Housing market hurrah

The news may not merit breaking out a bottle of bubbly, but recent signs are pointing to a nascent recovery in the U.S. housing market. On Sept. 25, the Standard & Poor’s Case-Shiller Home Price Index showed a 1.2 percent price gain in July compared to a year earlier. The increase marked the third consecutive month of price gains. In addition, the National Association of Realtors (NAR) reported on Sept. 26 that sales of existing homes jumped 9.3 percent in August, compared to a year earlier, and that the median price of existing homes sold was up 9.5 percent over the past year (NAR and Case-Shiller track different markets and use different methodologies).

Maybe it’s not jump-for-joy news, but it’s at least worth a thumbs up. Single-family housing prices are still 30 percent off their peak in 2006, but market watchers seem to think things are headed in the right direction.

“The news on home prices in this report confirm recent good news about housing,” notes David Blitzer, chairman of the Index Committee at S&P Dow Jones Indices. “Single-family housing starts are well ahead of last year’s pace, existing home sales are up, the inventory of homes for sale is down and foreclosure activity is slowing.”

In an article by Knowledge@Wharton, Why the Housing Market Is Poised to Enter a “Virtuous Cycle,” Susan Wachter, professor of real estate at the University of Pennsylvania’s Wharton School, notes the housing recover is under way. “It’s for real. This is absolutely for real,” says Wachter. She contends the market is poised to enter a “virtuous cycle” where positive trends will spur more positive trends. “This market recovery will continue,” she says, predicting that rising prices will prod potential buyers to buy before prices go up more. That demand will nudge prices up, drawing in even more buyers.

Low interest rates and a recent run-up in the stock market have boosted consumer confidence. Now if only the economy could gain some traction and finally put the stalled job market into gear … maybe then a little celebration and a champagne toast.


Larry Gray is editorial director of Institutional Real Estate, Inc.

Solving the real estate world’s problems

The fall conference season has begun with the Editorial Advisory Board meetings of The Institutional Real Estate Letter – North America, – Europe and – Asia Pacific being held in Laguna, Calif.; Barcelona, Spain; and Beijing, China. Participants at the three meetings covered the globe, representing managers and investors headquartered in Australia, Canada, China, Denmark, Finland, Germany, India, Ireland, Japan, the Netherlands, Norway, Singapore, South Korea, Switzerland, Thailand, the United Kingdom and the United States. Pension funds, endowments, foundations, sovereign wealth funds, insurance companies, family offices, banks, consultants, multi-managers and investment managers were all involved, giving those participating a real insight into the thinking and workings of the entire spectrum of capital providers and influencers.

The discussions at the three meetings reflected the atmosphere of each region — Asian investors were only minimally affected by the global financial crisis and are enthusiastic and active investors. U.S. investors are still cautious, but they believe they understand where the market stands today and where it is going — and this gives them confidence to go out and find investment opportunities. European investors are still reticent to make major commitments. In fact, there is a feeling that there will be more U.S. and Asian capital invested in Europe than European capital during the next 12 to 24 months. It’s not for want of desire — Europeans would love to be out in the market again — but every time they raise their heads, they get knocked down. It’s no wonder one participant stated that all he hoped to get out of the meeting was “a reason for optimism.”

To help determine where the industry stands on a variety of questions, we used a quick tally system to provide answers. Most of the questions were specific to the advisory board region, but a few overlapped and offer some interesting comparisons. The following are a few of the questions we asked at multiple meetings, with the answers recorded by region.

In my fund, we expect core values over the next three years

  • Will continue to rise at the same pace as they have been rising
    • Europe — 5%
    • Americas — 2%
  • Will continue to rise, but at a more moderate pace than they have been rising
    • Europe — 33%
    • Americas — 38%
  • Will stabilize at current levels
    • Europe — 48%
    • Americas — 42%
  • Will start to decline at a moderate pace
    • Europe — 14%
    • Americas — 15%
  • Will decline dramatically
    • Europe — 0%
    • Americas — 3%

At my fund, we believe the current high pricing on core assets

  • Will remain confined to core assets
    • Europe — 79%
    • Americas — 37%
  • Will spread to non-core assets
    • Europe — 21%
    • Americas — 63%

Overall, my fund

  • Continues to be bullish on the outlook for core real estate investing
    • Asia — 47%
    • Europe — 25%
    • Americas — 14%
  • Is no longer bullish, but is not yet bearish on the outlook for core real estate investing
    • Asia — 42%
    • Europe — 55%
    • Americas — 59%
  • Is bearish on the outlook for core real estate investing
    • Asia — 11%
    • Europe — 19%
    • Americas — 27%

As a result of our view on the outlook for core real estate and/or based on our current exposure to core

  • Our fund will be increasing our allocations to core real estate
    • Asia — 47%
    • Europe — 21%
    • Americas — 17%
  • Our fund will be maintaining our current allocation to core real estate
    • Asia — 42%
    • Europe — 47%
    • Americas — 51%
  • Our fund will be decreasing its allocations to core real estate
    • Asia — 11%
    • Europe — 32%
    • Americas — 32%

As a result of our view on the outlook for core real estate and/or based on our current exposure to core

  • We will be net buyers of core assets over the next 12 to 36 months
    • Europe — 41%
    • Americas — 30%
  • We will be net sellers of core assets over the next 12 to 36 months
    • Europe — 41%
    • Americas — 41%
  • We will not be buying or selling any additional core assets over the next 12 to 36 months
    • Europe — 17%
    • Americas — 29%

Compared with how we felt a year ago about value-added real estate investment strategies, today we feel

  • Significantly more bullish
    • Europe — 15%
    • Americas — 15%
  • Slightly more bullish
    • Europe — 35%
    • Americas — 35%
  • About the same
    • Europe — 38%
    • Americas — 41%
  • Slightly more bearish
    • Europe — 12%
    • Americas — 9%
  • Significantly more bearish
    • Europe — 0%
    • Americas — 6%

Compared with how we felt a year ago about opportunistic real estate investment strategies, today we feel

  • Significantly more bullish
    • Europe — 27%
    • Americas — 3%
  • Slightly more bullish
    • Europe — 19%
    • Americas — 18%
  • About the same
    • Europe — 38%
    • Americas — 50%
  • Slightly more bearish
    • Europe — 15%
    • Americas — 25%
  • Significantly more bearish
    • Europe — 0%
    • Americas — 5%

Interest rates are on everyone’s mind. Inflation doesn’t seem to be an imminent threat, but when interest rates are still down in record-low territory, it’s only logical to believe that they will rise at some time. When is the $64,000 question. Participants at the Europe and Americas meetings were willing to record their best guesses. You do have to wonder, however, at those who believe that interest rates will be significantly lower than they are today — how much lower can you go when rates are approaching 0 percent?

By the end of 2016, we expect interest rates in Europe will be

  • 26% — Significantly higher than they are today
  • 56% — Marginally higher than they are today
  • 14% — About the same as they are today
  • 2% — Marginally lower than they are today
  • 2% — Significantly lower than they are today

We think interest rates in the United States

  • 13% — Will start to rise, but not until after 2014
  • 37% — Will start to rise, starting in 2014
  • 16% — Will start to rise, starting in 2013
  • 25% — Will remain at current levels for the next three years
  • 7% — Will continue to decline until the end of 2013
  • 1% — Will continue to decline until the end of 2014

By the end of 2016, we expect the market and economic climate in Europe will be

  • 33% — Significantly better than it is today
  • 40% — Marginally better than it is today
  • 12% — About the same as it is today
  • 10% — Maybe worse than it is today
  • 5% — Significantly worse than it is today

We think economic growth in Europe will

  • 4% — Pick up significantly, but not until after 2014
  • 16% — Pick up significantly, starting in 2014
  • 0% — Pick up significantly, starting in 2013
  • 72% — Remain sluggish for at least the next three years
  • 8% — Enter another recession starting in 2013
  • 0% — Enter another recession, starting in 2014
  • 0% — Enter another recession, starting in 2015

Debt investment was the number 1 topic at the Europe advisory board meeting. Some funds have already begun investing, though most are still doing their due diligence.

We see real estate debt instruments

  • 37% — As attractive currently, and this kind of debt most likely will be a long-term part of our portfolio
  • 43% — As attractive currently, but probably not a long-term part of our portfolio strategy
  • 14% — As not that attractive at the current time
  • 6% — As not at all attractive at the current time

Our commitments to real estate debt are (will be) coming out of

  • 22% — Our equity real estate allocation
  • 37% — Our fixed-income allocate
  • 7% — A special subset of our overall real estate allocation that has been set aside specifically for real estate debt allocation
  • 4% — Something else
  • 30% — We are not investing in real estate debt

What percentage of your real estate allocation do you estimate will consist of debt investments?

  • 32% — none
  • 44% — 1% to 5%
  • 12% — 6% to 10%
  • 0% — 11% to 15%
  • 12% — More than 15%

Lots more quantitative information came out of each meeting, but most participants felt the strategic and philosophical discussions were the best part of the event. Investors and managers don’t often get a chance to talk to their peers about the challenges they are facing and questions they are asking: Does co-investment really align interests? How did funds repair themselves after the crash? Are investors getting paid for the risks they are taking? How does real estate fit in a liability-driven portfolio? How does real estate fit in a defined contribution world? etc. Attending one or (in the case of a few global investors) more board meetings gives investors and managers alike the opportunity to explore the issues that frame their everyday decisions. Talking strategically with investors and competitors is something that can only help the industry as it faces challenges in regulations and capital supply — once a year doesn’t seem nearly enough.


Sheila Hopkins is managing director – Europe at Institutional Real Estate, Inc.

The big two

The recent post–financial crisis consolidation trend has seen some of the industry’s largest real estate investment management firms get even bigger. The top 100 real estate investment managers in the world collectively control approximately $1.67 trillion of assets under management. The two largest investment managers account for 11.3 percent of that total. Brookfield Asset Management is the world’s largest real estate investment manager with $94.5 billion of AUM, followed closely by CBRE Global Investors with $94.1 billion, according to a recent global survey of 129 real estate investment managers conducted by U.K.-based Property Funds Research.

Almost across the board, investment managers reported higher AUM figures at year-end 2011 compared with year-end 2010, according to the survey results. Total assets for the top 100 investment managers increased by 15.2 percent, jumping from $1.45 trillion in 2010 to $1.67 trillion in 2011. As has been the case for decades, the institutional real estate universe is dominated by a few large firms. The top 10 largest firms account for 38 percent of the total AUM reported by the 129 firms in the survey.

The Top 10 Global Real Estate Managers by AUM

  1. Brookfield Asset Management ($94.5 billion)
  2. CBRE Global Investors ($94.1 billion)
  3. The Blackstone Group ($70.5 billion)
  4. UBS Global Asset Management ($62.2 billion)
  5. RREEF Real Estate ($57.4 billion)
  6. TIAA-CREF Asset Management ($54.9 billion)
  7. AXA Real Estate ($54.6 billion)
  8. J.P. Morgan Asset Management ($51.3 billion)
  9. Prudential Real Estate Investors ($49.1 billion)
  10. Invesco Real Estate ($48.3 billion)

A copy of the report and survey results can be downloaded on Institutional Real Estate, Inc.’s website.


Larry Gray is editorial director of Institutional Real Estate, Inc.

Australia’s export partners

Not surprisingly, China’s continued demand for natural resources to support its explosive development growth during the past five years puts the country atop Australia’s list of major export partners in terms of market share, according to the Australian Bureau of Statistics.

This far exceeds Australia’s total exports to China since the late 1980s, when Japan was Australia’s primary export partner.

During the past two decades, India, another growth-driven Asian country, has slowly crept up in terms of Australia’s export market share, while exports in recent years to the United States and United Kingdom have diminished somewhat.

Even with a cooling of its property markets, China may very well continue its reign as Australia’s primary export partner in five years’ time.


Jennifer Molloy is editor of The Institutional Real Estate Letter – Asia Pacific.