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6
In this issue, we’ll be looking at the arguments for rising levels of allocation to real assets. We’ll need to remind ourselves that the biggest determinant of allocation levels is what was done last year: history is the most influential strategist and real estate, by historical measure, is, in many ways, a new boy in the institutional portfolio. We’ll try to determine whether rising levels are indeed a fact or an aspiration. Beyond the need for income, what else is driving, or should drive, the shift to above 10%? The thinking behind a rise in allocations seems to be largely American. Are Europeans following? Is Europe going to benefit? After several issues of The Decisive Eye which forecast a decidedly gloomy outlook for our industry against a backdrop of maturing funds and Basel 3 bank unbundling, after yet again deliberately cancelling a quarterly issue while hoping for some resolution of Southern fringe debt issues, it is good to report in this issue of The Decisive Eye that the investment world may have made a dramatic reassessment of the role of real estate in the institutional portfolio. Without doubt, the proximate driver behind any reassessment is a need for income, but what is heartening is that many institutions may be in the process of acknowledging that real estate deserves a far bigger permanent share of the investment action. Why is the historic 5-8% a sensible level when real estate, more properly real ‘assets’, both medium term and long term, can deliver returns and risk profiles close to institutional performance targets? Are those who talk about eventual levels of 25% blowing smoke? Jos Short THE DECISIVE EYE • ISSUE 7 • Winter 2012 Investors Get Real Talk about a ‘tectonic shift’ in institutional allocations to real assets has tangibly improved both mood and outlook for the real estate fund management industry. Is the shift a reality? What motivates it? Will new investors follow logic or seek trophies? In this issue • Did the earth move? • The shift: thesis and end game • Is the shift evident? • Manage to core - a strategy to match the shift FOR RESEARCH Jos Short is Executive Chairman of INTERNOS Global Investors which he founded with Andrew Thornton A strategic bulletin from INTERNOS Global Investors on issues and opportunities in European real estate. ISSUE 7 Winter 2012 FOR RESEARCH THE DECISIVE EYE No euphoria However: there will be no euphoria. When the investing world gets a new idea into its head, the tendency is to go with what it knows. Major cities and prime real estate are invariably the target. Overheating results and performance suffers. As both asset and fund managers, our role must be to use knowledge gained on the ground to maximise total returns and to temper the enthusiasm of investors driven by the glamour, or perceived, but perhaps illusory, security, of core trophy assets in fashionable city centres. “illusory security of core trophy assets”
Transcript of 4096INT DE7-ARTwork5 Layout 1 01/11/2012 09:48 Page 1 … · 2020. 5. 5. · gathered in Q4 2011...
THE DECISIVE EYE • ISSUE 7 •Winter 20125
Most investors upping theirallocations to real estate willbe doing this for long termcapital growth and for
immediate and growingincome. Existing funds arepolluted by a legacy of weakassets acquired in the boomyears. With a sea of moneyalready beginning to hit realestate, they will not find whatthey need in tier 1 core real
estate – neither in incometerms nor in the risk nowinherent to the pricing ofglamour buildings. In this low
Managed to Core: a real estate strategy to match a dramatic shift
If the evidence so farsupports the theory that thereis a rising tide of institutionalmoney into real estate andthat Europe is a main target,as far as fund managers areconcerned, we should setagainst this the timing impactof maturing funds, bankunbundling and onerouscompliance with AIFMDdirectives captured in thechart below. It is estimated*that there is 1413bn of realestate for sale in Europe, ofwhich 1231bn is by banks.Prime core real estate in
major cities has already beenstrongly sought and pricinghas reacted accordingly butthis timing suggests thatsecondary and core plus real estate will not show a
shortage of supply until 2015by which time, banks should have complied with Basel 3requirements. *The Property Ticker Sept 2012
Source Jones Lang Lassalle, Internos
The implication in all theabove is heartening forEuropean real estate fundmanagers – especially if itmeans new entrants totransnational investmentwhere the expertise of our,
now more lean and realistic,industry is called for. Latest
capital flow figures indeed
show significant net inflow to Europe – more so as thechart below omits residentialflow into Europe, which, inLondon and Paris, Savillsestimate to be 30+% of all inflows.
Europe: back to reality
Europe: real estate capital flows $bn Q 1 and Q2 2012Origin of funds Into Europe Leaving Europe Net Inflow
Americas 6.7 3.6 3.1Middle East 3.3 1.3 2.0Far East 3.0 0.9 2.1Global Funds 5.3 4.4 0.9Europe 2.8 2.7 0.1Total H1 2012 21.1 12.9 8.2
“significant net inflow to Europe”
“a sea of money already beginning to
hit real estate”
“they will not find what they need in tier 1 core real estate”
European real estate funds by maturity
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
GAV (1m)
30,000
25,000
20,000
15,000
10,000
5,000
0
Source: Property funds Research, Internos
AIFMDImplementation
Peak in loanmaturities
THE DECISIVE EYE • ISSUE 7 •Winter 20126
This document is issued in the United Kingdom by INTERNOS Global Investors Limited (“INTERNOS”) which is authorised and regulated by the Financial ServicesAuthority. Internos makes no guarantee of its accuracy and completeness and is not responsible for errors of transmission of factual or analytical data, nor is it liable for
damages arising out of any person’s reliance upon this information. The opinions in this document constitute the present judgement of Internos, which is subject tochange without notice. The value of investments and the income from them can fluctuate and investors may not get back the full amount invested. Property and landcan be difficult to sell, so you may not be able to sell when you want to. The value of the property is generally a matter of a valuer’s opinion. Past performance is not a
guide to the future. Information accurate as at October 25th 2012
www.internosglobal.com
Attributing success to speed and rigour of decision making, INTERNOS has become a significant pan-European investment manager since its formation by Andrew Thornton and Jos Short in 2008. Now with offices in London, Frankfurt, Amsterdam, Paris and Luxembourg, over 330 commercial propertyinvestments in 9 countries, 1 2.2 bn under management and its earliest funds dating from 2004, INTERNOS has expertise across the real estate asset classes and major markets. Evidence ofentrepreneurial flair and strategic credibility lies in the success of this owner-managed business in takingover the management of complex funds and situations and in building consensus among diversestakeholders in competition with much larger industry peers. INTERNOS uses the phrase 'The DecisiveEye' to sum up its approach and as the title of these strategic bulletins.
London
INTERNOSGlobal Investors Limited,
65 Grosvenor Street, London W1K 3JH,
United Kingdom
t +44 (0) 20 7355 8800 f +44 (0) 20 7355 8801
Amsterdam
INTERNOSGlobal Investors B.V.,
WTC, H Tower, 19th Floor, Zuidplein 156,
1077 XV Amsterdam, The Netherlands
t +31 (0) 20 676 50 60 f +31 (0) 20 670 51 02
Frankfurt
INTERNOSGmbH,
Goethestraße 10, 60313 Frankfurt,
Germany(Until 28th November 2012)
t +49 (0) 6950 5066 90 f +49 (0) 6950 5066 929
Luxembourg
INTERNOSS.à r.l.,
6 rue Jean Monnet,L-2180 Luxembourg
t + 352 2675 4108 f + 352 2675 4106
Paris
INTERNOSGlobal Investors Sarl,
21 rue des Pyramides,75001 Paris,
France
t +33 1 40 15 53 00f +33 1 40 15 53 99
A dramatic upward shift in allocations to real assets by institutions is a game-altering prospectfor our industry. If, as suggested, real estate joins equities and bonds as one of three
traditional investments, specialised fund managers must create the instruments to meetmainstream institutional needs. That is the challenge. That is the opportunity. Jos Short
A managed to core strategycan be described as ‘incomebiased’ with a ‘long only’ownership and managementhorizon targeting assets thatare very well located,physically suited to themarket or economically
capable of conversion, andoffer higher value alternativeuses to a spectrum ofoccupiers. Managers needthe territorial nous to avoidassets that are highlyspecialised or in poor ordeclining occupier markets.
Managed to core is thus a value–driven strategywhich properly utilises the expertise of fundmanagers - who are alsoexpert asset managers in the countries or localitieswhere they would have their clients invest.
Income biased – on the ground expertise
return environment, there is aneed for high income and anabsolute requirement forproper asset management. A persuasive strategy is‘managed to core’ but
investors must understandthat it is a strategy that onlyworks where investors canaccess management teamson the ground with the abilityto target fundamentally good
property, continuouslyimprove the asset and deliverfor reliable and growingreturns.
In this issue, we’ll be lookingat the arguments for risinglevels of allocation to realassets. We’ll need to remindourselves that the biggestdeterminant of allocationlevels is what was done lastyear: history is the most
influential strategist and realestate, by historical measure,is, in many ways, a new boyin the institutional portfolio.We’ll try to determinewhether rising levels areindeed a fact or anaspiration. Beyond the need
for income, what else isdriving, or should drive, theshift to above 10%? Thethinking behind a rise inallocations seems to belargely American. AreEuropeans following? IsEurope going to benefit?
After several issues of TheDecisive Eye which forecast adecidedly gloomy outlook forour industry against abackdrop of maturing fundsand Basel 3 bankunbundling, after yet againdeliberately cancelling aquarterly issue while hopingfor some resolution ofSouthern fringe debt issues,it is good to report in thisissue of The Decisive Eyethat the investment worldmay have made a dramaticreassessment of the role of real estate in theinstitutional portfolio.
Without doubt, the proximatedriver behind anyreassessment is a need forincome, but what isheartening is that manyinstitutions may be in theprocess of acknowledgingthat real estate deserves a farbigger permanent share ofthe investment action. Why isthe historic 5-8% a sensiblelevel when real estate, moreproperly real ‘assets’, bothmedium term and long term,can deliver returns and riskprofiles close to institutionalperformance targets? Arethose who talk about
eventual levels of 25%blowing smoke?
Jos Short
THE DECISIVE EYE • ISSUE 7 •Winter 2012
Investors Get Real Talk about a ‘tectonic shift’ in institutional allocations to real assets has tangibly
improved both mood and outlook for the real estate fund management industry. Is theshift a reality? What motivates it? Will new investors follow logic or seek trophies?
In this issue
• Did the earth move?
• The shift: thesis and end game
• Is the shift evident?
• Manage to core - a strategyto match the shift
FOR RESEARCH
Jos Short is Executive Chairman of INTERNOSGlobal Investors which he founded with Andrew Thornton
A strategic bulletin from INTERNOS Global Investors on issues and opportunities in European real estate.
ISSUE 7 Winter 2012
FOR RESEARCH
THE DEC IS IVE EYE
No euphoria However: there will be noeuphoria. When the investingworld gets a new idea into itshead, the tendency is to gowith what it knows. Majorcities and prime real estateare invariably the target.
Overheating results andperformance suffers. As bothasset and fund managers, our
role must be to useknowledge gained on the
ground to maximise totalreturns and to temper theenthusiasm of investorsdriven by the glamour, orperceived, but perhapsillusory, security, of coretrophy assets in fashionablecity centres.
“illusory security of core trophy assets”
4096INT_DE7-ARTwork5_Layout 1 01/11/2012 09:48 Page 1
THE DECISIVE EYE • ISSUE 7 •Winter 20124
significant in the case of theUSA) in the proportion of real
estate held in portfolios byinvesting institutions, exceptby those in the UK. Furthermore these data were
gathered in Q4 2011 and Q12012, so if the shift thesis isto be believed, moresignificant growth is to beexpected in the 2013 data.Looking at this as a US ledphenomenon, the data theresuggest a growth in realestate AuM of 18% withinferentially, a much largershare taken by newallocations invested in 2011.However, if this is a tectonicshift gathering pace, it will be
some time before it can becaptured by statistics but Ihave been struck by the
number of news items thissummer and autumnsuggesting something seismicis indeed rumblingunderground. A selection:
“growth (very significant in the case of the USA) in the proportion of real estate held by
investing institutions”
“something seismic is indeed rumblingunderground”
SEISMIC RUMBLINGS: financial & real estate media Q2 - Q4 2012
German insurers are planning to grow property holdings and should reach 6.7% oftotal assets by year-end, up from 6.3%, and may well exceed this. Ernst and Young, June 2012
The Blackstone Group has closed its latest global real estate fund, which is thelargest real estate opportunity vehicle ever raised. [$13.3bn. Also a planned $3.3bndebt fund] PERE October 2012
With real estate financing in Europe still difficult to come by, one of America’sbiggest commercial real estate lenders [Wells Fargo] is ramping up in the region. PERE
October 2012
GE Capital to build $5 billion UK loan portfolio within 5 years Tavistock Real Estate Wrap October 2012
Global insurance groups Axa, Met Life, Aviva and Legal & General have launchedprogrammes for providing debt finance to property companies. October 2012
… a small group of institutional North American investors have tilted their currentallocations toward real assets, which now approach 15 percent to 25 percent ofoverall funds. PERE April 2012
The largest US property companies are cashing in on the troubles of their Europeanrivals with a 13.5bn spending spree. Sept 2012
Invest more in real estate. In particular, invest more in opportunistic real estate. (KKR) PERE Sept 2012
These are not the sort ofheadlines that we would have read 12 months ago. They do seem to reflect a
distinct attitudinal change.They also suggest awillingness to overlookEurope’s weak spots in favour
of perceived opportunity – for income or total return.
Institutions in key countries with portfolios > $5million Source: Property Funds Research, Internos
To turn to real estatespecifically, (thought by JPMorgan to account for 60%approx. of tradeable globalreal assets), inflationscenarios also make acompelling case for the assetclass. Most studies concludethat real estate valuations inreal terms are inflation neutralwhile direct income performsbadly (if inflation guaranteedproducts are excluded) andequities perform erratically.
Reverting to Europe, there is,for the foreseeable future, aquasi-inflationary effect, ahuman inflation, in the
inexorable growth ofurbanisation putting pressureon land and ensuring thatresidential needs will competefor space and jobs andunderwrite valuations ofcommercial property.
This is particularly true ofEurope where land useoutside most cities is legallyrestricted. UN predictions,shown above for a selectionof cities, make this casedramatically.
assets through beingsignificantly easier to manage.In fact, only through thecreation and growth ofproperty funds in the nineties,did global real estate gain asignificant but still ‘alternative’share of assets undermanagement.
For 30 years however,equities have been
mainstream, now moreimportant than fixed income.Is it time for real assets toleave the alternative box and
join them? And in terms ofmore recent history, for thoseinvestors over-leveraging theirreal estate investments in2006/07, with unhappyoutcomes after 2008, willthere be a realisation that realestate can have a mild riskprofile alongside muchneeded current income?
Currency and human inflation
Given that the thesis behindthe shift is based on a view ofhow investors are thinkingnow and will act in the nearfuture, it is not surprising thathard evidence will emergeslowly. The chart alongsidehowever does show that insome key countries, therehas been growth (very
Is the shift evident?
“time for real assets toleave the alternative box”
“inexorable growth ofurbanisation puttingpressure on land”
Index of predicted population growth 2000-2025Source: United Nations, Internos charting
THE DECISIVE EYE • ISSUE 7 •Winter 20123
Actual real estate investments % of total AuM
Total Population Index
%
12
10
8
6
4
2
0
Index
170
160
150
140
130
120
110
100
Germany UK France US
2000 2005 2010 2015 2020 2025
2010 2012
MadridToulouseBarcelonaMünchenParisLondonAmsterdamRotterdamKölnBerlin
Taking the geologicalmetaphor further: if there wasa first tremor at the start of a‘tectonic shift’, I felt it when itwhen I read J.P. MorganAsset Management’s circularentitled ‘The Realization’*earlier this year and I own that ‘tectonic shift’ is their
coinage, not mine. Of courseI very much want it to be trueand, if the jury is still out, thearguments are sound and wehave our ears to the groundhoping to hear those platesgrinding. Certainly, thetremors are suggestive butthough not contradicted (nor
confirmed) by statistics, it is above all the news mediathat keep me believing in aseismic event of which wemay not have certainmeasurement for manymonths yet. It will be a drawnout sort of earthquake.
Did the earth move for you?
THE DECISIVE EYE • ISSUE 7 •Winter 20122
The end of alternativestatus for real assets?If the arguments for the shiftshould be largely familiar, thepredicted end result willshatter preconceptions: within10 years, institutions to beallocating 25% to real assetsand the ‘real’ class being
recognised as one of threetraditional investment classes,
along with bonds and
equities. The thesis is that asearch for income, which haslasted since 2010, hasbecome desperate and isdriving a revolutionary changeinto the thinking of investorsand that there will be nobacktracking once committedto a new investment reality.
The shift: thesis and end game
*The Realization. J.P. Morgan AssetManagement. April 2012
Too good to give upThe justification for thisthinking is that, while incomeenvy is the immediate causeof a lust for real assets, theydo more than provide acurrent income stream. Realassets, and this is particularlytrue of real estate, have anupside in good economictimes shadowing equities, but
with less volatility, leading tobetter risk-adjusted total
returns. At the same time realassets can achieve a stabilityof income that has more in
common with bonds. Oncefirmly established at higherlevels in a portfolio, thecurrent and predictedperformance of real assetswill have precisely the profileneeded by institutions suchas pension funds or thosefollowing a cautious policy -but needing current income.
Both sides of the investment fence
So, why now? If it was thatobvious, why will investorshave waited so long to buyinto the dream performanceprofile represented by realassets? Simple really: in theintroduction, I referred tohistory as the 'most influentialstrategist’. Investors,especially those controlled by
committees, will tend to dowhat they have always doneor risk criticism when it goes wrong: follow-my-leader isreputationally the safe way togo and the portfolio marginthe only place to experiment.In historical terms, real assetsare a new class. Indeed inmuch of Europe and USA,
moving out of fixed incomeinto equities, and sometimesinto real estate, in an urgentsearch for total returns,became legally permissible forpension funds only in the twodecades following 1960.Equities were the firstalternative asset,predominating over real
The hand of history
“the ‘real’ class beingrecognised as one of three traditionalinvestment classes”
“...real assets will haveprecisely the profile
needed by institutions...”
4096INT_DE7-ARTwork5_Layout 1 01/11/2012 09:48 Page 2
THE DECISIVE EYE • ISSUE 7 •Winter 20124
significant in the case of theUSA) in the proportion of real
estate held in portfolios byinvesting institutions, exceptby those in the UK. Furthermore these data were
gathered in Q4 2011 and Q12012, so if the shift thesis isto be believed, moresignificant growth is to beexpected in the 2013 data.Looking at this as a US ledphenomenon, the data theresuggest a growth in realestate AuM of 18% withinferentially, a much largershare taken by newallocations invested in 2011.However, if this is a tectonicshift gathering pace, it will be
some time before it can becaptured by statistics but Ihave been struck by the
number of news items thissummer and autumnsuggesting something seismicis indeed rumblingunderground. A selection:
“growth (very significant in the case of the USA) in the proportion of real estate held by
investing institutions”
“something seismic is indeed rumblingunderground”
SEISMIC RUMBLINGS: financial & real estate media Q2 - Q4 2012
German insurers are planning to grow property holdings and should reach 6.7% oftotal assets by year-end, up from 6.3%, and may well exceed this. Ernst and Young, June 2012
The Blackstone Group has closed its latest global real estate fund, which is thelargest real estate opportunity vehicle ever raised. [$13.3bn. Also a planned $3.3bndebt fund] PERE October 2012
With real estate financing in Europe still difficult to come by, one of America’sbiggest commercial real estate lenders [Wells Fargo] is ramping up in the region. PERE
October 2012
GE Capital to build $5 billion UK loan portfolio within 5 years Tavistock Real Estate Wrap October 2012
Global insurance groups Axa, Met Life, Aviva and Legal & General have launchedprogrammes for providing debt finance to property companies. October 2012
… a small group of institutional North American investors have tilted their currentallocations toward real assets, which now approach 15 percent to 25 percent ofoverall funds. PERE April 2012
The largest US property companies are cashing in on the troubles of their Europeanrivals with a 13.5bn spending spree. Sept 2012
Invest more in real estate. In particular, invest more in opportunistic real estate. (KKR) PERE Sept 2012
These are not the sort ofheadlines that we would have read 12 months ago. They do seem to reflect a
distinct attitudinal change.They also suggest awillingness to overlookEurope’s weak spots in favour
of perceived opportunity – for income or total return.
Institutions in key countries with portfolios > $5million Source: Property Funds Research, Internos
To turn to real estatespecifically, (thought by JPMorgan to account for 60%approx. of tradeable globalreal assets), inflationscenarios also make acompelling case for the assetclass. Most studies concludethat real estate valuations inreal terms are inflation neutralwhile direct income performsbadly (if inflation guaranteedproducts are excluded) andequities perform erratically.
Reverting to Europe, there is,for the foreseeable future, aquasi-inflationary effect, ahuman inflation, in the
inexorable growth ofurbanisation putting pressureon land and ensuring thatresidential needs will competefor space and jobs andunderwrite valuations ofcommercial property.
This is particularly true ofEurope where land useoutside most cities is legallyrestricted. UN predictions,shown above for a selectionof cities, make this casedramatically.
assets through beingsignificantly easier to manage.In fact, only through thecreation and growth ofproperty funds in the nineties,did global real estate gain asignificant but still ‘alternative’share of assets undermanagement.
For 30 years however,equities have been
mainstream, now moreimportant than fixed income.Is it time for real assets toleave the alternative box and
join them? And in terms ofmore recent history, for thoseinvestors over-leveraging theirreal estate investments in2006/07, with unhappyoutcomes after 2008, willthere be a realisation that realestate can have a mild riskprofile alongside muchneeded current income?
Currency and human inflation
Given that the thesis behindthe shift is based on a view ofhow investors are thinkingnow and will act in the nearfuture, it is not surprising thathard evidence will emergeslowly. The chart alongsidehowever does show that insome key countries, therehas been growth (very
Is the shift evident?
“time for real assets toleave the alternative box”
“inexorable growth ofurbanisation puttingpressure on land”
Index of predicted population growth 2000-2025Source: United Nations, Internos charting
THE DECISIVE EYE • ISSUE 7 •Winter 20123
Actual real estate investments % of total AuM
Total Population Index
%
12
10
8
6
4
2
0
Index
170
160
150
140
130
120
110
100
Germany UK France US
2000 2005 2010 2015 2020 2025
2010 2012
MadridToulouseBarcelonaMünchenParisLondonAmsterdamRotterdamKölnBerlin
Taking the geologicalmetaphor further: if there wasa first tremor at the start of a‘tectonic shift’, I felt it when itwhen I read J.P. MorganAsset Management’s circularentitled ‘The Realization’*earlier this year and I own that ‘tectonic shift’ is their
coinage, not mine. Of courseI very much want it to be trueand, if the jury is still out, thearguments are sound and wehave our ears to the groundhoping to hear those platesgrinding. Certainly, thetremors are suggestive butthough not contradicted (nor
confirmed) by statistics, it is above all the news mediathat keep me believing in aseismic event of which wemay not have certainmeasurement for manymonths yet. It will be a drawnout sort of earthquake.
Did the earth move for you?
THE DECISIVE EYE • ISSUE 7 •Winter 20122
The end of alternativestatus for real assets?If the arguments for the shiftshould be largely familiar, thepredicted end result willshatter preconceptions: within10 years, institutions to beallocating 25% to real assetsand the ‘real’ class being
recognised as one of threetraditional investment classes,
along with bonds and
equities. The thesis is that asearch for income, which haslasted since 2010, hasbecome desperate and isdriving a revolutionary changeinto the thinking of investorsand that there will be nobacktracking once committedto a new investment reality.
The shift: thesis and end game
*The Realization. J.P. Morgan AssetManagement. April 2012
Too good to give upThe justification for thisthinking is that, while incomeenvy is the immediate causeof a lust for real assets, theydo more than provide acurrent income stream. Realassets, and this is particularlytrue of real estate, have anupside in good economictimes shadowing equities, but
with less volatility, leading tobetter risk-adjusted total
returns. At the same time realassets can achieve a stabilityof income that has more in
common with bonds. Oncefirmly established at higherlevels in a portfolio, thecurrent and predictedperformance of real assetswill have precisely the profileneeded by institutions suchas pension funds or thosefollowing a cautious policy -but needing current income.
Both sides of the investment fence
So, why now? If it was thatobvious, why will investorshave waited so long to buyinto the dream performanceprofile represented by realassets? Simple really: in theintroduction, I referred tohistory as the 'most influentialstrategist’. Investors,especially those controlled by
committees, will tend to dowhat they have always doneor risk criticism when it goes wrong: follow-my-leader isreputationally the safe way togo and the portfolio marginthe only place to experiment.In historical terms, real assetsare a new class. Indeed inmuch of Europe and USA,
moving out of fixed incomeinto equities, and sometimesinto real estate, in an urgentsearch for total returns,became legally permissible forpension funds only in the twodecades following 1960.Equities were the firstalternative asset,predominating over real
The hand of history
“the ‘real’ class beingrecognised as one of three traditionalinvestment classes”
“...real assets will haveprecisely the profile
needed by institutions...”
4096INT_DE7-ARTwork5_Layout 1 01/11/2012 09:48 Page 2
THE DECISIVE EYE • ISSUE 7 •Winter 20124
significant in the case of theUSA) in the proportion of real
estate held in portfolios byinvesting institutions, exceptby those in the UK. Furthermore these data were
gathered in Q4 2011 and Q12012, so if the shift thesis isto be believed, moresignificant growth is to beexpected in the 2013 data.Looking at this as a US ledphenomenon, the data theresuggest a growth in realestate AuM of 18% withinferentially, a much largershare taken by newallocations invested in 2011.However, if this is a tectonicshift gathering pace, it will be
some time before it can becaptured by statistics but Ihave been struck by the
number of news items thissummer and autumnsuggesting something seismicis indeed rumblingunderground. A selection:
“growth (very significant in the case of the USA) in the proportion of real estate held by
investing institutions”
“something seismic is indeed rumblingunderground”
SEISMIC RUMBLINGS: financial & real estate media Q2 - Q4 2012
German insurers are planning to grow property holdings and should reach 6.7% oftotal assets by year-end, up from 6.3%, and may well exceed this. Ernst and Young, June 2012
The Blackstone Group has closed its latest global real estate fund, which is thelargest real estate opportunity vehicle ever raised. [$13.3bn. Also a planned $3.3bndebt fund] PERE October 2012
With real estate financing in Europe still difficult to come by, one of America’sbiggest commercial real estate lenders [Wells Fargo] is ramping up in the region. PERE
October 2012
GE Capital to build $5 billion UK loan portfolio within 5 years Tavistock Real Estate Wrap October 2012
Global insurance groups Axa, Met Life, Aviva and Legal & General have launchedprogrammes for providing debt finance to property companies. October 2012
… a small group of institutional North American investors have tilted their currentallocations toward real assets, which now approach 15 percent to 25 percent ofoverall funds. PERE April 2012
The largest US property companies are cashing in on the troubles of their Europeanrivals with a 13.5bn spending spree. Sept 2012
Invest more in real estate. In particular, invest more in opportunistic real estate. (KKR) PERE Sept 2012
These are not the sort ofheadlines that we would have read 12 months ago. They do seem to reflect a
distinct attitudinal change.They also suggest awillingness to overlookEurope’s weak spots in favour
of perceived opportunity – for income or total return.
Institutions in key countries with portfolios > $5million Source: Property Funds Research, Internos
To turn to real estatespecifically, (thought by JPMorgan to account for 60%approx. of tradeable globalreal assets), inflationscenarios also make acompelling case for the assetclass. Most studies concludethat real estate valuations inreal terms are inflation neutralwhile direct income performsbadly (if inflation guaranteedproducts are excluded) andequities perform erratically.
Reverting to Europe, there is,for the foreseeable future, aquasi-inflationary effect, ahuman inflation, in the
inexorable growth ofurbanisation putting pressureon land and ensuring thatresidential needs will competefor space and jobs andunderwrite valuations ofcommercial property.
This is particularly true ofEurope where land useoutside most cities is legallyrestricted. UN predictions,shown above for a selectionof cities, make this casedramatically.
assets through beingsignificantly easier to manage.In fact, only through thecreation and growth ofproperty funds in the nineties,did global real estate gain asignificant but still ‘alternative’share of assets undermanagement.
For 30 years however,equities have been
mainstream, now moreimportant than fixed income.Is it time for real assets toleave the alternative box and
join them? And in terms ofmore recent history, for thoseinvestors over-leveraging theirreal estate investments in2006/07, with unhappyoutcomes after 2008, willthere be a realisation that realestate can have a mild riskprofile alongside muchneeded current income?
Currency and human inflation
Given that the thesis behindthe shift is based on a view ofhow investors are thinkingnow and will act in the nearfuture, it is not surprising thathard evidence will emergeslowly. The chart alongsidehowever does show that insome key countries, therehas been growth (very
Is the shift evident?
“time for real assets toleave the alternative box”
“inexorable growth ofurbanisation puttingpressure on land”
Index of predicted population growth 2000-2025Source: United Nations, Internos charting
THE DECISIVE EYE • ISSUE 7 •Winter 20123
Actual real estate investments % of total AuM
Total Population Index
%
12
10
8
6
4
2
0
Index
170
160
150
140
130
120
110
100
Germany UK France US
2000 2005 2010 2015 2020 2025
2010 2012
MadridToulouseBarcelonaMünchenParisLondonAmsterdamRotterdamKölnBerlin
Taking the geologicalmetaphor further: if there wasa first tremor at the start of a‘tectonic shift’, I felt it when itwhen I read J.P. MorganAsset Management’s circularentitled ‘The Realization’*earlier this year and I own that ‘tectonic shift’ is their
coinage, not mine. Of courseI very much want it to be trueand, if the jury is still out, thearguments are sound and wehave our ears to the groundhoping to hear those platesgrinding. Certainly, thetremors are suggestive butthough not contradicted (nor
confirmed) by statistics, it is above all the news mediathat keep me believing in aseismic event of which wemay not have certainmeasurement for manymonths yet. It will be a drawnout sort of earthquake.
Did the earth move for you?
THE DECISIVE EYE • ISSUE 7 •Winter 20122
The end of alternativestatus for real assets?If the arguments for the shiftshould be largely familiar, thepredicted end result willshatter preconceptions: within10 years, institutions to beallocating 25% to real assetsand the ‘real’ class being
recognised as one of threetraditional investment classes,
along with bonds and
equities. The thesis is that asearch for income, which haslasted since 2010, hasbecome desperate and isdriving a revolutionary changeinto the thinking of investorsand that there will be nobacktracking once committedto a new investment reality.
The shift: thesis and end game
*The Realization. J.P. Morgan AssetManagement. April 2012
Too good to give upThe justification for thisthinking is that, while incomeenvy is the immediate causeof a lust for real assets, theydo more than provide acurrent income stream. Realassets, and this is particularlytrue of real estate, have anupside in good economictimes shadowing equities, but
with less volatility, leading tobetter risk-adjusted total
returns. At the same time realassets can achieve a stabilityof income that has more in
common with bonds. Oncefirmly established at higherlevels in a portfolio, thecurrent and predictedperformance of real assetswill have precisely the profileneeded by institutions suchas pension funds or thosefollowing a cautious policy -but needing current income.
Both sides of the investment fence
So, why now? If it was thatobvious, why will investorshave waited so long to buyinto the dream performanceprofile represented by realassets? Simple really: in theintroduction, I referred tohistory as the 'most influentialstrategist’. Investors,especially those controlled by
committees, will tend to dowhat they have always doneor risk criticism when it goes wrong: follow-my-leader isreputationally the safe way togo and the portfolio marginthe only place to experiment.In historical terms, real assetsare a new class. Indeed inmuch of Europe and USA,
moving out of fixed incomeinto equities, and sometimesinto real estate, in an urgentsearch for total returns,became legally permissible forpension funds only in the twodecades following 1960.Equities were the firstalternative asset,predominating over real
The hand of history
“the ‘real’ class beingrecognised as one of three traditionalinvestment classes”
“...real assets will haveprecisely the profile
needed by institutions...”
4096INT_DE7-ARTwork5_Layout 1 01/11/2012 09:48 Page 2
THE DECISIVE EYE • ISSUE 7 •Winter 20125
Most investors upping theirallocations to real estate willbe doing this for long termcapital growth and for
immediate and growingincome. Existing funds arepolluted by a legacy of weakassets acquired in the boomyears. With a sea of moneyalready beginning to hit realestate, they will not find whatthey need in tier 1 core real
estate – neither in incometerms nor in the risk nowinherent to the pricing ofglamour buildings. In this low
Managed to Core: a real estate strategy to match a dramatic shift
If the evidence so farsupports the theory that thereis a rising tide of institutionalmoney into real estate andthat Europe is a main target,as far as fund managers areconcerned, we should setagainst this the timing impactof maturing funds, bankunbundling and onerouscompliance with AIFMDdirectives captured in thechart below. It is estimated*that there is 1413bn of realestate for sale in Europe, ofwhich 1231bn is by banks.Prime core real estate in
major cities has already beenstrongly sought and pricinghas reacted accordingly butthis timing suggests thatsecondary and core plus real estate will not show a
shortage of supply until 2015by which time, banks should have complied with Basel 3requirements. *The Property Ticker Sept 2012
Source Jones Lang Lassalle, Internos
The implication in all theabove is heartening forEuropean real estate fundmanagers – especially if itmeans new entrants totransnational investmentwhere the expertise of our,
now more lean and realistic,industry is called for. Latest
capital flow figures indeed
show significant net inflow to Europe – more so as thechart below omits residentialflow into Europe, which, inLondon and Paris, Savillsestimate to be 30+% of all inflows.
Europe: back to reality
Europe: real estate capital flows $bn Q 1 and Q2 2012Origin of funds Into Europe Leaving Europe Net Inflow
Americas 6.7 3.6 3.1Middle East 3.3 1.3 2.0Far East 3.0 0.9 2.1Global Funds 5.3 4.4 0.9Europe 2.8 2.7 0.1Total H1 2012 21.1 12.9 8.2
“significant net inflow to Europe”
“a sea of money already beginning to
hit real estate”
“they will not find what they need in tier 1 core real estate”
European real estate funds by maturity
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
GAV (1m)
30,000
25,000
20,000
15,000
10,000
5,000
0
Source: Property funds Research, Internos
AIFMDImplementation
Peak in loanmaturities
THE DECISIVE EYE • ISSUE 7 •Winter 20126
This document is issued in the United Kingdom by INTERNOS Global Investors Limited (“INTERNOS”) which is authorised and regulated by the Financial ServicesAuthority. Internos makes no guarantee of its accuracy and completeness and is not responsible for errors of transmission of factual or analytical data, nor is it liable for
damages arising out of any person’s reliance upon this information. The opinions in this document constitute the present judgement of Internos, which is subject tochange without notice. The value of investments and the income from them can fluctuate and investors may not get back the full amount invested. Property and landcan be difficult to sell, so you may not be able to sell when you want to. The value of the property is generally a matter of a valuer’s opinion. Past performance is not a
guide to the future. Information accurate as at October 25th 2012
www.internosglobal.com
Attributing success to speed and rigour of decision making, INTERNOS has become a significant pan-European investment manager since its formation by Andrew Thornton and Jos Short in 2008. Now with offices in London, Frankfurt, Amsterdam, Paris and Luxembourg, over 330 commercial propertyinvestments in 9 countries, 1 2.2 bn under management and its earliest funds dating from 2004, INTERNOS has expertise across the real estate asset classes and major markets. Evidence ofentrepreneurial flair and strategic credibility lies in the success of this owner-managed business in takingover the management of complex funds and situations and in building consensus among diversestakeholders in competition with much larger industry peers. INTERNOS uses the phrase 'The DecisiveEye' to sum up its approach and as the title of these strategic bulletins.
London
INTERNOSGlobal Investors Limited,
65 Grosvenor Street, London W1K 3JH,
United Kingdom
t +44 (0) 20 7355 8800 f +44 (0) 20 7355 8801
Amsterdam
INTERNOSGlobal Investors B.V.,
WTC, H Tower, 19th Floor, Zuidplein 156,
1077 XV Amsterdam, The Netherlands
t +31 (0) 20 676 50 60 f +31 (0) 20 670 51 02
Frankfurt
INTERNOSGmbH,
Goethestraße 10, 60313 Frankfurt,
Germany(Until 28th November 2012)
t +49 (0) 6950 5066 90 f +49 (0) 6950 5066 929
Luxembourg
INTERNOSS.à r.l.,
6 rue Jean Monnet,L-2180 Luxembourg
t + 352 2675 4108 f + 352 2675 4106
Paris
INTERNOSGlobal Investors Sarl,
21 rue des Pyramides,75001 Paris,
France
t +33 1 40 15 53 00f +33 1 40 15 53 99
A dramatic upward shift in allocations to real assets by institutions is a game-altering prospectfor our industry. If, as suggested, real estate joins equities and bonds as one of three
traditional investments, specialised fund managers must create the instruments to meetmainstream institutional needs. That is the challenge. That is the opportunity. Jos Short
A managed to core strategycan be described as ‘incomebiased’ with a ‘long only’ownership and managementhorizon targeting assets thatare very well located,physically suited to themarket or economically
capable of conversion, andoffer higher value alternativeuses to a spectrum ofoccupiers. Managers needthe territorial nous to avoidassets that are highlyspecialised or in poor ordeclining occupier markets.
Managed to core is thus a value–driven strategywhich properly utilises the expertise of fundmanagers - who are alsoexpert asset managers in the countries or localitieswhere they would have their clients invest.
Income biased – on the ground expertise
return environment, there is aneed for high income and anabsolute requirement forproper asset management. A persuasive strategy is‘managed to core’ but
investors must understandthat it is a strategy that onlyworks where investors canaccess management teamson the ground with the abilityto target fundamentally good
property, continuouslyimprove the asset and deliverfor reliable and growingreturns.
In this issue, we’ll be lookingat the arguments for risinglevels of allocation to realassets. We’ll need to remindourselves that the biggestdeterminant of allocationlevels is what was done lastyear: history is the most
influential strategist and realestate, by historical measure,is, in many ways, a new boyin the institutional portfolio.We’ll try to determinewhether rising levels areindeed a fact or anaspiration. Beyond the need
for income, what else isdriving, or should drive, theshift to above 10%? Thethinking behind a rise inallocations seems to belargely American. AreEuropeans following? IsEurope going to benefit?
After several issues of TheDecisive Eye which forecast adecidedly gloomy outlook forour industry against abackdrop of maturing fundsand Basel 3 bankunbundling, after yet againdeliberately cancelling aquarterly issue while hopingfor some resolution ofSouthern fringe debt issues,it is good to report in thisissue of The Decisive Eyethat the investment worldmay have made a dramaticreassessment of the role of real estate in theinstitutional portfolio.
Without doubt, the proximatedriver behind anyreassessment is a need forincome, but what isheartening is that manyinstitutions may be in theprocess of acknowledgingthat real estate deserves a farbigger permanent share ofthe investment action. Why isthe historic 5-8% a sensiblelevel when real estate, moreproperly real ‘assets’, bothmedium term and long term,can deliver returns and riskprofiles close to institutionalperformance targets? Arethose who talk about
eventual levels of 25%blowing smoke?
Jos Short
THE DECISIVE EYE • ISSUE 7 •Winter 2012
Investors Get Real Talk about a ‘tectonic shift’ in institutional allocations to real assets has tangibly
improved both mood and outlook for the real estate fund management industry. Is theshift a reality? What motivates it? Will new investors follow logic or seek trophies?
In this issue
• Did the earth move?
• The shift: thesis and end game
• Is the shift evident?
• Manage to core - a strategyto match the shift
FOR RESEARCH
Jos Short is Executive Chairman of INTERNOSGlobal Investors which he founded with Andrew Thornton
A strategic bulletin from INTERNOS Global Investors on issues and opportunities in European real estate.
ISSUE 7 Winter 2012
FOR RESEARCH
THE DEC IS IVE EYE
No euphoria However: there will be noeuphoria. When the investingworld gets a new idea into itshead, the tendency is to gowith what it knows. Majorcities and prime real estateare invariably the target.
Overheating results andperformance suffers. As bothasset and fund managers, our
role must be to useknowledge gained on the
ground to maximise totalreturns and to temper theenthusiasm of investorsdriven by the glamour, orperceived, but perhapsillusory, security, of coretrophy assets in fashionablecity centres.
“illusory security of core trophy assets”
4096INT_DE7-ARTwork5_Layout 1 01/11/2012 09:48 Page 1
THE DECISIVE EYE • ISSUE 7 •Winter 20125
Most investors upping theirallocations to real estate willbe doing this for long termcapital growth and for
immediate and growingincome. Existing funds arepolluted by a legacy of weakassets acquired in the boomyears. With a sea of moneyalready beginning to hit realestate, they will not find whatthey need in tier 1 core real
estate – neither in incometerms nor in the risk nowinherent to the pricing ofglamour buildings. In this low
Managed to Core: a real estate strategy to match a dramatic shift
If the evidence so farsupports the theory that thereis a rising tide of institutionalmoney into real estate andthat Europe is a main target,as far as fund managers areconcerned, we should setagainst this the timing impactof maturing funds, bankunbundling and onerouscompliance with AIFMDdirectives captured in thechart below. It is estimated*that there is 1413bn of realestate for sale in Europe, ofwhich 1231bn is by banks.Prime core real estate in
major cities has already beenstrongly sought and pricinghas reacted accordingly butthis timing suggests thatsecondary and core plus real estate will not show a
shortage of supply until 2015by which time, banks should have complied with Basel 3requirements. *The Property Ticker Sept 2012
Source Jones Lang Lassalle, Internos
The implication in all theabove is heartening forEuropean real estate fundmanagers – especially if itmeans new entrants totransnational investmentwhere the expertise of our,
now more lean and realistic,industry is called for. Latest
capital flow figures indeed
show significant net inflow to Europe – more so as thechart below omits residentialflow into Europe, which, inLondon and Paris, Savillsestimate to be 30+% of all inflows.
Europe: back to reality
Europe: real estate capital flows $bn Q 1 and Q2 2012Origin of funds Into Europe Leaving Europe Net Inflow
Americas 6.7 3.6 3.1Middle East 3.3 1.3 2.0Far East 3.0 0.9 2.1Global Funds 5.3 4.4 0.9Europe 2.8 2.7 0.1Total H1 2012 21.1 12.9 8.2
“significant net inflow to Europe”
“a sea of money already beginning to
hit real estate”
“they will not find what they need in tier 1 core real estate”
European real estate funds by maturity
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
GAV (1m)
30,000
25,000
20,000
15,000
10,000
5,000
0
Source: Property funds Research, Internos
AIFMDImplementation
Peak in loanmaturities
THE DECISIVE EYE • ISSUE 7 •Winter 20126
This document is issued in the United Kingdom by INTERNOS Global Investors Limited (“INTERNOS”) which is authorised and regulated by the Financial ServicesAuthority. Internos makes no guarantee of its accuracy and completeness and is not responsible for errors of transmission of factual or analytical data, nor is it liable for
damages arising out of any person’s reliance upon this information. The opinions in this document constitute the present judgement of Internos, which is subject tochange without notice. The value of investments and the income from them can fluctuate and investors may not get back the full amount invested. Property and landcan be difficult to sell, so you may not be able to sell when you want to. The value of the property is generally a matter of a valuer’s opinion. Past performance is not a
guide to the future. Information accurate as at October 25th 2012
www.internosglobal.com
Attributing success to speed and rigour of decision making, INTERNOS has become a significant pan-European investment manager since its formation by Andrew Thornton and Jos Short in 2008. Now with offices in London, Frankfurt, Amsterdam, Paris and Luxembourg, over 330 commercial propertyinvestments in 9 countries, 1 2.2 bn under management and its earliest funds dating from 2004, INTERNOS has expertise across the real estate asset classes and major markets. Evidence ofentrepreneurial flair and strategic credibility lies in the success of this owner-managed business in takingover the management of complex funds and situations and in building consensus among diversestakeholders in competition with much larger industry peers. INTERNOS uses the phrase 'The DecisiveEye' to sum up its approach and as the title of these strategic bulletins.
London
INTERNOSGlobal Investors Limited,
65 Grosvenor Street, London W1K 3JH,
United Kingdom
t +44 (0) 20 7355 8800 f +44 (0) 20 7355 8801
Amsterdam
INTERNOSGlobal Investors B.V.,
WTC, H Tower, 19th Floor, Zuidplein 156,
1077 XV Amsterdam, The Netherlands
t +31 (0) 20 676 50 60 f +31 (0) 20 670 51 02
Frankfurt
INTERNOSGmbH,
Goethestraße 10, 60313 Frankfurt,
Germany(Until 28th November 2012)
t +49 (0) 6950 5066 90 f +49 (0) 6950 5066 929
Luxembourg
INTERNOSS.à r.l.,
6 rue Jean Monnet,L-2180 Luxembourg
t + 352 2675 4108 f + 352 2675 4106
Paris
INTERNOSGlobal Investors Sarl,
21 rue des Pyramides,75001 Paris,
France
t +33 1 40 15 53 00f +33 1 40 15 53 99
A dramatic upward shift in allocations to real assets by institutions is a game-altering prospectfor our industry. If, as suggested, real estate joins equities and bonds as one of three
traditional investments, specialised fund managers must create the instruments to meetmainstream institutional needs. That is the challenge. That is the opportunity. Jos Short
A managed to core strategycan be described as ‘incomebiased’ with a ‘long only’ownership and managementhorizon targeting assets thatare very well located,physically suited to themarket or economically
capable of conversion, andoffer higher value alternativeuses to a spectrum ofoccupiers. Managers needthe territorial nous to avoidassets that are highlyspecialised or in poor ordeclining occupier markets.
Managed to core is thus a value–driven strategywhich properly utilises the expertise of fundmanagers - who are alsoexpert asset managers in the countries or localitieswhere they would have their clients invest.
Income biased – on the ground expertise
return environment, there is aneed for high income and anabsolute requirement forproper asset management. A persuasive strategy is‘managed to core’ but
investors must understandthat it is a strategy that onlyworks where investors canaccess management teamson the ground with the abilityto target fundamentally good
property, continuouslyimprove the asset and deliverfor reliable and growingreturns.
In this issue, we’ll be lookingat the arguments for risinglevels of allocation to realassets. We’ll need to remindourselves that the biggestdeterminant of allocationlevels is what was done lastyear: history is the most
influential strategist and realestate, by historical measure,is, in many ways, a new boyin the institutional portfolio.We’ll try to determinewhether rising levels areindeed a fact or anaspiration. Beyond the need
for income, what else isdriving, or should drive, theshift to above 10%? Thethinking behind a rise inallocations seems to belargely American. AreEuropeans following? IsEurope going to benefit?
After several issues of TheDecisive Eye which forecast adecidedly gloomy outlook forour industry against abackdrop of maturing fundsand Basel 3 bankunbundling, after yet againdeliberately cancelling aquarterly issue while hopingfor some resolution ofSouthern fringe debt issues,it is good to report in thisissue of The Decisive Eyethat the investment worldmay have made a dramaticreassessment of the role of real estate in theinstitutional portfolio.
Without doubt, the proximatedriver behind anyreassessment is a need forincome, but what isheartening is that manyinstitutions may be in theprocess of acknowledgingthat real estate deserves a farbigger permanent share ofthe investment action. Why isthe historic 5-8% a sensiblelevel when real estate, moreproperly real ‘assets’, bothmedium term and long term,can deliver returns and riskprofiles close to institutionalperformance targets? Arethose who talk about
eventual levels of 25%blowing smoke?
Jos Short
THE DECISIVE EYE • ISSUE 7 •Winter 2012
Investors Get Real Talk about a ‘tectonic shift’ in institutional allocations to real assets has tangibly
improved both mood and outlook for the real estate fund management industry. Is theshift a reality? What motivates it? Will new investors follow logic or seek trophies?
In this issue
• Did the earth move?
• The shift: thesis and end game
• Is the shift evident?
• Manage to core - a strategyto match the shift
FOR RESEARCH
Jos Short is Executive Chairman of INTERNOSGlobal Investors which he founded with Andrew Thornton
A strategic bulletin from INTERNOS Global Investors on issues and opportunities in European real estate.
ISSUE 7 Winter 2012
FOR RESEARCH
THE DEC IS IVE EYE
No euphoria However: there will be noeuphoria. When the investingworld gets a new idea into itshead, the tendency is to gowith what it knows. Majorcities and prime real estateare invariably the target.
Overheating results andperformance suffers. As bothasset and fund managers, our
role must be to useknowledge gained on the
ground to maximise totalreturns and to temper theenthusiasm of investorsdriven by the glamour, orperceived, but perhapsillusory, security, of coretrophy assets in fashionablecity centres.
“illusory security of core trophy assets”
4096INT_DE7-ARTwork5_Layout 1 01/11/2012 09:48 Page 1
