While there is a sense of optimism about the North American and Global economy for 2011 the pace of recovery from the recession is expected to be slow and irregular. Economists say the worst is over yet unemployment is stubbornly high and debt burdened governments are simultaneously cutting spending and stimulus funding. The message about the global economy is decidedly mixed.
Declining performance of bonds and the equity market have turned investor interest toward safer and higher yielding opportunities. Real estate investment trusts (REITs) have seen an influx of funds from capital markets, institutional investors have increased their allocations to property, fund managers and high net worth individuals around the World are focusing their attention on real estate investment.
Just as the availability of capital for property is returning the supply and demand for real estate remains weak. A stalled global economy has undermined the strength of property fundamentals and questions remain about mortgage refinancing and how it will impact the property markets in 2011 and beyond.
With ballooning coffers assigned to property while the economic recovery remains uncertain “How will investors deploy capital in 2011?” is the key question to address at this year’s Global Property Market to be held on November 30th in Toronto says conference Chair Andrew Trickett, Senior Vice President, Investment, Oxford Properties Group.
Russell Chaplin, Chief Investment Officer for Property with Aberdeen Asset Management, a UK based firm with a Canadian presence that dates back to 1875 and manages a C$23 billion real estate portfolio, told RENX that the total volume of global funds available for property investment has returned to about 2004 levels.
Chaplin said global property investment is a powerful trend that is drawing increasing attention from sovereign wealth funds. He expects capital assigned to real estate investment will grow to exceed its 2007 peak.
In response to challenging circumstances for investors seeking accretive property investments there has been an unprecedented flight to core real estate assets located in the major capitals of World at the exclusion of secondary and tertiary markets.
‘Highly bifurcated’ is how Andrew Trickett describes the U.S. real estate investment market where he says there are ‘have and have not’ cities.
The ‘have’ cities are a very few gateway locations in the U.S. such as New York and Washington that have quality buildings in core locations with attractive risk adjusted returns to warrant acquisition or investment.
The majority of U.S. urban centres, the ‘have nots’, don’t currently have properties that meet institutional investment criteria. An available class A building in downtown New York might currently attract 10 to 20 bids while a similar building in a mid-American city would likely generate none, Trickett added.
Brookfield Refinances Tower With Chinese Loan – Wall St. Journal,
Canada’s CPPIB sees more U.S. property investments – Reuters Canada, November 10, 2010
Institutional investors ideal for plugging real estate funding gap – Global Pensions, November 10, 2010
REITs Going Global to Find Deals – Wall St. Journal, November 10, 2010
Russell Chaplin contends that when investors stepped back into global markets, following the financial crisis of 2008, they focused on major capital cities because they looked well priced relative to other cities, other asset classes, most notably cash. He describes this strategic choice as starting in early 2009 in UK and then spreading around the world.
“The very best assets are getting bid up relatively quickly and as the price rises the ability to capture reasonable returns has diminished,” said Chaplin. “A strategy of acquiring trophy assets in major cities across the globe would not necessary represent diversification. It is difficult to see how it would pay off in the long term.”
As a consequence, Chaplin sees investors being tempted away from the core assets and ‘up the risk return spectrum’ in order to find new investments. He cautioned that analyzing properties outside the core is a more difficult and less straightforward process.
Brad Olsen, who is President of Atlantic Partners, a U.S. based global property investment advisor, said that investors are now hard pressed to find ‘risk adjusted return’ in some of the major cities. He said they would be compelled to consider alternatives to outright acquisition of properties such as recapitalization, joint ventures and to look beyond the major cities.
Olsen whose expertise includes Central Europe is recommending Poland and the Czech Republic as locations to consider. He said Poland didn’t experience a recession and the major cities in both countries have robust office, retail and warehousing sectors.
An ‘inkblot analogy’ is what Olsen uses to describe an evolving commercial real estate market in the U.S. Around cities like Washington, where there is little sign of recession, he sees property investment gradually seeping out from the city centre.
With reference to the New York City, Andrew Trickett said that there have not been enough transactions to conclude that the core property market is overheated. Nevertheless, Oxford Properties is considering investment in mortgage debt for properties beyond the gateway cities that will ultimately meet its investment criteria.
In a recent survey looking into the topic of real estate debt as an alternative to equity, Mercer identified an opportunity for non-bank lenders such as institutional investors, as borrowers face a ‘funding gap’ when it comes time to refinance.
Russell Chaplin said he wouldn’t be surprised to see a pause in the pace of investment in 2011. He expects investor to exercise caution given the variable economic outlook and to adjust their global investment strategies to account for what may be over heated markets in some major cities.
To learn about global investment strategies for 2011, register for Global Property Market to be held on November 30th, 2010 at the Metro Toronto Convention Centre, South Building. Only $395 + $51.35 HST which includes the Toronto Real Estate Forum Chair’s Reception.
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