INREV Annual Conference 2024 Berlin: A Summary

Anatole Kaletsky, distinguished economist and financial journalist opened the conference with a lively, and perhaps surprisingly upbeat, outlook for the near and medium-term macro-economic environment. 

Setting the scene, Anatole Kaletsky acknowledged the shift in sentiment since the start of this year that inflation would reduce to 2%. He said that we have left behind the era of secular stagnation that kept interest rates at zero or below. Instead, we have entered an era in which 2% rates will be a floor rather than a ceiling.  

He referenced three likely scenarios: ‘immaculate disinflation’; persistent inflation; or a US or global recession. Anatole suggested the probability for each of these scenarios occurring was 30%, 65% and 5%, respectively. These scenarios, he said, are already priced in, but not in terms of the fundamentals of asset allocation. The key question for market participants is whether they should hedge against recession or against inflation. 

He said that 3% inflation is likely to be the norm because all the forces leading to disinflation have reversed and US inflation is stuck on a 3% to 4% plateau.  

On a final hopeful note, Anatole Kaletsky offered the view that recession would not happen in the short term. The good news, he added, was that for the next few years, relative to financial assets, real assets will be more attractive than most market participants will ever have experienced in their working lives to date. 

Audience poll:

When will interest rates return to 2%?

• 2024: 1%
• 2027: 38%
• 2030: 32%
• Never: 29%

In the face of mounting global pressures in geopolitics, climate, and resource conflicts, is achieving central bankers' 2% inflation targets:

• More important and more likely: 7%
• More important but less likely: 45%
• Less important but more likely: 14%
• Less important and less likely: 34%

An exceptional panel of experts debated the lessons the industry could learn from events and strategies of earlier years.  

Establishing the context for the broader debate that followed, Isabelle Scemama, Global Head of AXA IM Alts, said there were definitely lessons that market participants could take from the GFC. She began with an encouraging view that the end of the current cycle was in sight with yields stabilising, and the likely return of value by the end of this year – especially in large cities. The core difference between now and 2008 was, she said, the industry’s ability to target new niche sectors with low correlation to traditional commercial real estate, adding that higher income has become key. 

A central part of Isabelle’s thesis was an interesting question about whether the obstacles currently facing the office sector today in any way mirror those experienced by the retail sector during the recent past. In terms of similarities, she drew a parallel between offices coping with hybrid working and retail addressing the challenge of e-commerce. But she suggested that the big difference between the fortunes of the two sectors was that, unlike retail, offices benefit from a diversity of occupiers and are backed by all sectors of an economy. 

Venturing a view on the subject, Anne Kavanagh, CEO of Telford Homes, highlighted the fact that getting the timing right to re-enter either of these sectors was key, noting that trends that used to play out over several years now happen on a much shorter timescale – closer to 12 months. She identified the rental growth opportunities in the market today, but pointed out that the key difference now is the political sensitivity associated with both retail and offices. 

Focusing on residential, Robin Goodchild, former Global Research Strategist, Lasalle IM, said that the real estate industry has long passed the point where business was just about collecting the rent. Properties with the best return opportunities, he said, require the most intensive management. This is a view firmly echoed by Madelaine Cosgrave, Non-executive Director, Landsec and panel moderator, who referenced the operational nature of real estate today, which requires new and specialist skills. 

There was consensus from the panel that rent controls in residential were both a threat and an opportunity. As Robin highlighted, a balance needs to be struck to ensure there’s a fair deal for both landlords and occupiers. According to Anne, clarity and certainty are the keys to a successful outcome. 

In an interview conducted by Caroline Daniel, former Editor of FT Weekend, Bruce Flatt, CEO Brookfield, gave delegates a fascinating insight into the intricacies of operating at a significant scale. 

He explained how scale and diversity allow for flexibility which means it’s possible to make mistakes, but these mistakes won’t be fatal. He explained how at Brookfield, the only way the business works effectively is by breaking the scale down into discreet bits and ensuring accountability at the grassroots level. 

In the context of the current economic environment what really matters, he said, is stability in capital markets, adding that rates will eventually come down – even if slowly. From his perspective of being active in 30 countries, he underlined the importance of investing in what he described as “great countries” and investing for the long term. 

Bruce Flatt also offered the suggestion that the greatest opportunities in real estate are good real estate assets that have been over-financed and need to be stripped back. This, he suggested, is where money can be made. On a more general point about investment style, he explained how Brookfield has always been a cashflow, value investor: “The business has evolved over time, but with value investing something has to convert into cashflow fairly quickly.” 

He acknowledged that, in general, the fundraising environment has been tough. But he explained that for Brookfield, which has a strong franchise in Asia, the experience of raising funds has been okay, having moved past the bottom.  

In reference to infrastructure, he explained how scale and longevity are important. Both enabled Brookfield to do things others maybe can’t. Bruce also stressed the importance of reputation. In infrastructure, reputation is what determines the possibility of owning key assets, such as pipelines, telecom towers, and nuclear plants. With reference to nuclear, in particular, he underlined how important it is for Brookfield to be able to “run things well”, particularly given its current position running 45% of all nuclear plants in the world. 

Audience poll:

Has operating a very large-scale global real estate portfolio recently become:

• More risky and more rewarding: 20%
• More risky and less rewarding: 50%
• Less risky and more rewarding: 20%
• Less risky and less rewarding: 11%

Sabina Reeves, CBRE Investment Management, moderated a lively debate with insightful contributions from Michael Shiels, ING, Christian Stracke, PIMCO, Marc Mogull, PineBridge Benson Elliott, and Henri Vuong, PGIM Real Estate. 

Panellists commented on a wide range of issues from the current tough capital raising environment – which was likened to the early 1990s – to comparative levels of capital resilience, which was low during the GFC when leverage was high but is much more robust today. The debate touched on the fact that while real estate lending no longer poses a systemic risk to traditional banks it remains hard for real estate market participants to find debt and to refinance. Described by Henri Vuong as ‘the future’, non-bank lenders are, apparently, poised to take up the slack as traditional banks face tougher legislation – especially Basel 3.1. However, despite real estate debt offering some of the best opportunities, the pace of take-up may be slower than anticipated given that some investors currently feel over-allocated to real estate. 

Audience poll:

For those of you who are equity investors seeking debt, how have borrowing conditions (price, availability) changed over the past year?  

• Easier: 27%
• No change: 16% 
• Harder: 57%

When do you expect debt market conditions to normalise?

• When the central bank starts cutting rates: 19%
• 2025: 37%
• 2026: 20%
• Longer than that: 24% 

Jo McNamara, Oxford Properties and Peter Morgan, PFA shared their respective views on the best approach to investing in the current environment in a fascinating panel discussion moderated by Thomas Brown, LGT Capital Partners. 

Both panellists agreed that making the investment case for real estate – especially real estate equity – was much harder now than it has been in the past, unless there is a compelling cashflow or income story. They shared the view that, in the current battle of the asset classes, private equity and private debt seem to be coming out on top. And while investors want access to real assets, infrastructure and energy are more attractive than real estate. Nonetheless, Jo McNamara held firm to the view that real estate should be seen as an inflation hedge. 

In a tour de force, General Sir Mark Carleton-Smith, former chief of staff of the British Army, provided a sobering overview of the geopolitical tensions and challenges facing the world today. 

He opened with a view that the world has already reached beyond the high watermark of globalisation. It’s now a bifurcated world characterised by greater volatility and a new era of long-term military conflict. He referenced the fact that we have reached a major strategic inflexion point in the wake of three significant events: the fall of the Berlin wall and the collapse of the Soviet Union; the 9/11 attacks and subsequent conflict in Afghanistan and Iraq; and Russia’s invasion of Ukraine. Each of these has posed a major challenge to statecraft. 

The global rules-based system, he said, is not self-organising or self-sustaining. It is underscored by power – especially hard power, most of which is in the hands of the US. But this is being challenged and pulled in different directions notably by Russia, China, and Iran. 

In General Sir Mark’s view, we’re currently sitting at the confluence of three key threats: the erosion of the European security settlement; the risk of widening conflagration in the Middle East; and a potential strategic miscalculation by China. He described Russia as a monarchy and Putin as the tsar who has developed a hybrid playbook that first appeared with the bloodless take-over of Crimea. Now there’s strategic fatigue among Ukraine’s allies, which is complicated by the fact that the situation in Ukraine has been eclipsed by the Israel/Gaza conflict. 

In the Middle East, we’re witnessing the culmination of endemic instability. Iran is an authoritarian criminal state seeding instability and increasingly confronting Israel, while Israel wants to restore deterrence and demonstrate that it could destroy Iran if it wanted to. 

In China, President Xi is determined to make the country the world’s dominant power and economy by the middle of this century. It is locked in a technical arms race with the US and is intent on digital dominance.  

We have, said General Sir Mark, reached a moment of great vulnerability and risk. He concluded that we are no longer the complacent post-war generation. Instead, we may be the new pre-war generation and what we’re witnessing today is the reshaping of the contours of the post-war order. 

Audience poll:

Have we entered a new cycle of long-term conflicts and wars? 

• Yes: 76%
• No: 5%
• Maybe: 19%  

Is Europe investing enough in defence? 

• Yes: 10%
• No: 90%

Are you willing to pay more taxes for stronger defences? 

• Yes: 66%
• No: 34%

Peter Altmaier, former German Minister for Economy and Energy, and former Minister for Finance, offered delegates a robust defence of Western democracy with a passionate plea for all to play their part in preserving the precious principles of pluralism.  

Acknowledging the popular view in some parts of the world that autocratic regimes are superior to democratically elected governments, Peter Altmaier argued that, overall, democracies are the most efficient way of governing a country. But he also raised concern about the position of European economies in the global context, emphasising their need to earn respect through economic performance. Europe, he said, is currently not focused on the areas that really matter, such as digitalisation.  

He highlighted the shift in the balance of power, referencing how after 80 years of peace in Europe, something went wrong when Putin annexed Crimea. He identified part of the problem being the West’s treatment of Russia as a regional power, along with a misplaced principle that it could deal with global problems unilaterally. He said that lasting peace in Europe could not happen without military strength. Europe, he said, needs to be able to defend itself.   

Affirming his own long-held view that there should be a European army, Peter Altmaier also acknowledged that time probably didn’t allow for this to be assembled in preparation for any potential looming threat. He also recognised the need for Europe to accept that funding for improving its defence capabilities would need to be delivered through domestic GDP growth rather than an untenable reliance on the US.  

He left delegates with two powerful thoughts:  

1. Global politics requires global exchange and global coalitions – stable international relationships based on shared values. 
2. It takes leadership to organise a stable world and Europe can take that leadership to change things for the better.   

Audience poll:

Who is Germany’s most important ally in our new world order? 

• The EU: 54%
• USA: 7%
• Poland: 3%
• Russia: 0%
• China: 1%
• India: 0%
• France: 22%
• UK: 3%
• Japan: 0%
• NATO: 10%

Is what is good for Germany also good for the whole of Europe? 

• Yes: 31%
• No: 6%
• Sometimes: 63% 

Brenna O’Roarty, RHL Strategies, set the scene for the thought-provoking panel discussion on the challenge of solving the European housing crisis, moderated by Greg Clarke. She was joined by Graeme Craig, Places for London, Bill Hughes, Legal and General Investment Management, and Jurgen Bruns-Berentelg, former CEO of HafenCity Hamburg.  

Panellists highlighted the issue of scale and complexity. How, for example, can the real industry – which is joining an established sector that has been around forever and which is at once global and very local – manage the discrepancies of definition around key concepts such as affordability?  Similarly, how does regulation fit into the picture and how can regulation – especially around decarbonisation – help to impact total cost? Panellists agreed that institutional capital has a critical role to play in helping to solve the housing crisis but that there is no room for short-termism. There was also a clear consensus around the need to build greater trust between stakeholders – investors, occupiers, planners and politicians – and for politicians to make more meaningful interventions when it comes to removing supply-side barriers.  

Audience poll:

Are there easy and obvious solutions to the housing affordability crisis in Europe’s most successful cities? 

• Agree: 36%
• Disagree: 28%
• Are you joking?: 25% 
• What housing affordability crisis?: 1%

Can we use publicly owned land to better address the housing crisis? 

• Yes, of course: 77%
• No, it’s too difficult: 6%
• Only if it is sold to the private sector: 18%

In a broad-ranging conversation with Andrea Carpenter, Hines co-chief executives, Jeff Hines and Laura Hines-Pierce, provided delegates with a fascinating glimpse of the realities of jointly managing a unique family firm that’s also one of the industry’s largest investment managers.   

Jeff and Laura each acknowledged that their respective decisions to work in the family business came from their own motivations as opposed to any feelings of familial obligation. However, both also underlined the very strong sense of responsibility that comes with working in a business that carries their name. 

Jeff told delegates how the transition from developer to investment manager was a natural progression. It was, he said, based on core principles about treating occupiers and investors properly and devolving responsibility to people on the ground within the business. 

Both he and Laura agreed that one of the key benefits of their co-leadership is their shared, but different, generational perspectives. Jeff Hines highlighted the fact that their diversity of opinions is particularly valuable in terms of improving decision-making. It was clear how important this is given that both he and his daughter are equally involved in all decisions. In terms of the division of labour, Jeff referred to his own focus on the “perfunctory duty of a CEO”. Laura, on the other hand, concentrates on strategic thinking. 

Culture is an overriding focus for Hines. Laura explained how the firm has an entrepreneurial spirit that encourages employees to think with a partnership and ownership mindset. She described how the business is always looking to do the right thing for partners – inside and outside the business – and to think about the long term. Indeed, there is a clear focus on the future and on pushing innovation across the business. 

Jeff acknowledged that investors do sometimes ask questions about the convergence of an institutional business with a family business. He explained that those investors who know Hines will recognise and appreciate the positive difference that being a family firm makes. Laura Hines-Pierce added that the firm has institutionalised over 30 years embedding the controls and governance that are critical for creating stability for partners, but that the culture and family ethos is also critical in allowing Hines to think long-term “in decades not quarters”. 

Culture and the future are clearly closely aligned. And as to the future, the co-leaders expressed their enthusiasm for the coming investment vintage. In the near term, the focus will be on the living sector and retail, with private credit offering exciting potential in the longer term. Laura concluded by emphasising Hines’ commitment to driving forward the green transition to reach net zero by 2040, which she explained was part of the firm’s DNA. 

Neil Shelton, GXO, Enrico Sanna, The Office Group, and Chris Igwe, Chris Igwe International, provided delegates with insightful perspectives from their respective areas of expertise on the changing nature of occupation – across retail, offices and logistics. 

Moderator Greg Clarke drew out the consistent themes, chief among which was the need for landlords to embrace operational real estate, roll up their sleeves and get involved. There was a clear consensus about the imperative of treating occupiers as customers and understanding and delighting those customers. According to Enrico Sanna, the number one consideration for landlords and asset owners should always be asset selection, and then having a clear idea of what to do with it. This, he said, should be informed by customer needs at the heart of which are flexibility, choice, and a desire to connect. Ultimately, it’s about being in a position to generate super rents. Chris ventured that the best investment opportunities in retail will be in retail parks, outlets and tier-one shopping centres. While from a logistics perspective, Neil was clear that the sector has not yet peaked, and any current dip is cyclical rather than structural. Underlying demand, he said, remains strong, though investors will need to adapt to occupier requirements for changes to contracts – especially in terms of delivering greater efficiency.   

Audience poll:

How much are your occupiers/tenants need changing this year? 

• Not at all: 4%
• Not much: 62%
• A lot: 31%
• Way too much: 3%

How much revenue risk are you now sharing with your occupiers/tenants? 

• 0: 49%
• 25%: 40%
• 50%: 6%
• 75%: 2%
• 100%: 3%