Autumn Conference 2018 Madrid: presentation summaries

The conference opened with a keynote by Didier Sornette, ETH Zurich he took us back to 1980s, when a systematic change of routine happened, he looked at the end of productivity-based growth and how we are now in a stage of virtual growth. This lack of productivity growth is an anomaly in an increasing price environment and could suggest a bubble. 

Real estate bubbles have a sustainable impact on both economic growth and financial stability. Detecting real estate bubbles sufficiently early can guide central banks to improve their monetary policy, assist banks and regulators to develop better capital requirements and underwriting of standards, warn households of speculative waves and inform institutional investors about periods of upcoming high-volatility. No or low wage growth kept inflation low during a period of sustained quantitative easing. 

Volatility is not a predictor of crashes, when you feel it, it’s too late. 

In just under 24 minutes Dror Poleg, Founder, Rethinking Real Estate took us on a whistle stop tour of how real estate is changing and becoming more complex and how we can adapt and take advantage of the ‘real estate smiling curve’, where creativity is more important to make us stand out from the crowd. 

We are in a period of great upheaval and change. The sharing economy is having a profound impact on real estate eg WeWork, AirBNB. Dror warned corporate life is unpredictable, demand is changing, customers expect tailor-made solutions, specific to their needs. The average life span of a company is declining and trending downwards. Machines are pushing humans to work differently. The product is too complex for tenants to manage, they can no longer deal with it and everyone wants a piece of the pie. The thicker operating layer means higher cap rates for the real estate industry similar to what we see in the hospitality industry. Venture capital investments are pouring into real estate and vice versa. Building developers and owners used to control the value of real estate assets, now service providers in real estate are making more profit as they serve consumer demand. 

Dror explained that an asset class we need to take lessons from the rise of the popularity of churches, working for the greater good of the community, aligning our interests, constantly reconciling your alliances and adversaries, leveraging networks, assets and the operating platform. Focus on tangible and intangible propositions, think what’s missing and see uncertainty as an ally. 

He also stated that real estate is becoming personal and data is a goldmine but it’s also a time bomb, he asked the audience: do you know how secure your data is? If not spend more time thinking about it. 

Audience poll: 58% of the delegates thought the sharing economy would have the biggest impact on real estate values in the next 3 years. 

In this lively discussion we found out how the healthcare and student housing sectors are evolving rapidly and how they can offer good growth and investment opportunities. 

Mike Adams, Octopus Travel explained that the growth of the healthcare sector has been aided by the changes in demographics eg aging population, people wanting to stay active and fitter for longer, people needing to work longer due to insufficient pension systems. 

Frank Uffen, Partner, The Student Hotel explained how the student accommodation story has been a strong growth story in many regions. 

The parallels between these two emerging sectors are that they offer a community to live in for like-minded people and both investments require real estate and operational capabilities.

The lack of supply and how you differentiate your brand was addressed by the audience. Frank explained that they are always looking for ways to offset the polarisation of prices so that everyone can afford student housing eg scholarships, opening-up ground floors for those living locally to study and that they focus on the most flexible part of the market, short stays rather than long term rentals to differentiate themselves. 

Mike was asked about global health care brands and he stated there is a lot to be learnt from the US where the sector is more mature but global health care brands are a long way off. 

Audience poll: We asked are student housing and health care emerging sectors, 41% of the audience think yes, 41% believe somewhat and 18% say no. 

To discuss the topic of alternative sectors, alternative risks, three large investors took to the stage, Sander van Riel, CBRE Global Investment Partners, Jerome Berenz, Allianz Real Estate and Martijn Vos, APG Asset Management. 

It was agreed that some emerging sectors are considered mainstream already. The challenge with alternatives is that they are more operationally intense and that brings with it greater risk. You need to identify the good operators and as a result they often invest in the operator. Reputational risk is a challenge when investing with operators.

They highlighted that you need to be comfortable with the fundamentals of the operator then you can accept to take more controlled risk. It was agreed that different stages of the cycle need different skill sets. 

With bounds of enthusiasm Märtha Rehnberg, Co-Founder and Partner, DareDisrupt took to the stage with the aim of making the audience fall in love with tech. 
Martha explained to future proof we need to understand that disruption is not something we forecast, it’s something we imagine and create. Say yes to the ridiculous and it might become good enough. It’s not about what technology can do for you, it’s about what you can do for technology. 

She took us on a journey of 3D printing from how it transformed the maritime industry to how we already have solar ink being 3D printed onto roofs in Manchester. She used the amazing example of robot competition to show the exponential speed of technology development. 

To round off Martha shared her ten commandments for new digital investments versus the old commandments for older investments when there was a lack of technology and data, the most important one being life was a journey now it’s a dance. 

To fully embrace the theme of embracing alternatives it felt appropriate to discuss impact investing. Matthew Ryall moderated the panel and got the insights of three experts, Ivan Rodriguez, Bridges Fund Management, Marten Dresen, Good Hotels and Neil Harris, UBS Wealth Management. 

Neil set the scene by taking us through a recent survey that showed despite the low take-up of impact investment currently that over the next 5 years the level of adoption would be up to 40% and 58% of the respondents thought that in the next 5-10 years impact, sustainable investing would become the new norm. 

Martin explained that in creating his brand, Good Hotels, he realised that doing business and doing good could go hand in hand and Ivan explained how health care, student housing and sustainable homes can support SME’s. 

The panel explained that social impact investing can achieve attractive financial returns while making a positive contribution to society. Risk adjusted market returns are possible but lower returns may increase impact, so investors can optimise balance. 

The audience were asked who had heard of impact investing and how many were involved in impact investments. The show of hands was minimum, let’s see if that increases in the future. 

Matthew Ryall opened-up this session by asking why don’t we see many Spanish investors in this room? It was explained that Spain is a net importer of capital, as pensions in Spain are public, there are only insurers left as institutional investors and they invest heavily in sovereign bonds. Real estate investment is left to non-Spanish investors. 

Our panel of local experts Ismael Clemente, Founder and CEO, Merlin Properties, Juan Barba, Partner - Real Estate, Meridia Capital and Cristina García-Peri, Head of Corporate Development at Azor provided the European audience with an insight into why Spain is doing so well, what’s driving investment and where the opportunities lie. Real estate prices in Spain are still 30% below 2006/2007, leverage is much lower now than before the GFC. We have not seen the peak yet, explained Cristina. 

Spain is not in the retail apocalypse that is seen in the Anglo-Saxon world because it has a different starting point than the rest of Europe. Spain has less oversupply of space, fewer online sales and a rise in employment with more houses having a higher disposable income. Hotels and offices were thought to offer the most opportunity.

Audience poll: 62% of the delegates intend to invest in Spain in the near future. 

The conference wrapped up with Alexis Crow, PwC talking to us about trade wars and the impact of the global economy, where we have seen the return and fall of trade in the public markets. 

In Europe, economies depend much more heavily on the export of goods and services, which makes it much more vulnerable to trade skirmishes. She explained that flat productivity and high debt in Europe coupled with immigration and unemployment could create real challenges. 

US government debt is spiralling out of control, Alexis believes that in two years it will reach levels not seen since 1946. And no real wage growth in the last 35 years virtually ensures political unrest. US debt will push up interest rates which can challenge emerging markets. China and Vietnam have large trade surpluses with the US which creates volatility. 

Looking to opportunities Alex would invest in the Philippines and believes that India has immense growth opportunity, looking to 2035 India is set to surpass China in terms of consumption of energy.