Families in Business chaired a roundtable meeting at the Families in Business real estate conference in London to discuss the current state of global real estate – how, where and when to achieve maximum returns
Javier de Muguiro is the founder of Achievers Capital, a multifamily office based in Spain.
Jeremy Gates is managing director of Strategic Real Estate Advisors, a specialist global real estate advisory based in London.
Kevin Hackett is president and CEO of the New York based Rockefeller Group Development Corporation.
Niraj Kishan is managing director of Ashford Mediacon PVT Ltd, a property firm based in India.
Richard Weber is managing director of Weber Grundstuecksverwaltung, a German family office focusing on real estate.
A recent report by Jones Lang LaSalle (JLL) highlighted the fact that real estate investment increased 38% from 2005 to 2006 and is nearly double the volumes of 2003. What has spurred this phenomenal growth in your opinion?
De Muguiro: There are three things in my opinion. First, the sheer amount of liquidity that has gone into the real estate and private equity markets over the past 10–15 years. Second, I think people are no longer afraid to invest in real estate outside of their native country. Third, advances in communication – you can type "real estate in Spain" into an internet search engine and instantly get a list of suppliers.
Hackett: I think what has also helped real estate is that it has shed its former image as an alternative investment to become a legitimate asset class on its own. Judging only from the institutions who allocate capital, I know that US pension funds traditionally had a 5% allocation to global real estate, but now it's double that. In addition, as people have become aware of real estate's own merits, it's been turbocharged by the increasingly public nature of real estate; for example, you can now trade real estate securities both as debt and equity.
Kishan: In India, rapid growth has meant that companies now need a lot of space and we have seen real estate values going up by almost 30% year-on-year. There are also approximately 200 million middle class people and their numbers are growing every year. Finally, many real estate funds are returning to India which is creating a big boom – in 2001 9% of GDP was internationally created, today it is more than 25%.
Weber: The interesting thing in Germany right now is the number of foreign investors. I asked a British equity fund why they are investing in Germany and they said that when they build a supermarket in the UK they get a yield of 3–4%, but in Germany a supermarket generates a yield of 11%.
Gates: Certainly the internationalisation of other securities markets and the cost of debt has led a lot of people to look overseas, while the huge growth in the private equity market has spawned the private equity real estate funds. I think we have also seen that real estate is no longer viewed cyclically – it is now as seen as being more permanent.
I also think you've seen a lot of people chasing returns and real estate has been seen as a pretty secure investment for that. Lastly, while the familiar markets of western Europe and the US have always been pretty mature markets, moving overseas into what are considered emerging markets was always seen as a risk, but now it is seen as an opportunity.
The role that private equity has played in fuelling the market has been well documented. Is this a positive thing?
Gates: In my view absolutely positive. It has taken real estate into a new field, whether you call it the private equity real estate model or the private fund model, and it's enabled people to raise the necessary amounts of money.
Hackett: Private markets value real estate more highly than public markets. The regulation of public companies is intense and they value their real estate based upon past appraisals which lock in old values, whereas private markets and private equity value far higher.
How worried should investors be that Tony Horrel, CEO of JLL, said that $4 of money invested is chasing $1 of product? Is this sustainable?
De Muguiro: You have to be selective. If it takes four times as much effort to find the right deal then you have to be very conservative when you do your deal because so many people are raising money and then trying to invest it. We've recently done a deal in Romania where, for the first time, we agreed the deal first and raised the money after. So I think raising money is the easy part. The dangerous part is having money that you have to invest.
Kishan: In 2010 the Commonwealth Games are being held in New Dehli. There was an auction for hotel plots, but the government were unable to sell them, even at a fair price. Incidentally, they were expecting to get twice the reserve price. Property is available, but there is no profit to be made.
Weber: I always say the key for success is sustainability so therefore we are very conservative. Sometimes we might miss an investment but when we buy something we are very confident that in the next 10–15 years there will not be any significant negative demographic changes. Looking at institutional investors, I believe their rather short-term view is simply because managers know they are going to leave, after five years or so.
Kishan: It is true that investment managers are under pressure to invest. You have a specific time period and, once you raise the money, you have to invest in the market. However, the market situation might not be good.
Hackett: You have to remember too that, notwithstanding the fact that real estate has become global, it is still a local business so you have to pick your markets carefully with the appropriate advisors.
What do you think of market prospects generally for the next 5–10 year period?
Weber: In Germany in the late 1990s there was an economic boom so the German stock exchange was very popular with people investing in shares. But the last five years have been less good so a lot of capital was moved into real estate. However, sustainability is now the key issue as we look to what might happen in 10 years time.
De Muguiro: If you look at countries that have a sustained growth, a declining interest rate, falling inflation and developing mortgage markets, you have a huge opportunity. Romania, for example, had not built flats for 30 years but it is now growing and has a lot of money coming in from the EC. In Mexico there is a huge population that is growing between the 24–44 age range, which is demographically very different from what is happening in Europe. This is exactly what happened in Spain; interest rates moved from 14% into 3%, inflation moved from 14% to 4% and mortgages moved from 10 years to 40 years today.
If we can now move on to talk about how to invest. There is always an issue of wealth preservation vs creation – how does this change what real estate you are looking to invest in?
Gates: Some view real estate as a good defensive stock that you hold onto and build up the market value, but I see that as a way to potentially lose money in the current environment. You need to be in development and active management. If you look at the present marketplace, prices are at the top end while yields are at the low end. Interest rates are going up and, while I do believe that investing in core markets such as Paris or New York has less risk, paying at the top of the market can leave you exposed.
Whatever asset you buy, you've got to have a number of ways out. You can't just have a single let building from which you've no idea of how you're going to get your money back. You need to know, for example, that it's in a very strong location where there's a very strong demand for leasing out, if it's got conversion opportunities or if there's something you can do in the life of the asset.
Overall, I think core investing is an area that people need to be more concerned with.
Hackett: I certainly agree with that because it's hard to imagine that capitalisation rates will go much lower, so what you have to bank on to increase value in the core market is rental growth.
De Muguiro: Leverage is what turns a conservative preservation asset into a dangerous and risky asset. When we talk about preserving wealth, it is the ability to have enough financial muscle to reduce leverage. If you have big enough assets, it is easier to take risks as you have sufficient money to repay the loan in the event that it goes wrong.
Gates: The most extreme cases, which happened in the past 10 years, were when private buyers would just buy with cash. This is not too prevalent now as people use equity wisely and leverage it, but in terms of protecting the downside, that is one way that they used to do it. It's a conservative investment and they kept it conservative – let's not make it risky by putting a high leverage debt on it.
Family offices have several ways to invest both directly and indirectly, plus there is the rise of REITs. How do you choose what is right?
Weber: Speaking for my family we prefer the type of investments where we have 100% control. In the past we set up closed funds but it's a pain that minor shareholders are the most difficult ones and, personally speaking, I would not set up a closed fund again. We prefer to do something because we believe it is the right decision. But, we also have just over 20% of our investments in real estate investment funds.
De Mauguiro: You should have as many asset classes in real estate as you have in equities (ie, emerging and regional markets, risk tolerance, etc). Then you have to find the right specialist and then it depends on their liquidity. You would normally want to aim long-term and with low liquidity you get
If a family wanted to invest in India, for example, what would your approach be?
De Muguiro: I would look at one of the large investment banks as they have a team of Indian nationals.
Kishan: Due diligence is really necessary because nobody can know everything. Also, it is very difficult to buy directly. I don't even know what is happening south of Delhi because the laws change according to the region.
Gates: India's a good example because the laws are based on a similar model to the UK's. It's risky and you come back to what you're comfortable with. You have to find someone that you're comfortable with to partner in the investment banking process and that can be very hard.
Kishan: All these investment bankers also have an exit plan. Investing is one thing, but exiting is a very different and very important point.
The globalisation of assets is increasing exponentially with 42% of all deals involving some sort of cross-border transaction. Do you think this figure will rise?
Gates: I think this is normal practice now in real estate, but it is complicated.
Hackett: It's important whether you invest alone or you do it with others, especially in a cross-border context. There used to be two principal ways to invest, either through a separate account, which was on your own with an advisor, or a co-mingled fund. Separate accounts used to be very popular, but now as more and more capital is coming into the market co-mingled funds have taken over a much higher percentage of institutional investments.
Kishan: Delhi is such a cosmopolitan city that people have got no qualms about coming to India and investing now.
Weber: We have invested in the US and Canada and we will do so again because we know these markets, but to some extent India and China are strange markets that are too risky for us.
How important is it to have a diversified real estate portfolio?
Gates: At the end of the day it comes back to how much capital the investor has to invest and what they can do with it. If they've got £5 million that they can allocate to real estate and that's 5–20% of their wealth, putting £5 million into a building worth £15–20 million and borrowing 80% gives you risk in one building and one location. Is that really a sensible thing to do? Probably not, you might as well put £5 million into a diversified fund.
So it comes back to two things: think how much money you have to invest, how involved you want to be and how much control you want to have. Real estate is a very time-consuming, hands-on business. There are always things to do and even with the simplest investment, investors don't appreciate that things can go wrong.
Weber: I suppose it comes down to whether you want to preserve capital or to create money. As Jeremy said, preserving capital is the easy part if you have a good property in a good location.
But making money is hard work because it's not just a question of signing a piece of paper. You have to work at it and the investor must know that to make money can also mean to lose money.
What is the best bit of advice you will be able to give our readers in relation to investing in real estate?
Weber: Ensure you have a sustainable strategy.
De Muguiro: Diversify both geographically and within your asset class.
Hackett: Search out the best possible advice and guidance.
Kishan: I would say location.
Gates: Trust and experience.