Running out of space?

8-28 Warsaw Atrium 1 SkanskaYou wouldn’t have thought it possible, but in Poland investors may be running out of buildings to buy.

Transaction activity in the recent period across Poland has been buoyant, befitting a country that was once the wrong side of the Iron Curtain but that has now ditched its emerging market tag and joined the European mainstream. It bears repeating that Poland was the only major European country that did not slip into recession following the global financial crisis. It is demonstrably not suffering overmuch from the euro zone’s problems; yes, its main export market is Germany, but this euro zone stalwart has just returned a much improved GDP growth rate for the second quarter of 0.7 percent.

Real estate investors saw the value signals that were being given out as part of Poland’s burgeoning economic development and signed deals to acquire prime assets across the sector spectrum. They particularly liked office developments in the capital city, Warsaw, and large retail developments in Poland’s regional centres. Investors are looking a bit further out now, geographically and sectorally, but may be coming across a bit of a brick wall. Brick wall, property — oh, well.

It helps that the earlier signs of a pricing disconnect between sellers and buyers have dissipated. But is the transaction party now over? The Letter – Europe’s September 2013 issue carried a news story titled “In central Europe, Poland is the place to be”, focusing on Cushman & Wakefield’s finding that Poland accounted for 72 percent of the €631 million invested in central Europe in the second quarter and listing the numerous latest deals. That’s as may be, but it’s only worth being there if you can actually meet your investment objectives, and meeting your investment objectives usually means doing the deal. But you can only buy buildings if they’re standing and for sale.

Now Savills has come along and reported that Poland is set to record €3 billion in transaction volume this year — a post-2006 annual high. The firm’s latest investment report on Poland suggests that the majority of deals this year, some 70 percent, will be retail. The office sector accounted for more than half of transaction activity in H1 2013, but retail is expected to take over by the year-end.

According to Michal Cwiklinski, director of investment for Savills Poland, “retail assets will account for up to 70 percent of the annual volume, reflecting the shrinking supply of decent investment product in the office sector, which may only account for 20–30 percent of market share as a proportion of the entire 2013 volume.”

Warsaw remains the preferred destination for office transactions, accounting for 11 of the 14 office deals in H1 2013, but Savills reports that some areas, such as the Mokotów district, are receiving slightly less interest from investors, as many already have assets in this location.

Real estate investors will doubtless be maintaining their interest in Poland as the country continues on its growth path. Oxford Economics expects GDP growth of around 2.5 percent in 2014 and 3.3 percent in 2015, healthy numbers, certainly as seen against particular euro zone laggards. But much will depend on supply — developers completing assets and wanting (and needing) to sell on, and current owners agreeing to sell — and demand — investors seeking to meet portfolio design and return objectives and wanting to buy.

Assuming no disasters or shifts in sentiment, growing economies such as Poland have a habit of becoming self-fulfilling prophecies. Investors like self-fulfilling prophecies; they tend to pay handsome dividends. As long as countries like Poland don’t then decide to spoil things by applying to join the euro zone. Which is a distinct possibility.

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RichardFlemingRichard Fleming is editor of The Institutional Real Estate Letter – Europe.

Blackstone debt fund holds final close

The Blackstone Group has raised an additional $406 million in equity commitments for its Blackstone Real Estate Debt Strategies II (BREDS II), according to a filing with the Securities and Exchange Commission.

The value-added fund previously held a close in early July. In total, BREDS II has raised $1.74 billion since its launch in October 2012. The real estate debt strategy fund had a $4 billion fundraising goal. Despite being below its target, the firm will not be raising additional capital.

BREDS II invests primarily in mezzanine debt, with a focus on preservation of investor capital where the last dollar of risk is well below current values and replacement cost. Investments will be located in North America and Europe. Through this strategy, BREDS II seeks to generate attractive returns and make quarterly current income distributions to its limited partners.

BREDS II is part of the firm’s Blackstone Real Estate Debt Strategies platform, which was created in 2008 in response to the dislocation in the global real estate and credit markets.

Blackstone has been actively fundraising. Last week, the firm launched a fourth billion-dollar European fund, Blackstone Real Estate Partners Europe IV. And it held a $1.5 billion first close for Blackstone Real Estate Partners Asia; the opportunistic fund is Blackstone’s first fund that focuses exclusively on Asia.

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AndreafinalwebAndrea Waitrovich is web content editor of Institutional Real Estate, Inc.

Video killed the radio star

We may not be MTV (they don’t show that many music videos any more anyway), but as most subscribers to our blog and publications (and even those who read our blog just for fun!) may have noticed, we’ve revamped out website, made over our publications and even started podcasts. A lesser known addition that has been in the works here at Institutional Real Estate, Inc. — and you can see a few examples already on our website — is video interviews and clips.

These videos range from in-depth interviews with bestselling authors (see Margaret Heffernan and Peter Diamandis hold informative and entertaining conversations with The Institutional Real Estate Letter – Americas editor Mike Consol) to industry professionals talking anywhere from two to 10 minutes about industry trends and issues.

My question to you blog readers out there is: What topics and trends would you like to see IREI cover in upcoming months?

Also, keep an eye out for upcoming videos with industry professionals covering different topics such as fundraising, portfolio management, capital market trends, investment focus and strategy in the market today, and more!

For a glimpse at what videos you can watch and enjoy so far, visit our video page.

Enjoy!

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DenisefinalwebDenise DeChaine is special projects editor of Institutional Real Estate, Inc.

Slow and steady wins the race

More investors are anteing up, placing new bets on commercial real estate. Others are looking to raise their stakes as they seek to move some capital out of dreary fixed-income and into alternatives such as real estate where they might actually earn an attractive yield. The appeal of the asset class has been reflected in increasing capital flows.

Global private equity real estate funds raised $14.9 billion in the second quarter of 2013, according to Institutional Real Estate FundTracker; not a figure that will blow your hair back but at least one that should grab your attention. It ranks as the second highest fundraising total over the past 12 quarters, trailing only the fourth quarter 2012 mark of $24.8 billion — a figure significantly inflated by The Blackstone Group’s closing of its $13.3 billion Blackstone Real Estate Partners VII.

The largest fund to close during the second quarter was Starwood Capital Group’s Starwood Distressed Opportunity Fund IX, which raised $4.2 billion from more than 75 global investors.

The fundraising momentum has continued into the third quarter. Four billion dollar–plus funds announced final closings in July and early August, including Brookfield Asset Management, which raised $4.4 billion for its first opportunity fund, Brookfield Strategic Opportunity Partners; Perella Weinberg, which collected commitments of $1.72 billion for its European opportunity fund, Perella Weinberg Real Estate Fund II; Alpha Investment Partners, which raised $1.65 billion for its Alpha Asia Macro Trends Fund II; and KTR Capital Partners, which attracted $1.2 billion of investor capital for its KTR Industrial Fund III.

Early in the third quarter, fundraising volume has already surpassed $12 billion. With subsequent closings expected from sizable funds sponsored by Gaw Capital Partners, Mesa West Capital, Crow Holdings and Secured Capital, third quarter volume could total $18 billion or more.

The increased flow of capital has been evident with U.S.-based core open-end funds as well. The first quarter 2013 deposit queue to enter this group of funds was more than $6 billion, according to The Townsend Group.

Investors’ attraction to the asset class has been rewarded with recent strong performance. For example, CalPERS recently reported that its real estate portfolio recorded an 11.2 percent return for the 2012–2013 fiscal year, and CalSTRS reported a 14.1 percent return.

With fixed-income assets stuck in the mud and with the stock market’s unpredictable volatility, investors might consider real estate the slow and steady tortoise; for now it certainly looks like a winner.

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LarryFinalwebv2Larry Gray is editorial director of Institutional Real Estate, Inc.

What’s up with China?

I would like to share with you some observations and news from China. The news that attracted my attention last week came from Jilin, a capital of the province with the same name in Northeast China. Real estate developers there used a rather unconventional technique to sell their properties. They painted floor plans of the units for sale on female models’ bodies and sent them to the housing fair to attract potential buyers. I am not certain whether this was a stroke-of-genius advertisement or a desperate move by a developer trying to get rid of his inventory.

Property sales slowed down in China after the government introduced cooling measures, but this was after millions of units had been sold to eager investors. News program 60 Minutes aired again last week an earlier report on empty cities in China. I saw the segment for the first time this week, and although I have heard about this situation, the picture of a huge number of empty residential towers did produce an impression on me. All these properties have been sold, in many cases for cash, and are sitting there empty, waiting for a bigger fool to come and pay an even higher price. If this is not a bubble, I don’t know what is.

We have already discussed the bubble situation in China in previous blog posts, and I want to bring to your attention something more interesting and telling this time. Several successful, experienced and fabulously rich Chinese investors/developers have started leaving their home turf and begun making acquisitions in overseas markets.

Wang Shi of China Vanke, the largest developer listed on Chinese exchanges, has recently formed a joint venture with Tishman Speyer to develop a luxury condominium project in San Francisco. He has been warning of a real estate bubble in China for quite sometime. At a conference I attended several months ago in Shanghai, he clearly said there was a bubble in China, and he repeated it during an interview for the above-mentioned TV program. But according to him, it will last for a while due to unique Chinese factors such as people’s propensity to own real estate and continued urbanization. So his foray into an unknown market didn’t come as a surprise.

Famed Chinese investor and developer Zhang Xin of SOHO, together with Brazilian banking tycoon Moise Safra, paid $1.4 billion for a 40 percent stake in the General Motors Building in midtown Manhattan. It was not disclosed how much of the $1.4 billion was her part, but it clearly constituted a big chunk of her personal net worth estimated at $3.6 billion. Most recently, Shanghai-based, government-owned developer Shanghai Greenland acquired a stake in a huge vacant lot in downtown Los Angeles that was considered to be the biggest U.S. deal made by a mainland Chinese developer. The company committed to invest $1 billion, beating all previous investments by Chinese firms in the United States.

You may say this is just diversification, and I would agree with you, but the question I cannot answer is why this is taking place now and not three, two or even one year ago. Could it be that a few successful investors who are intimately familiar with the local environment in China sensed a change in the trend and started taking measures to protect their businesses, while the crowd, true to its instincts, failed again at the inflection point in the trend?

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AlexFinalv3webAlex Eidlin is managing director – Asia Pacific with Institutional Real Estate, Inc.

How do you measure character?

One of the most important questions an institutional investor asks when deciding whether to invest with a particular fund manager is, “Can I trust them to manage this money?” The problem, of course, is that there isn’t always an easy way to determine the answer.

An investor needs to know if a GP will act as a fiduciary, putting the needs of the LPs ahead of personal gain. This is especially important when a deal gets into trouble because that is when interests can diverge. Investors need GPs with strong moral codes, who will do what is right, not what is expedient.

But “character” is an amorphous quality, not easily quantified or measured. This is why institutional investors have settled on certain key elements as “proxies” for measuring character.

One of these measures is co-investment. The belief is that, if GPs are putting their own personal wealth at stake, it will align their interests with that of the GPs. An active discussion is going on at IREI’s LinkedIn discussion group about the importance of co-investment.

Another measure is track record. A GP’s history is important not just to see if the manager has outperformed over time. Investors should also pay attention to how GPs have handled dicey situations, and if they were honest and aboveboard in their dealings with LPs. But an emphasis on track record may cause LPs to ignore emerging managers, who have not yet had the time to develop a history.

Transparency is also important. LPs care about communication and openness because it can be a mark of good character. A manager without secrets has nothing to hide. But, as with co-investment or track record, transparency itself is no guarantee that a manager will behave with diligence, prudence, fiduciary responsibility and good character.

All of these measures can only point toward the real question: “Can you be trusted?”

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LorettawebfinalLoretta Clodfelter is a contributor to Institutional Real Estate, Inc.

Active investors from the north

“Show me the money!” Let’s do a transaction roundup; it has been a while since we have done one.

This blog post will be about our neighbors to the north. Canadian firms have been making headlines in high-priced deals in the past couple months. The Aug. 2 IREN contained three Canadian transactions:

And earlier IRENs have covered Crombie REIT’s purchase of 68 Safeway properties located in western Canada for $990 million and The Brookfield Canada Office Properties acquisition of the Bay Adelaide Centre East development in downtown Toronto from its parent company for $602 million.

Last week started with Brookfield Property Partners buying a U.S. warehouse company from Japan’s Kajima Kajima Corp. in a $1.1 billion deal that will increase its industrial real estate portfolio.

Canadian investors have been spending, particularly the CPPIB. The pension fund has a grocery list of announced deals starting during the first quarter. CPPIB invested £173.9 million ($257.7 million) to acquire a 50 percent interest in a London-based core-plus/value-add portfolio with joint venture partner The BT Pension Scheme. In another London deal, The Westfield Group sold a 50 percent stake in its Stratford City development to Dutch pension fund APG and the CPPIB. The sales price was £871.3 million ($1.34 billion).

In Asia, CPPIB and its partner Goodman Group have increased their equity allocations to Goodman China Logistics Holding, with $400 million contributed by CPPIB and $100 million by Goodman. CPPIB continued its Asian exposure by forming a new partnership with GE Capital, the Tokyo Office Venture, which targets investment in mid-size class A and B office properties in key CBD submarkets of Tokyo. And CPPIB committed an additional $316 million to its GLP Japan Development Venture, a 50-50 joint venture with Global Logistic Properties that develops modern logistics properties in Japan.

Back in Toronto, CPPIB acquired 1 Queen St. East and the adjoining 20 Richmond St. East property from the Ontario Pension Board for C$220 million ($209 million). In another joint venture, CPPIB and Oxford Properties Group, the real estate arm of the Ontario Municipal Employees’ Retirement System, have expanded their 50-50 Canadian retail joint venture, investing in two Canadian-based malls.

It’s only Monday. CPPIB has been quiet so far, but who knows what could happen in the rest of the week. Check out this week’s IREN or the newsfeed to see what’s happening.

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AndreafinalwebAndrea Waitrovich is web content editor of Institutional Real Estate, Inc.

Penalizing the power players

The Securities and Exchange Commission (SEC) has had a busy summer so far as it has been actively prosecuting investment managers for charges ranging from theft to fraud — but when most plaintiffs refuse to admit guilt or innocence, is the SEC really effecting positive oversight in the investment universe?

In a civil suit finalized this week, a New York jury found former Goldman Sachs trader Fabrice Tourre liable for fraud in an investment deal known as Abacus, which closed in the midst of the global financial crisis and cost investors $1 billion, according to the BBC. He is expected to pay hundreds of thousands of dollars in penalties for his behavior, which gained notoriety after his emails revealed his glee at the economic collapse, as well as an ostentatious nickname: “Only potential survivor, the Fabulous Fab … standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!”

Stemming from these emails, Tourre was first accused of misleading investors by the SEC in 2010. The SEC alleges Tourre knew the investments, linked to subprime mortgage deals, would fail. The investment portfolio was allegedly created to benefit Paulson & Co., a New York City–based hedge fund that had an economic interest adverse to the investors. Without admitting guilt or innocence, Goldman Sachs paid the SEC $550 million in 2010, one of the largest settlements paid by Wall Street to the SEC according to the New York Times. The failure of the SEC to hold Goldman Sachs responsible, and instead letting Fabrice Tourre be the fall guy, was critiqued in The Guardian this week:

“This is why the SEC has to push for better, clearer, more damning settlement terms than ‘neither admitting nor denying’. If the SEC already allowed Goldman Sachs to escape with a ‘no harm, no foul’ excuse, it makes no sense to go after a relatively junior former Goldman Sachs employee and accuse him of harming investors.”

The lack of accountability for illegal or unethical behavior continues with Chauncey Mayfield, CEO and founder of MayfieldGentry Realty Advisors (MGRA). In June, the SEC filed a lawsuit against Mayfield and his colleagues for allegedly taking $3.1 million from a Detroit pension fund in 2008, and conspiring to keep it a secret until it could be repaid. So far, only $1.1 million has been paid to the pension fund, and Chauncey and his colleagues neither admitted guilt nor denied the allegations to the SEC. Mayfield pled guilty to participating in a “pay to play” scheme, as part of a separate matter.

With great power comes great responsibility, but parallel wisdom states that with great risk comes great reward. Maintaining a sense of ethical engagement in business is critical to the viability of the industry, but the SEC would be wise to hold investment firms who mislead their investors accountable for their deceit.

When is the last time someone from Wall Street ended up in prison for their crimes, which impact the financial stability of investors and individuals?

Penalizing firms with fines and fees will do little to encourage businesses to have better oversight and transparency in their business practices. Punitive measures ought to be taken against people and companies that manipulate the system through fraudulent measures.

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SarafinalwebSara Kassabian is a reporter with Institutional Real Estate, Inc.

Risky business

Grant's Pass FireDid we underwrite for that?

Investors, managers and everyday people are always talking about risk — construction risk, government risk, currency risk, interest rate risk, lots of other risks. But a lot of the talk seems more theoretical than real: “Yes, we’re aware of all those risks, but we’ve already accounted for them, so full speed ahead.”

Then something happens that brings the risk out of the theoretical into the real. It might be a great financial crisis that completely obliterates all underwriting assumptions.

It might be a summer wildfire burning out of control in Grant’s Pass, Ore., forcing brides to scurry to find new venues for their ceremonies and receptions (congratulations Jessie — both on getting married and on surviving a 48-hour reality-show-worthy dash to relocate the festivities).

Or it might be the operator of the Detroit-Windsor Tunnel filing for bankruptcy.

It’s this type of event that illustrates why no one — investor or municipality or owner — wants to take on the demand risk in an infrastructure deal. It’s just too hard to forecast demand for the 10, 15, 20 or even 30 years that these deals encompass.

Back in 2006, when American Roads took over the Detroit-Windsor Tunnel and four toll bridges in Alabama, as well as $800 million in debt, the forecasts for growing demand were rosy. The operating company’s owner, infrastructure investment firm Alinda Capital Partners, felt confident it was involved in a relatively low-risk investment with strong demand characteristics.

Seven years later, a great recession, volatile gas prices and high local unemployment rates have combined to reduce travel and discretionary spending; Detroit’s population has continued the downward trend that started in the 1950s (it was around 1.8 million then; it now stands at 700,000 and falling); and, in the case of the Alabama toll bridges, environmental disasters such as the BP oil spill and several years of exceptionally severe (meaning tornadic) weather have had a negative effect on the tourist traffic in the region. Traffic volume in the tunnel and on the bridges has fallen far short of projections made in 2006, and American Roads is seeking court protection because it is unable to service the debt.

What happens when American Roads restructures? The company may very well come out stronger since it won’t have all that debt to worry about, but those who invested in the deal — specifically the Mellon Bank, which provided long-term debt in the form of $500 million of bonds due in 2026—- will be weaker. And, if I were them, much less likely to invest in infrastructure again.

American Roads management has stated the bankruptcy will not affect operations, and it will continue to operate the tunnel and bridges as before. It expects to continue to partner with Windsor and Detroit despite this little blip. (Nothing to see here, folks, just keep moving.) Of course, with Detroit in receivership, anything could happen — the trustee could force Detroit to sell its interest in the tunnel, but American Roads would probably continue to operate the tunnel under any new ownership. (Did anyone underwrite for Detroit itself going bankrupt when the public-private partnership was proposed?)

So, once again, it appears the operating company will do fine. The cities will do OK because they will continue to receive the contracted payments. And the investors will end up with the short end of the stick.

Is it any wonder that investors are hesitant when it comes to PPPs? Except for the continued decline in Detroit’s population, the other factors that blew up the traffic forecasts would have been nearly impossible to predict 10 years out.

The rationale for PPPs look so good on paper — municipalities need long-term cash-infusing investment in infrastructure, pension funds need long-term, cash-producing investments — but it always seems that the investor is the one left holding the bag when things implode. And while implosion is unusual, it’s not rare.

One of the more infamous failures was the PPP involving the London tube system. In 2003, the city entered into a 30-year agreement with two private companies to operate, upgrade and maintain the metro system. Four years later, the firm responsible for two-thirds of the system filed for bankruptcy and the city took over those operations. By 2010 — just seven years into a three-decade contract — the city bought out the remaining private firm and the entire system was back in public hands.

Public-private partnerships are a relatively new investment phenomenon, and it is to be expected that mistakes will be made as the industry figures out workable structures and pricing that protect everyone. After all, it took a while for institutional real estate to find its sea legs.

The difference, however, is in timing. Some 25 or 30 years ago, when real estate was first being proposed for institutional portfolios, the United States had a young workforce. Large waves of retirees were, well, 25 to 30 years off. If mistakes were made in real estate while everyone figured what to expect from the asset class, there was plenty of time to recoup any losses. Today’s pension funds don’t have the luxury of making mistakes with their investment portfolios.

Infrastructure is an emerging diversified asset class that can provide stability and cash to an institutional portfolio. But to make investors comfortable with the class in these early days, GPs are going to have to provide more protection for the LPs — or better underwriting for everyone. When that happens, we’ll see a lot more pension funds with infrastructure as part of their real assets allocation.

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Sheilaflippedfinalv3stSheila Hopkins is managing director – Europe and infrastructure with Institutional Real Estate, Inc.