SIIC France (ensemble des sous-indices)
2,500 2,000
IEIF SIIC Bureaux
1,500
Successful: pure plays only, big caps, prime 1,000 offices and shopping 500 malls
IEIF SIIC Locaux mixtes
31/12/2002 31/03/2003 30/06/2003 30/09/2003 31/12/2003 31/03/2004 30/06/2004 30/09/2004 31/12/2004 31/03/2005 30/06/2005 30/09/2005 31/12/2005 31/03/2006 30/06/2006 30/09/2006 31/12/2006 31/03/2007 30/06/2007 30/09/2007 31/12/2007 31/03/2008 30/06/2008 30/09/2008 31/12/2008 31/03/2009 30/06/2009 30/09/2009 31/12/2009 31/03/2010 30/06/2010 30/09/2010 31/12/2010
0
IEIF SIIC Habitation
How sustainable can a Two-Tier market be ? •
Due to the uncertainties on the valuations of the secondary property, banks might decide to halt financing and refinancing that class of assets. Also, they might decide to sell their holdings in order to crystallize the losses.
•
New sales and lack of buyers due to the lack of financing: secondary property valuations might fall further.
•
There might be new covenants breaches.
•
Secondary assets still included in the investor’s portfolio’s: new losses still to come ? And consequently, new redemptions? Funds might have to sell prime assets in order to finance them, thus diffusing the fall
Is the Two-Tier market leading to a Two-Steps crisis ?
Financing more difficult •
It is not the banks that created the problem
•
The problem came from the vanishing of the securitization and of the private equity
Come-back of the private finance? •
Recent launchings show a renewed interest from the private financing, mainly through mezzanine
•
But Mezzanine is risky Not the same access to • cash-flow • guarantees • Riskier financing in a risk averse environment means: Higher yields requirements, And at the same time: focusing on prime property Is it realistic ?
Source: Prequin
Looking for lower volatilities •
High profitability means high volatility
•
Risk adversity means: looking for lower volatilities
•
Lower volatility means: lower profitability
•
The products do exist. The issue is: are investors prepared to enter these new territories ?
Looking for lower volatilities A perfect illustration: Switzerland, and the option for stability
Low volatility, low performance: the model exists German housing prices: no risk, no return
Low volatility, low performance: the model exists German commercial property: more or less the same story
Are investors prepared to the new approach ? •
France has an excellent product with its housing sector
Low volatility Fundamental support •
However, there are no private investors in the sector –by example, there is only one Housing Siic
•
On the other hand, note that the US Housing Reits top performed in 2010: 47% of total return
RPX – IEIF Index of prices in the residential sector Paris / Ile de France
Risk aversion: the Regulatory side •
Under preparation at the moment are: Solvency II: Insurance companies solvability, Basel III: Banks solvability and liquidity, AIFM: Alternative Investment Fund Managers, EMIR: Organisation of Derivatives Markets, UCITS : Asset Management
•
And more to come: Green Paper on Pension System…
•
Supposed to come into effect rapidly; by example, Solvency: end of 2012 – beg. of 2013
The Regulatory Side •
What is behind the regulation: - the risk is measured , asset class by asset class, and translated into proportional capital requirements - also, there are disclosure and transparency requirements
•
Due to a low relative volatility, direct property will be favored for Insurance companies, as well as mortgage loans for Banks: there will be lower capital requirements for these assets
•
Nevertheless, for the banks, capital requirements could be higher for secondary property. This could accelerate the disaffection for that part of the property sector and the movement of freeing up the balance sheets
The Regulatory Side •
Indirect property: - the funds status is not yet clear( or understandable) - the listed property sector will be treated as part of the stock market, supposed to be the most volatile, therefore the most capital requiring. This could lead to reductions in the insurance companies’ holdings
•
In France, an IEIF calculation indicates that 1/10th of the market cap of the listed property companies could have to come back from the insurers’ portfolios. This is not really significant, but this could cap the market prices
•
Due to the new reporting requirements, all actors will have to bear heavy additional costs
The bigger picture: Debt still a major threat •
The public debt remains too high, in all advanced economies
•
On the long term, this could reveal unmanageable
•
There are two solutions - Repayment : a heavy burden, with a risk of recession and later, due to the lack of cash, a risk of deflation. The worst case scenario for real estate - Inflation: real estate friendly (but not for the listed sector, which will have to absorb the rates increases)
Source: IMF / Soc. Gen.
The outlook The case for a positive outlook •
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The case for a less positive outlook
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Recovery in the prime segment
•
A Two-Tier market is a threat for the market as a whole
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Private finance seems to be back
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Private finance : not realistic
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Secure products are available
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Secure products: where are the takers?
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Regulation: good for property
•
Regulation: bad for indirect property
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Inflation is good for the real estate
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Inflation is bad for the stock markets Deflation is a real threat
•
As a Judge of Peace
•
•
The VIX Index : The higher the index, the more stressed the markets It is interesting to notice that the Index is currently trading at some relatively low levels. Those are far from the levels reached in crisis times. In other terms, the markets seem to be confident for the future
20 nov. 2008 (Lehmann bros.)
80%
60%
First Gulf War aug. 1990
40%
Russia + LTCM 11 sept. august 1998 2001 Crisis in Asia nov. 1997
Bush "bad apples" (Enron, etc.) jul. 2002
Bernanke : "risk of inflation" 17 août 13 june 2006 2007
Mexican Crisis april 1994
20%
Subprime crisis
0%
16 août 2007
déc… déc… déc… déc… déc… déc… déc… déc… déc… déc… déc… déc… déc… déc… déc… déc… déc… déc… déc… déc… déc… déc… déc…
•
Source: CBOE
MIPIM 2011: Insights from the participants Prof. François Ortalo‐Magné with the Real Estate MBA students of the Wisconsin School of Business
Last year’s wrap‐up keynote • Investors: Focus on the real estate – Work above the NOI line, the cash flows – Transparency toward investors • Cities – Regions: Looking forward to a new reality – Sustainability beyond CO2 emissions – Public Private Partnerships no longer a dirty word Ö We could see the sun rising
How is your business activity this quarter compared to same quarter last year? 2% Worse 3%
33% Same 33%
66% Better 64% City‐Regions
Others
How has MIPIM changed your outlook? 3% Less Optimistic 2%
43% Same 63%
53% More Optimistic 35% City‐Regions
Others
What is your perspective on your real estate market compared to same time last year? 3% Less Optimistic 5%
35% Same 23%
62% More Optimistic 72% City‐Regions
Others
2011: Already high noon in core markets • The wall of money is back – Chasing safety – Chasing yield from core‐plus assets • Macro strategies – UK, US, France, or rather Washington D.C., New York City, London, Paris, Ö Betting on the US gvt and the global economy – Moving to Germany – history of stable yield
Or is it already past noon in core markets? • Sub 5 cap rates But what were we saying in 2009? • Strong history of German yields But what about the history of negative growth? • Weary of macro – momentum strategies But capital must be deployed Ö Tough execution environment
Roubini’s keynote: half full • Accelerating global economic recovery • Lower risk of major shocks: deflation, double‐dip recession, break‐up of EMU • Strong corporate performance • Growing emerging economies provide diversification of sources of growth • The worst of the real estate/housing bust in many economies is behind us • Risk is on, and risk aversion is lower now
Roubini’s keynote: half empty • • • • • • •
Painful deleveraging in mature markets High and rising budget deficits and public debt Serious chronic problems of the Eurozone periphery Risk of a double‐dip in the US Food, oil, and commodity inflation in emerging world North‐Africa/Middle‐East turmoil “It is a G‐Zero World rather than a G‐20 World”
And the risks you told us about • Real estate debt markets • Political risks in mature economies • Regulatory risks: Solvency II, Basel III, AIFM, EMIR, UCITS • Commercial real estate as a tax target • Inflation risk
Strategies for today • Emerging markets – Continued growth in appetite for Asia – Growing awareness of the diversity of Asia – Many markets beyond the BRICs at MIPIM, including North African countries
Which emerging market would you consider first for investment? 60 50 40 30 20 10 0
Strategies for today • Emerging markets Balancing strong fundamentals and country risks
Strategies for today • Emerging markets Balancing strong fundamentals and country risks • Mature markets – Moving to core plus 200/250 basis points
Is now the time to invest beyond core/safe real estate assets?
No
Yes
30%
70%
Strategies for today • Emerging markets Balancing strong fundamentals and country risks • Mature markets – Moving to core plus 200/250 basis points – Taking advantage of the functional obsolescence of the existing stock
Functional obsolescence • The greening of real estate – Fast technological progress leading to lower costs – No longer an option (exit strategy concerns) – Strong dissatisfaction with the standards – The “brown discount” • And the next wave… When human resources talk to corporate real estate
Boris Johnson’s keynote • Cities are the single most brilliant invention – People live longer – Better educational outcomes – Better productivity – Less pollution per capita – Greater opportunities for reproduction • His secret: keep putting the village back into the city ÖSense of trust and neighborliness
Competition across cities • Fierce competition to attract – Population – Economic activity – National public investment – Private investment – global!
What do you consider the biggest impediment to investment in your city or region? Global economic conditions
58%
Competition from other cities
44%
Local economic fundamentals
Political climate
36%
20%
What competitive advantage did you emphasize here at MIPIM to make your city attractive to investors? Location
27%
Growth
25%
Regeneration/New Vision
15%
High‐tech base
9%
Infrastructure
9%
Moving forward requires new strategies • Cooperating with nearby cities – To compete against the large metro areas – To compete for private public funds – Reaching across national borders • In policy‐making and regulatory processes – Success of MIPIM’s Mayor Think Tank – Innovations to capture the windfall profits from public investments and zoning changes Ö A major change for the developers
Real Estate Investment Post‐Crisis What have we learned? What next? 1. The value of transparency 2. The value of true leadership
Lesson 1: Transparency • 2010: Driven by the investment community • 2011: Reaching further – To learn from each other – To overcome history of corruption – Supported by the increased availability of data (Private providers working with public authorities) – Supported by the expansion of professional accreditation organizations
Lesson 2: Leadership • Long term thinking – Developers and investors: smart building designs to preserve market value over time – Cities and regions: smart communities to maintain attractiveness and vibrancy of urban environment • Educating our partners – National governments: regulation/funding – Voters to see beyond the election cycles – Private sector ↔ Public sector
Lesson 2: Leadership • Beyond financial carrots and sticks – Toward new financial/regulatory relationships – Toward new processes for interactions – Toward developing a shared visions, and fostering synergies from our diversity Both in the private and the public sector, and in the way we engage the broader community
A bright new day for the city!