A back-to-basics approach is the most sensible route for investors to take in the current climate, says Glenn Rufrano, president and chief executive officer of property consultant Cushman & Wakefield. Speaking from experience, New York–based Rufrano – who has held leadership positions at public REITs and in the private real estate investment arena, most recently as chief executive of Australian retail group Centro Properties – warns investors against overleveraging, as well as “betting the ranch,” as Lehman Brothers did.
The first of his commonsense lessons stipulates that as the world gets riskier, investors should decrease the risk on their balance sheets. Struan Robertson, global cohead of real estate investment banking at Morgan Stanley and an ULI member, agrees that investors should be conservative in their use of leverage, but says that if they do choose to apply higher gearing, they “should adopt a trading mentality and be prepared to push the ‘sell’ button at any moment.” His view is that public equity is likely to win over private equity formats in the near to medium term.
The effects of the credit crisis are still reverberating around global markets, yet there is plenty of equity available for property. “If you can deploy the capital (and you’ve survived), there will be good opportunities to be had over the next 36 months,” says Rufrano. However, he also urges investors to recognize that the wave of distress the market had been expecting may not arrive. “Much of the capital that has been accumulated was allocated for distressed assets, but lenders have not been forcing borrowers to sell in circumstances where the borrower is in a strong position to manage the asset,” he says. “Therefore, more concentration of investment capital has been on core or lower-risk assets.”
In the short term, at least, capital will flow toward lower-risk markets and core assets, Rufrano explains. “In an ailing economy like we have today, where some markets are growing much faster than others, the institutional community still wants to invest in long-term, safe markets even though they are lower-growth markets.” These include London, Paris, Washington, New York City, and Tokyo. “We’re not out of [turmoil] yet, and when you’re in a storm, you should get into the biggest ship you can,” he reasons.
Furthermore, some high-growth markets – Brazil, for example – pose a risk because of their lack of transparency. “There is still a fundamental risk issue today that has forced investors to think ‘safety.’ They’ll move away from that mentality over time,” Rufrano predicts.
The best assets for investors to purchase are core properties (a quality level of B+ and above), at the lowest achievable price. Alternatively, for noncore assets in poorer locations, it is very difficult to price the risk.
Ultimately, real estate is a long-term game, says Rufrano. On that note, his final tip for investors is to “be safe, think long term, and maintain control. Let’s learn from the past. Don’t take too much risk, don’t assume too much leverage, don’t expect too much growth, and keep your finger on the button.”