By Laura Dunn '12 and Jeremy Griffin '11
The main panel on global investment opportunities was a lively one, with three distinguished real estate veterans interacting with the audience and Professor Lynne Sagalyn who served as moderator. The overall tone was positive, yet investors remain focused on key markets, primarily in developed economies that are poised to recover quickest. Panelists included Keith Barket, senior managing director at Angelo, Gordon & Co., Jay Mantz, vice chairman of investment management at Morgan Stanley, and Steve Wechsler '72, senior managing director at Tishman Speyer.
Keith Barket noted that Angelo, Gordon & Co. has been actively pursuing acquisitions opportunities in the U.S., China, and to a lesser extent London, Tokyo and Seoul. A common theme of their recent investments has been a focus on core markets that continue to outpace others in terms of recovery speed, positive demand, and limited reliance on positive absorption to fill space. A substantial portion of their recent U.S. investments have involved the purchase of REO assets and bank notes, and Barket expects this trend to continue over the next one to two years. Morgan Stanley continues to maintain both opportunistic funds as well as core investments through its Prime Property Fund. According to Mantz, initial yields have converged across location and property type to 5-6 percent levels.
While Morgan Stanley remains focused on opportunistic investments in India, China and other parts of Asia, there is a consensus that China represents the only emerging market with a viable exit strategy and even then, most are primarily focused on high quality assets in gateway cities. According to Mantz, there is real demand for well-leased multi-national headquarter assets from sovereign wealth and pension funds, as well as German open and closed-end funds, at cap rates in the 5 percent range.
On the subject of Asia, panelists expressed many opinions. Barket’s firm is targeting 20 percent returns in China, Japan and Korea, although the ability to leverage in these markets varies greatly, with China at 20-30 percent and Tokyo and Seoul closer to 60 percent. Given the overall health of the Asian banks, leverage is certainly obtainable in these markets. The biggest impediment to investments in these markets is the macro-level due diligence process. According to Barket, "Investments that you know well are probably more risky than you think and investments that you don’t know well are probably less risky than you think."
Tishman Speyer remains focused on the Brazilian market. Given the limited supply of Class A buildings, approximately 8 percent of the market, and the increased demand from multinational firms for space, Tishman Speyer continues to see opportunity for speculative buildings and solid returns of approximately 20 percent, unlevered. Continuing on the topic of Brazil, Tishman is getting 20 percent levered returns from the residential product in the country, which is characterized as a lower risk profile. However, Wechsler was quick to note that the US market was picking up, as evidenced by Tishman Speyer’s three new transactions in the last two months.
As the conversation shifted from global investment opportunities to US opportunities, all three panelists echoed that the US market remains very attractive to foreign and sovereign investors eager to put cash to work. According to Mantz, while the developing world is not viewed as unsafe by the sovereign funds, they find the distressed US opportunities more attractive right now. Within the United States, core markets are beginning to see intense competition as investors are shying away from locations that lack population growth and diverse business environments.
The panel concluded with a question and answer session during which the discussion converged on some major themes inherent in global real estate investing. The panelists agreed that Russia represented one of the most complicated countries to do business in due to the very different risks inherent in the business culture, and, for Mexico, a reduction in corruption and violence would absolutely increase institutional investor appetite. Further, due diligence in global investing opportunities creates complications in general, as laws differ from country to country, and region to region. The panelists agreed that it would not be wise to underwrite deals based on lower exit cap rates, but instead to use "historical averages" as any other parameter "would be betting against the odds." Barket concluded that "sometimes the best time to buy is when you don’t know who will be buying on the exit."