Moderator:
David Hodes, Hodes Weill & Associates
Panelists:
Steven Hason, APG Asset Management
Stuart Rothstein, Apollo Global Management
Alan Supple '99, JP Morgan Asset Management
By Tommy Chan ’19 & Menglan (Ellen) Qiu ’20
As global capital flows have and continue to play a critical role in determining investment allocations to real estate, four experts on global real estate gathered to discuss the ongoing trends they see within the industry during the late stages of the current cycle. David Hodes, of Hodes Weill & Associates, moderated the panel and began with a brief presentation of his firm’s recent research.
Hodes acknowledged strong performance in the real estate sector which led to continuous institutional capital inflow and an increase in asset allocation. Capital flows were very much cross-border, but this year saw some changes due to currency and geopolitical reasons. Although institutions were taking more investment evaluations in-house, they were still working with third-party managers.
Allocation to real estate was up by 40 basis points relative to 2017, increasing to over 10% of total allocations for the first time. Asia Pacific, Africa, and the Middle East were the regions which experienced the largest gains. Hodes also discussed the conviction index which had been steadily trending downwards given the late phase of the cycle but saw an increase in 2018 instead.
Another trend Hodes mentioned was that of investors moving away from core investments, as they have become priced to near perfection and leaving little room for error.
Steven Hason started the panel off by sharing how APG takes a global approach to finding value by dynamically allocating across Europe, Asia, and the Americas. He agreed with Hodes’ view that core real estate was now priced to perfection in the private sector, but pointed out that certain listed companies were selling at a discount to Net Asset Value.
To find value and discounts, APG tends to be early adopters in emerging asset classes such as data center and self-storage. Using the industrial sector as an example, Hason elaborated on how APG maintained a positive long-term view on logistics assets, despite the sector becoming overheated in recent years, by strategically pivoting to Brazil where e-commerce still has low penetration.
The conversation then shifted to Stuart Rothstein, who spoke about his experiences in both the equity and debt spaces as well as opportunity evaluation from the lending side.
Lenders have been a major force in capital inflow into real estate in the past five years. As credit transactions are ultimately derivative of real estate transactions, the approach to evaluation remained the same across various transaction types and regions, which is to focus on the transaction itself—the underlying property, the business plan, and where the value is.
Rothstein echoed Hason’s view on taking a differentiated view of assets. He suggested finding opportunities that were more operationally intensive, such as hospitality and manufactured housing, where investors still can find value.
Hodes next asked whether equity or credit investors were stretching more to find deal flow. The panel emphasized that investors need to build a durable portfolio with moderate leverage and good assets to prepare for when the cycle turns.
Investors may need to accept lower returns at this time rather than stretch their underwriting. On the credit side, there is healthy and rational competition amongst lenders despite being the ninth year of the current cycle.
Regarding the public markets, Alan Supple ’99 chimed in on his experiences in the global securities and REIT markets. It has been an interesting year for REIT managers with growing concerns over the interest rate environment, the cycle, and opportunity cost for generalist investors. In individual property sectors, retail has suffered heavy discounts while industrial has performed well. Strong performance for e-commerce and logistics assets will likely continue, but they may now be fully priced. Investors had been chasing growth instead of value as economic fundamentals were good, but Supple has seen a pivot back towards value as the tides have started to turn.
Hodes commented on how global REITs had become victim of their own success as REIT stocks experienced more volatility from capital flows rather than fundamentals. Hedge funds have been a big driver of price movements and sector rotation.
Overall, Supple remained positive on the long-term advantages, such as strong fundamentals and dividends, that real estate securities offer but short-term volatility and trend shifts should not be overlooked. He also discussed various reasons, such as interest rates, taxes, premiums and underperformance, which may be responsible for slow activity in the public real estate sector despite relatively strong fundamentals.
On the global credit market, Rothstein noted the trend of larger overseas accounts moving from acquisitions to the credit market. He acknowledged it was a very robust financing market with lenders having been more cautious and disciplined. Despite abundant capital inflows, banks had not been doubling down on real estate.
The panel also discussed the advances of newer property sectors and technology and how investors can access them. Hason noted that new asset types are usually simply variations of an established theme, using student housing and senior housing as examples for thematic investments within the residential sector. He stressed the importance in understanding demographics and technology trends when investing in these assets. Similarly, key factors for newly-established asset classes such as co-working, single-family rentals, and self-storage are platform establishment, scale of efficiency, and operational expertise.
During the Q&A segment, the audience asked the panelists of their views on emerging markets. The panel mentioned great growth opportunities in South America and Asia which also come with their own risks. Specialized evaluation strategies at the city level rather than the country level are thus crucial. On the U.S. retail sector, the panelists remained cautious but were in favor of high-quality retail and anticipate continuing shifts in the retail landscape.
From a lender’s perspective, it is currently difficult to determine risk thresholds for retail. In the closing minutes, the panel noted the continuing demand for real estate allocation from their limited partners. It has been difficult to keep up with allocations during this stage of the cycle but the public markets could help relieve some of that challenge.
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Tommy Chan ’19 graduated from Cornell University with a B.S. in Civil Engineering and a M.S. in Engineering Management from Northeastern University. Prior to business school, Tommy worked as a project manager at Pinck & Co., Inc., an Owner’s Representative firm located in Boston, providing real estate development consulting services. He led design and construction efforts on behalf of private developers, non-profit organizations, and public municipalities for ground-up development and redevelopment projects. Tommy holds an Unrestricted Construction Supervisor’s License (CSL) in the State of Massachusetts. This past summer, Tommy interned at PGIM Real Estate on both their Acquisitions and Asset Management teams.
Menglan (Ellen) Qiu ’20 is a first-year student at Columbia Business School focusing on Real Estate and Finance. She is the recipient of the Alexander Bodini Real Estate Fellowship. Before business school, Ellen was a founding member of the real estate department at WeWork China, where she led WeWork’s expansion analysis and underwriting in Greater China. Prior to that, Ellen served as the Manager of the Investment and Capital Markets team at Cushman & Wakefield in Shanghai and Hong Kong.