The year 2012 is shaping up to be a challenging time for real estate companies, headlined by the “wildcard” of the European debt crisis, China’s decelerating growth and continuing weakness in the U.S., according to Graeme Eadie, vice-president of Real Estate Investments with the Canada Pension Plan Investment Board (CPPIB).
Graeme Eadie, Vice President of Real Estate Investments, Canada Pension Plan Investment Board
“There are all sorts of things going on that make it very hard as an investor in real estate to understand how to underwrite assets and determine where we should be putting our money,” said Eadie.
European banks have begun to pull out of real estate commitments to preserve capital and the institution of austerity programs in many countries on the continent mean growth will be slow at best.
“In terms of what this means for the real estate markets, I think we have seen most of it,” Eadie said. Demand, and capital is flowing to top-tier assets, which are perceived to carry the least amount of investment risk. “Higher risk assets, there is not a lot of appetite for them and development is not happening. A lot of people put that on capital, but I think as much as anything there is no real demand for it.”
For its part CPPIB, the country’s largest single purpose pension fund with $11-billion invested in real estate around the world, has been “incredibly busy” for much of 2011, making $4 billion worth of acquisitions since April.
The pension plan has relied on large transactions from distressed sellers over recent years, a pipeline that Eadie sees as being choked off.
“What is happening is prices have risen to the point that it just isn’t interesting to us anymore,” he said.
Going forward, CPPIB intends to grow by working with joint venture partners, investing $2 billion to $3 billion per year in real estate over the next five years while it will pare its portfolio of some assets. “We are trying to refocus the portfolio so we will sell about $3 billion over the next five years and (sell) about $600 million this year.”
Guy Metcalfe, Morgan Stanley’s, Managing Director & Global Co-head of Real Estate Investment Banking
The less-than-optimistic assessment of the next few years was shared by Guy Metcalfe, Morgan Stanley’s managing director & global co-head of real estate investment banking speaking on a panel at the forum. Part of that is only natural given the place real estate is in the investment cycle at a frenzied few years.
“We have seen a lot of activity, a lot of transactions over the last couple of years and a lot of that I think was tied to once in a decade or once in a lifetime sort of assets that were purchased at the peak of the market in 2006 and 2007 which were put back on the market as distressed sellers or lenders wanted to move the product,” he said. Fueling the transaction frenzy was a willing group of bullish buyers willing to make deals for those landmark properties.
That optimism among buyers has cooled recently, Metcalfe has seen. “I think buyers are being a little bit more cautious on their underwriting, on their outlook going forward. Financiers are certainly being more cautious, a lot of financings that people were willing to provide six months ago are being pulled back. So it is very possible that we will see a bit of a cooling off period.”
David Paine, Head of Real Estate Investments, Standard Life Investments
Fellow panelist David Paine, head of real estate investments with Standard Life Investments, which has more than $10 billion of real estate assets under management, said his company is generally taking a wait and see approach to Europe and developed economies generally. He said he believed the current Euro crisis could have been dealt with at an early stage but that opportunity was missed and now the fate of the Euro zone is largely in the hands of politicians.
“In terms of what we are doing, we are focusing on those markets where we can see either the positioning is relatively stronger from a starting point perspective” or markets well positioned for a quick turnaround in repricing and revaluation when the economy improves.
“Canada is one of them,” said the Standard Life executive. “Similarly in Australia there are pockets in Sydney and Perth that have very similar characteristics. We are invested in Brazil … that has been a very good market for us. And even in the Euro zone, our focus is on the stronger markets, Scandinavia, Poland, Germany and looking for the opportunities that will be created out of the dis-function in the marketplace,” he said.
“Over the course of the next year, there will be more of those opportunities emerging and really the challenge for us is to ensure that we are in the position to at least play in some of those as they emerge. But it will take, in terms of underwriting, there will have to be risk taken on that is not on the table at the moment.”