Global investors weigh capital preservation versus growth strategy

It’s a perennial issue for real estate investors: should their focus be on continued growth or is it too late in the cycle, meaning priority should be shifted to preservation of capital?

Few would say that it has been anything but a great time to be in real estate: as a class it has outperformed most other investments by offering steady and attractive yields. There are some troubling signs on the horizon, however. The flight to the “safety” of real estate could be a spent trend as prices have been bid up for prized assets in major cities and higher interest rates loom on the horizon. 

Ancar Ivanhoe SCJust what the “big money” in the form of institutional investors, portfolio managers and private equity funds intend to do in the uncertain markets of 2014 is the main focus for one of the opening sessions of the Informa Canada Inc.-organized Global Property Market: At the Canadian Real Estate Forum, set for Toronto on Dec. 3. 

“There is a lot of capital in the world right now,” said Louis Voizard, senior vice-president of growth markets with Ivanhoe Cambridge. “People are looking for ways to invest and with regards to real estate, interest rates are probably going to go up and cap rates are going to go up to a certain degree. (An Ancar Ivanhoe shopping centre in Brazil shown in image)

“Making people wonder”

“That is making people wonder how they should look at the future.”

The Montreal-based executive, whose company is owned by Quebec’s giant Caisse de Depot provincial pension plan, said he grapples with the growth-versus-capital preservation issue regularly.

“We don’t want to lose anything. We are pretty conservative investors,” he added. “When you see signs that valuations are going to be affected, you have to ask yourself how you are going to play that. 

“We are asking ourselves the same questions the other investors are asking themselves: How can you access the best bargains or the best deals out there?”

Voizard, moderator of the “Growth versus Capital Preservation” panel, and his panelists will host a conference call to map out the topics and themes of the morning presentation. “I suppose that we are going to get both (growth and capital preservation),” Voizard said. “Everybody wants growth but nobody wants to lose everything.”

Beyond the question of future rates, the issue of growth versus risk varies from region to region and the Ivanhoe executive has observed some countries are falling out of favour while others are gaining.

“There seems to be a buzz to Latin America and South America and Mexico and China has less of a buzz right now in my world,” he said. “That is my world, but that doesn’t mean others will not invest there; it is a huge market.”

Mexico, U.S. popular among investors

Mexico and the U.S. continue to attract the interest of investors who expect their economies will continue to improve, added Voizard, who was speaking from the airport awaiting a flight to Bogota, Colombia for business. 

As any executive who has the words “growth markets” in his title, Voizard is focused on countries and regions where investors view growth outweighing potential risks. Ivanhoe is heavily invested in Brazilian shopping malls through a joint venture established in 2006 with about $2 billion. It has some investments in China and last year sold its real estate holdings in Russia. 

“We are looking for other markets and that is one of the reasons I am on my way to Bogota right now,” he said. “We are looking at South America and other markets, not only Brazil.”

Geroge Ahl, principal of M3 Capital Partners of New York and a panelist on growth versus capital preservation discussion, does not foresee investors shying away from real estate. “Groups are very much focused on income, on value creation at the asset level as opposed to allocating capital to a strategy,” he said. 

“Depending on how sophisticated they are, they are either moving away from the gateway cities and core sectors to the alternative sectors, maybe a secondary market,” he added. ” Or other groups, especially if they are non-U.S., are looking to park their capital in a safe asset as an investment strategy.” 

The U.S. real estate market has benefited from its safe haven status among foreign investors, he noted. “There is more foreign capital coming in the U.S. from the Middle East and Asia than ever before and I think some of the other former safe havens like London or Paris are either hurt by their adjacency to countries to the south or less certainty of economic growth.”

Larger investment category

Ahl does not foresee institutional investors lessening their exposure to real estate as a class but has observed an American and, to a lesser degree, an international trend of pension funds putting real estate investments into a larger investment category described as “real assets” that might include oil and gas, timber, farmland and infrastructure. “The reason is that both categories, depending how you look at real estate, offer the opportunity to invest long-term in high quality income streams.”

Where real estate might have made up eight to 10 per cent of assets within a pension fund, it might now comprise a similar percentage but as part of a larger real asset class, perhaps 25% of a fund’s allocation. “So depending on how it is thought of relative to those other sectors, funds can either grow the real estate allocation or perhaps lessen it.”

Such a strategy could befit a conservative pension fund, but ultimately it depends on how an institutional investor looks at real estate within its portfolio, he said. “There are some groups who are delivering their portfolio and also de-risking it. They are not going to do a highly levered development strategy; they want to buy an office building on Park Avenue or Fifth Avenue and hold it and they want to leverage it before 50%.”

Like Ivanhoe’s Voizard, he noted that risk can be unique to geographies and real estate classes. For example, his firm is part of an industrial-sector development in China. “Is it risky? Perhaps. But if you have no logistics facilities in China, or very few that meet modern standards, this could be a very timely strategy.”

Paul is a writer, editor and media trainer based in Toronto with over 25 years of experience as a business reporter. He has written for Canada’s major news services on…

Read more

Paul is a writer, editor and media trainer based in Toronto with over 25 years of experience as a business reporter. He has written for Canada’s major news services on…

Read more

Industry Events