Being a VIP

Last month (January 28–30) was our annual Visions, Insights & Perspectives – Americas conference, held in Dana Point, Calif., at The St. Regis Monarch Beach Resort.

Having attended the past four VIP conferences, I would have to say that each year it gets better and better. With some of the best speakers, content and discussions, VIP 2015 blew it out of the water!

Below, you’ll be able to take a look at a few highlights of the three-day conference. Enjoy!

Opening of the General Session

Opening of the General Session

Real Assets Workshop

Real Assets Workshop

Real Estate Debt Workshop

Real Estate Debt Workshop

Inside the Real Estate Debt Workshop

Inside the Real Estate Debt Workshop

The registration table

The registration table

The welcome rotunda

The welcome rotunda

Publication Display

Publication Display

CF&RE Panel

CF&RE Panel

Jim Woidat from Kingsley presenting data

Kingsley’s Jim Woidat presents data from IREI’s annual investor survey

Game Changers Panel

Game Changers Panel

Conference attendees and IREI staff

Conference attendees and IREI staff

Millennials panel

Millennials panel

Conference attendees

Conference attendees

Conference attendees

Conference attendees

Gala Dinner

Gala Dinner

Gala Dinner

Gala Dinner

The IREI Conference Team

IREI’s conference team

The IREI team

The IREI team

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

Your glass is less full

2-22 Water glassI think of myself as a cautious optimist — a glass half, or maybe 45 percent, full type. So when I read the headline of the report NASA released last week that indicated large portions of the United States could experience droughts the likes of which we haven’t seen for 1,000 years or more, and being the editor of Institutional Investing in Infrastructure, where I see water systems of all types serving so many people in so many ways, one of my first thoughts was, “Sure, but we can fix it.”

As I read more of the press release and portions of the report, however, my typical cautious optimism became less so. In the statement, Ben Cook, a climate scientist at NASA’s Goddard Institute for Space Studies and the Lamont-Doherty Earth Observatory at Columbia University in New York City, and the lead author of the study, notes: “Natural droughts like the 1930s Dust Bowl and the current drought in the Southwest have historically lasted maybe a decade or a little less. What these results are saying is we’re going to get a drought similar to those events, but it is probably going to last at least 30 to 35 years.”

These types of droughts aren’t the variety that caused the Dust Bowl and you have to go back centuries to medieval times to get a comparison of what the potential future NASA outlines in the report.

Of course, the risk of droughts of this type can be reduced, the report goes on to note, but “if greenhouse gas emissions continue to increase along current trajectories throughout the 21st century, there is an 80 percent likelihood of a decades-long mega-drought in the Southwest and Central Plains between the years 2050 and 2099.”

Jeez, maybe we can’t fix it.

The areas the report says are most at risk include the Colorado Plateau in the Southwest United States where Mesa Verde, Chaco Canyon and Canyon DeChelly bear witness to the lost settlements of Native American cultures such as the Pueblo. Although it is not certain exactly why these societies abandoned their cliff dwellings and settlements, their migrations coincide with a mega-drought lasting 30 years in the late 13th century. And if their departure wasn’t explicitly due to a lack of water, conditions associated with the drought certainly seem to be a contributing factor. In any case, their story is in interesting one in the context of a future that could see similarly dry climates.

How might infrastructure investors come to play a role in helping the areas NASA has designated at risk of such mega-droughts?

I would say the place to start would be investing in water infrastructure and new technologies that conserve and get the most from our existing water resources.

This is because the need to rehabilitate and maintain existing water systems — in some cases more than a century old — and build new water systems in the United States increases as that need continues to be neglected.

What does that neglect mean?

It is estimated that each day in the United States, nearly 6 billion gallons of treated water is lost because of poor infrastructure. Annually, that figure is 2.1 trillion gallons or enough to flood the streets of Manhattan in 298 feet of water, Cleveland in 122 feet of water and Chicago in 43 feet of water. In other words, Americans are paying a lot for nothing.

In a state such as California, for example, where San Francisco did not receive a single drop of rain in the typically wet month of January — its driest January since 1850 when records began — this means water is becoming more and more precious, and expensive.

There is a lot of water out there that is going to waste that can, relatively speaking, be recovered easily. Maybe if we do a better job of that, then we won’t need to think about more expensive strategies, such as building pipelines or using rail or road to ship water to parts of the country that are in the midst of a mega-drought, or worse — picking up and moving out of areas that are too dry to sustain.

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DrewWebsiteDrew Campbell is senior editor of Institutional Investing in Infrastructure.

Guest Post: Putting the partner back in partnership

Partnership. The word is nearly ubiquitous in the property world. Anyone who has ever invested in a real estate fund is likely a partner in a partnership. But in the aftermath of the GFC and the losses suffered by many such funds, some investors find themselves feeling that the word partner has been sorely used by fund sponsors. For smaller investors, funds and similar commingled vehicles remain the best, if imperfect, means to gain exposure to diversified, professionally managed, commercial property. For larger investors, however, disappointing performance coupled with lingering suspicions of misaligned incentives between limited and general partners has led to a search to redefine partnership in a way that better meets their definition of this oft-abused term.

Of course, investors have been participating in direct relationships with developers and sponsors since the dawn of the property industry. And such partnerships have allowed both capital and sponsor to best tailor partnership terms and structure to meet the specific needs of both parties. Ironically, however, larger investors, who are most vocal in seeking new forms of partnerships and clubs, are also often the most poorly equipped in terms of staffing and resources to construct such bespoke arrangements. For capital and sponsor alike, the very features that permit tailoring a two-party relationship also make the process of hand-crafting the terms that govern that partnership an often painful and expensive enterprise.

This leaves many larger pensions, sovereigns and endowments in a quandary: Maximize efficiency and invest in funds, with the loss of focus and control that they entail; or hand-craft partnerships, deal-by-deal, and struggle to deploy capital in a way that is cost- and time-effective. On the horns of this dilemma, some are now forging a third pathway, creating programmatic partnerships that allow both capital providers and sponsors, having gone through the brain damage of constructing a tailored partnership solution, to replicate this effort by deploying capital across a series of properties or investments having similar characteristics that can be specified in advance.

While opportunity funds have been using this device for many years, only recently have institutional investors, led by the larger funds and insurance companies, realized that they too can identify operational sponsors with deep capabilities in targeted product and regional verticals to create proprietary access to highly focused investment opportunities. We expect to see an increasing number of capable sponsors and sophisticated investors venture into these waters as both seek a more lasting and ongoing relationship. The perfect partnership.

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Russell_PlattRussell Platt is a managing director and CEO of Forum Partners. He is a member of the advisory board of the VIP – Europe conference.

Pension or property?

Most of the money that flows into institutional real estate around the world is targeted at providing individuals with retirement income or long-term security. Many of those placing that money in the form of regular contributions to pension plans or insurance policies may not realize that their money — or a portion of their money, as dictated by asset allocation strategies — is being invested in real estate. But it is, it performs, and it makes a significant contribution to their ultimate wellbeing.

That could change. In the United Kingdom, for example, a new system will take effect from April 6 that will allow investors in defined contribution arrangements to take assets out of their pension pot as they wish from age 55, taxable at their marginal rate. Such investors will no longer be obliged to take out a lifetime annuity on retirement. That development has been welcomed — annuities give retirees certainty and security, but annuity rates are low and an annuity may not always be the best or sole route to retirement income — but the law of unintended consequences is also set to play a role. There will be winners and losers, and people may have to be saved both from themselves and from unscrupulous fee- and commission-driven advisers.

Hailed by some commentators as a revolutionary approach to pension provision, the new U.K. system will bring both advantages and disadvantages — and a principal disadvantage, once again, is that it will require individuals to have a clear idea of what they are looking to achieve from their pension assets and some reassurance that they know how best to go about doing this. “Free and impartial advice” will be available to inform decision making.

Eligible members who were told some time ago that their guaranteed defined benefit pension plan was being closed to new contributions and replaced by a less secure defined contribution plan that involved choosing where to place regular contributions are now being told that they can do what they like with their pension pot. You can see how unfettered access to a potentially large sum might look, and you can also see how tax implications and other financial aspects might get overlooked. Let alone what it might all mean for retirement income years down the line.

Does the U.K. government trust people to make the right decision, not to blow the pot on extravagant purchases and then have to fall back on the safety net provided by the state? Maybe, but can we trust a future government not to change everything again? The current U.K. government is in power only until May 7.

The new freedom will only be available to members of defined contribution arrangements. Fears have been raised, too, that members of defined benefit pension plans will be tempted to transfer out to defined contribution arrangements, and then exercise their right to freedom. (In the United Kingdom, few large plans remain open in the private sector, but they still dominate plan design, either final salary or career-average, in the public sector; invariably, many have large deficits and are severely underfunded.) Valuable pension benefits could be sacrificed on the altar of pension freedom.

It is unfortunately part of the human psyche that, given an opportunity to increase personal wealth, many people could be pushed in the direction of making a mistake. In a classic case of the “which is better: pension or property?” conundrum that has exercised the minds of investors since pensions were first invented, some investors are looking afresh at using their newly available pension assets after April 2015 to purchase buy-to-let properties, to become landlords of residential dwellings and to take the income from tenants. It’s a pension — regular income in retirement — of another kind. But we know only too well that property investments can be risky, values volatile and income from tenants uncertain. And those assets are then lost to institutions and fund managers — forever.

The pension-or-property question may be answered by actual and would-be pensioners voting with their fleet feet, cashing out their pensions and adding buy-to-let properties to their retirement income portfolios. Wouldn’t it be ironic if, in so doing, they were potentially exposing themselves to the very risks that the institutional investors who were previously managing their pension funds would eschew on their behalf? Wouldn’t you then have to ask who has the better take on those risks?

Give people an opportunity and many will make a mistake. There are precedents and people have form. The United Kingdom has had its fair share of financial scandals and missteps over the years, and these have contributed to a large loss of faith in the pension system — personal pension misselling, the Maxwell affair, Equitable Life, Gordon Brown’s abolition of the dividend tax credit for pension funds. I’ll ask again: pension or property?

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

The news never stops

A brand new year means new headlines to look out for in the IREI NewsCloud and IREN. To check out the January weekly wrap-up issues of IREN, click here, and to see this month’s first issue, click here. To become an IREN subscriber, click here.

Headlines you may have missed include:

Remember to check out Institutional Real Estate, Inc.’s newest publication, Real Assets Adviser, which also offers a daily newsfeed. To sign up, click here.

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

Ask and you shall receive

MoneyFallingFromSkyThe Blackstone Group is apparently well on its way to raising the industry’s first fund with a $13 billion equity target. After less than a month of official fundraising, BREP VIII is reportedly ready to hold its first close with $10 billion of commitments. Most of this is undoubtedly from current investors who re-upped when given the chance this past autumn, and it seems likely the rest will quickly follow.

I know, BREP VII closed at $13.3 billion in 2012, but it had only officially targeted $10 billion. Given that BREP VII overshot its minimum target raise by 33 percent, there is the real possibility that we might actually be looking at the first $15 billion fund.

It’s hard to overestimate what a big deal this is. According to the IREI FundTracker Database, Blackstone has raised more than $27 billion during the past three years. This is followed by Lone Star Funds, which brought in about $20.6 billion in that same timeframe. After that, the totals fall off sharply. Fortress Group raised a bit more than $7 billion, and Brookfield received commitments of $5.5 billion. So Blackstone’s $10 billion one-month first close comprises more capital than any other firm except Lone Star has been able to raise in three years. Talk about sucking the oxygen out of the room.

The 2015 Global Investor Survey, produced by IREI and Kingsley Associates and just released this week at VIP – Americas, estimates that U.S. investors will deploy $46 billion in new capital in 2015. The IREI FundTracker Database, however, tracks more than of $350 billion being targeted. (There is actually more capital being sought than this indicates because most open-end funds don’t indicate a target raise, but for simplicity, we’ll use the $350 billion figure.) If we assume U.S. investors will deploy around $50 billion in 2015 (they seem to always deploy a little more than the survey indicates), there is only $1.00 available for every $7.00 being sought. If you deduct Blackstone’s $13 billion from both the available capital and the sought capital, you end up with only $1.00 for each $9.00 being sought.

Even if you assume that LPs will actually put out more than $50 billion, and you know there are investors in Europe and Asia making commitments (INREV estimates Europe investors will deploy €42.5 billion in international strategies) it still comes nowhere near the more than $350 billion being sought.

Fundraising is never easy. Going up against a behemoth like Blackstone makes it even harder. People talk about timing the market to buy low, sell high. I wonder if fundraisers might begin timing the market to avoid the Blackstone years. It probably wouldn’t hurt.

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SheilaWebSheila Hopkins is a senior editor with Institutional Real Estate, Inc.

Top retirement destinations may not be worth the investment risk

Panama CityThis past September, I wrote a post about the growing confidence of U.S. workers regarding their ability to afford retirement, including comment on the best (and worst) places to retire in the United States. Now, ThinkAdvisor has come out with the top 15 foreign countries for U.S. retirees to spend their golden years in 2015 based on a series of measures (such as real estate, cost of living, healthcare and climate).

But where do some of these countries rank on the radar for ease of institutional investment for investors eager for greater yield in a low-growth world?

Here’s the top 15 list of foreign retirement destinations:

1. Ecuador
2. Panama
3. Mexico
4. Malaysia
5. Costa Rica
6. Malta (tie)
6. Spain (tie)
8. Colombia
9. Portugal
10. Thailand
11. Italy
12. Uruguay
13. Belize
14. Nicaragua
15. New Zealand

The six countries in bold on this list received risk rankings from Cushman & Wakefield’s 2014–2015 report, Emerging and Frontier Markets: Assessing Risk and Opportunity. The report ranks 42 emerging and frontier markets from lowest risk (1) to highest risk (42) in terms of transparency risk, geopolitical risk, corruption risk and health/safety risk, and also provides a snapshot of each country’s property market.

So while Panama may rank as a desirable location on the retirement living front, it poses the highest level of risk to investors, with a ranking of 27, of these six nations.

In this low-growth environment, more institutional investors may consider branching out from sought-after safe-haven markets to emerging and frontier markets to help meet underfunded liabilities.

But with those potential rewards come a multitude of risks that must be carefully weighed against long-term portfolio investment strategy and needs.

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Jennifer-Molloy91x119Jennifer Molloy is editor of The Institutional Real Estate Letter – Asia Pacific.