An era of cautious optimism for investors

In November 2008, the global business community was reeling from news that 158-year old Lehman Brothers had failed, a distressed Merrill Lynch was being sold to Bank of America and Washington Mutual was closed in the largest bank failure in U.S. history.   These events were preceded by a year long US financial crisis highlighted by the Bush administration taking control of mortgage giants Fannie Mae and Freddie Mac.

Few people anticipated these momentous events or that the situation would spiral down so far, so quickly.  At last years Global Property Market held in December of 2008, Chair of the conference Andrew Trickett, Senior Vice President, Global Principal Investment, Oxford Properties Group said there was a feeling edging on panic among commercial real estate professionals.

For the remainder of 2008 and most of 2009 there has been an enormous amount of uncertainty, ‘a lot of watching and not a lot of activity’ Trickett explained to RENX.   There has been a dramatic decline in the volume of real estate transactions in Canada from a peak in 2007 and U.S. property values have dropped by 43% according to Moody’s property index.

Now, a year later, the real estate market in Canada is changing and investors are entering into what Trickett calls “an era of cautious optimism”. The Canadian economy is beginning to stabilize, the capital markets have resumed lending activity and stock exchanges are responding positively. Optimism has also started to penetrate other countries most notably the UK and in Europe.

The talk at this year’s Global Property Market will be concerned with ‘is now the time to invest’ and if so, how and where will it happen said Trickett who is serving as chair of the conference for another year.

With respect to where investment will occur, Trickett thinks there will be a ‘heightened interest’ in Canada as a destination for global investment funds.  The prevalence of institutional ownership has created a more stable real estate market characterized by low debt levels and less volatility in rental rates.  As the barriers to entry into the Canadian market are relatively high it ensures that there are few significant players.

One global investor who has had success in Canada is KGAL led by Toronto based Christian Strauch, Managing Director, of the KGAL owned AL.I.NA Fund Management. KGAL is one of Germany’s leading initiators of public funds, private placements and funds for institutional investors. It offers investors a wide range of investment opportunities one of which is  real estate in both Germany and abroad. In 2008, it operated over 23 public real estate funds.

Between 2003 and 2005, two KGAL sponsored funds acquired seven Canadian commercial properties and prior to the recent financial crisis sold their interest for a significant gain.  AL.I.NA is now in the process of looking for new investments in Canada and the U.S. and anticipates making acquisitions in 2010.

AL.I.NA is also advising HANSAINVEST, the investment arm of German insurer Signal Iduna with acquisition in Canada.

The Oxford Properties Group is also has a global real estate platform and participates in the market as an investor, owner, asset manager and developer. It has compiled a portfolio of trophy assets and value-add opportunities in Canada, Europe and the U.S. Its portfolio under management is approximately $18-billion dollars with about 85% of those assets in Canada. It is owned by OMERS, one of Canada’s largest pension plans.

As 2010 approaches, Oxford Properties has shifted its attention toward the mature markets particularly the U.K. and U.S. and away from other emerging economies, said Trickett.  Oxford reached this conclusion after careful scrutiny of global markets using a top down and bottom up approach and weighing a blend of risk, return and its ability to execute its strategy.

In both countries Trickett said there is reason to be cautious, as well as optimistic.  In the UK he said there continues to be negative rental rate pressure due to continued weak tenant demand, as the greater economy struggles to get on its feet.   The size of U.S. commercial debt coming due over the next three years (estimated to be US $1.4-trillion) is an isolated case in terms of scale he said and will require investors to be more cautious there than any other place in the World.

A hot topic of discussion at the conference, for which Trickett said there is no clear answer, is what investment structures are going to be used to make property investments and how is the capital is going to be accessed.  He said there is a lot of conversation about whether a direct or indirect investment model that is dealing directly with property owners or through an intermediary is more appropriate.

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