ULI holds a series of invitation-only, real estate capital markets forums each year. The 2010 forums, held in Singapore, Tokyo, London, and New York, convene a wide array of industry participants including owners and developers, institutional investors, real estate advisors, fund managers, and service providers, commercial banks, insurance companies, and securitized lenders.
The following is a summary of the key themes and takeaways from the most recent forum, held in London in mid-November:
- A number of institutional real estate investment advisors are “for sale,” prompting a widespread view that consolidation among managers will accelerate.
- Only 1/3rd of the commercial mortgage loans maturing in 2010 were repaid; the balance were extended two to three years.
- Lending limits and capacity per commercial bank is a major problem throughout Europe with £100 million the upper limit.
- Interest rates are expected to remain at today’s low levels for an extended period.
- Investors are focused on core strategies, thereby creating a wide yield gap between core and “everything else”. At present, banks are “reticent” to lend on secondary market properties.
- The “Wall of Capital” (in London) remains with approximately £21.5 billion in equity available for only £3.0 billion of offerings in the City and West End, a 7:1 mismatch; in May 2010, the ratio was only 2:1.
- Investment trends:
- Allocations are overweight in U.S. and Asia, and underweight in Europe.
- U.S. investors are worried about the Euro Zone, particularly the outlook for the Euro due to the sovereign debt crises and the potential spread of the financial contagion to additional countries.
- The outlook for raising opportunistic capital from investors in 2011 is poor.
The Public Equity Capital Markets
- The public markets are currently in a “risk-on” period, driven by quantitative easing. In Europe, the most pressing issue is the status of sovereign wealth. For example, will Ireland be “bailed out,” and if so, when? Who will be next—Portugal and Spain?
- Core and sovereign wealth funds have been net winners throughout the global financial crises. Listed property has also been a net winner as it has proven its viability and ability to compete, funded by its access to the public equity capital markets.
- Overall, European property companies comprise 15% of the global public company real estate index; to get investor’s and the European market’s attention, you need to “be big or be irrelevant.”
The Situation in Germany
- The impact of Basel III is already being felt as regulators want to impose ratios on banks today even though they are not required until 2014, with some banks required to hold more capital.
- Overall, German banks distribute 50% to 55% of the loans on their balance sheets through Pfandbrief market, an “unbeatable” source of liquidity. The market is also available to fund development
- German banks will remain competitive due to their overall strong funding position.
- Regulators are to blame for “getting medieval” with banks at the wrong time in the cycle as they “crawl” all over bank’s balance sheets, capital positions, and impairment provisions.
- Many question whether the regulators actually “understand” the real estate industry and its business model.
- One positive is that Solvency II will provide a big incentive for insurance companies to enter the commercial real estate lending market.
The Situation in Ireland
- The National Asset Management Agency (NAMA) is “putting the gun to the head” of the Irish banks.
- There have been many Irish-Anglo receiverships in the past three months with several assets coming to market as NAMA is “selling whatever it can.”
Banks and Lending
- Banks are being especially careful in terms of who they will “bank”, supporting only one or two key developers.
- There is a huge lending capacity issue for development as there is a general mismatch between bank’s desires to lend and their financial capacity to fund more than £100 million.
- No surprise: projects need a “serious” amount of equity and pre-letting to get lender’s attention.
- The level of knowledge among young bankers is “worrying;” human talent is becoming a larger and larger issue.
- Among the biggest growth areas has been family offices in Asia and the U.S.
- Concern remains as to how to refinance property outside the “24 hour cities.”
- One positive feature of the current cycle is that most investors have only 5% to 10% allocated to real estate, leaving room for additional commitments to the sector.
- Investor’s are recalibrating their return expectations; returns available to opportunistic investors are “discouraging.”
- The “center of gravity is shifting” as the industry becomes bigger in Asia; everyone needs to be prepared to expand their knowledge of and ability to execute in new and different markets.
- Practioners may be struggling in the current market environment because the business model is broken rather than the real estate market.
- “A bank that doesn’t lend is a dead bank;” one reason to believe lending will come back.
- Commercial mortgage-backed securitization will come back in its “adult form.”
- Europe needs to learn more from the U.S. and leverage non-bank lenders such as private families, sovereign wealth funds, and insurance companies.
- Investors are only willing to fund core strategies.
- Investors should focus on opportunistic space, not just core.
- If secondary property markets continue to experience no investor or lender interest, no capex expenditures by owners, deteriorating properties, and the inability to retain tenants, a major problem will result.
- Secondary markets have no solution at the moment and investors have forgotten what opportunistic risk is.
- Equity need to move into the area of high risk, higher return; this will only happen as investors become more confident.
- New regulations will have a major impact on the capital and real estate markets.
- Money is available but investors are unwilling to take more speculative and secondary market risk and banks are limited as to how much they can lend and to whom.
- The focus on core properties causes major concerns as yields are bid down to pre-crash levels; more investor focus needs to be paid to the secondary markets.
- Diversification of funding mechanisms is necessary and funds from private families, sovereign wealth funds, and insurance companies may have a big role to play.
- Investment in human capital is an industry-wide necessity.
- There remain major lending capacity issues for development finance.
- The outlook for opportunistic capital raising is poor as value-added has become the strategy du jour.
- Asia is going forward; can Europe keep up?
- “If you’re not already big, you’ll become irrelevant.”