Annual Conference Berlin 2017: presentation summaries

Jürgen Stark, Member of the Executive Board of the European Central Bank described the global macroeconomic outlook. We are now in a new unprecedented era, there is a need for a new normalisation and it’s time for a rulebook.  Interestingly he commented that the ECB quantitative easing policy hadn’t worked as planned although the ECB were aware that the process of normalisation would be complex and bumpy.

He provided a clear insight into divergence in Europe, including the drivers of asymmetric development. The correlation between the quality of institutions and GDP growth, the need for reforms and adjustments in labour law that some countries have taken at an early stage with France and Italy lagging.

Interesting poll facts:  65% of delegates think that 2% is the right growth rate for Europe in the next three years.

Tom Leahy, Real Capital Analytics believed that political risk doesn’t seem to have had much of a negative impact on capital investment in real estate, he reminded us that political risk is binary, it almost can’t be priced in.  

Tom showed that there has been a 40% decrease in real estate investment in the UK in 2016 but there has been growth in Spain, Sweden, China and Canada. Investors have expanded into secondary/tertiary markets with Shenzhen at the top of the list, followed by Las Vegas and Dublin. In 2016 we saw a significant change in the flows of capital - the most money ever recorded came out of China. Whatever the investment strategy –we will continue to see elevated flows of capital into real estate – €6.4 billion has been spent so far in 2017 by new players in Europe.

This session provided the audience with a high-speed overview of what’s going on in Europe, US and Asia Pacific.

Jose Luis Pellicer, Rockspring gave an energetic account of what’s going on in Europe. In summary Europe is in a growth phase, supply is mostly under control, property is fairly-priced, credit is under control and real estate interest rates are close to zero. In short we are not in a price bubble.

He talked about megatrends such as logistics and technology and although most agree that they are needed – he warns it’s not that simple ‘don’t go with the herd’.

Will McIntosh from USAA Real Estate Company started the US perspective by stating that history will show that 2016 has been a unique year. Job growth remains steady in 2017, cap rates are not expected to jump up in the coming years and a large amount of foreign capital is coming from China, primarily to Manhattan but also Dallas and Los Angeles.  The US offers a growing economy, rent growth continues to be fairly strong – ‘logistics’ is up as is ‘light industrial’. There’s plenty of opportunity, value creation is where the real opportunity is, its fairly-priced, at least on the core side and the US will continue to attract capital.

Megan Walters, Jones Lang LaSalle took us on a tour of opportunities in Asia Pacific which now exceeds the US as the global market. Megan explained that China is ‘one to watch’, it’s now 35 times the size of Hong Kong and when it comes to growth ‘it does what is says it’s going to do’. Risk diversification is driving money into real estate and swings in currency can affect investors total returns.

Hong Kong is the most expensive office space followed by London and New York, Sydney is one of the cheapest. Retail has a similar picture but the move to online shopping is huge across China however Alibaba has moved from online to offline in Beijing. Australia is a top choice for international investors, followed by China, although there is competition with domestic money. India will be the story for the next 5 to 10 years.

Questions streamed in from the audience, but one stood out “what is your ‘black swan and where would you invest?’  Jose was concerned about the prospect of the Front Nationale’s Marie Le Pen gaining power in the upcoming French national elections, and he would invest in logistics or high street retail - but ‘not everywhere’. Will’s black swan was unsurprisingly the US government and he would focus on growth markets and for Megan she is concerned about North Korea and her preferred investment location is tier-one China.

This international panel moderated by Peter Hayes, PGIMdebated on how and where to invest in a politically unstable world. There was considerable support for debt, Francois Trausch, Allianz Real Estate said he was keen on debt ‘anytime, any size, anywhere but not at any price of course’. Judy McMahan, UPS Investments echoed this thought as it provides a monthly income to meet liabilities or dividend payments. In her view ‘Leverage is good but too much is always bad’. Tetsuya Hasegawa, Sumitomo Mitsui Banking Corporation said he is looking at ‘niche real estate sectors’ such as mezzanine debt to ‘survive any downturn’.   

The Japanese bank take a defensive positioning, they like core but supplement it with value added investments to boost returns. Mitsui Banking had looked at the UK’s private-rented residential sector before the Brexit vote in June last year – but decided not to pursue.

UPS take a risk off approach, they don’t have pressure that they must invest – Judy will not take the risk of investing in London office now because you ‘just don’t know what’s going to happen’. They will stay in major markets for major property types. Judy also follows demographics, and believes there is potential in investing on cities were people are moving to to get more quality of life such as Dallas.

Francois Tausch added that, as investors, we should overlook political uncertainty because there never been a better economic environment across all three regions than now. He was resolute on London, claiming it was a world city, dis-respective of Brexit. 

Eric Chaney, Echo described Artificial Intelligence (AI) as a ‘black box’. It’s been around for years the difference now is that more and more software’s are available online for those that want to use it.

He asks the question shall artificial intelligence take over from human intelligence, ‘it is probably not an issue for the next 5 years but a serious one for the next 10 to 15 years.’

AI software is becoming very good at interacting with humans. The combination of artificial intelligence software and human expertise is the winning combination eg cancer detection rates have been rapidly decreased with this method. It is also penetrating the asset management world eg hedge funds, high frequency trading, automating tasks, pattern detection. Data is key to the success, by combining robust data with a smart database you can identify patterns that are almost impossible to find. 

Andreas Shulten, BulwienGesa provided us with a further insight into the host city. Berlin one of the fastest growing cities in Germany, it is a huge hub for technology and entertainment and is well connected. There’s a demand for residential and a huge increase in office rents.  The relation between office ‘city value’ and population is a valuable indicator for regional economic productivity.

The challenges for Berlin is that of nostalgia and politics. Currently Germany is not allowed to figure migrants and refugees into their models – perhaps after the elections. And there is a sharp increase in land prices which slows down market development.

Interesting poll fact: 83% of delegates believe that Berlin’s growth is sustainable and 81% believe that in the next 10 years there will be more than 4 million people living in Berlin. 

Henri Vuong plotted the progress of the asset level index project and explained the importance of this project for the industry and the gain for members. She explained ‘We are aiming for one big thing, to strive towards greater transparency for our industry’. The investment market that we work in has changed rapidly as have our information needs. There is a genuine need to understand our investment needs at a fund and asset level.

Information is important, we need more choice, we need consistency. The asset level index will provide information at your finger-tips, to compare, to create customised indices and will be instantly downloadable.

We achieve this milestone we need to do it together; members are asked to invest a little now to save a lot later. Who’s in? 

To be a founding member of the asset level project contact henri.vuong@inrev.org

In an on-stage interview delegates listened attentively to Hamid Moghadam, Chairman and CEO of Prologis be interviewed by Anthony Hilton, Chief Economics and Business Commentator for the Evening Standard and Independent. Hamid talked about milestones in their history and the importance of being agile. ‘We had a competitive advantage we were early in our career; it was clear that the office market was going to be overbuilt in late 80’s so we moved into logistics.’

Hamid highlighted two trends that we need to consider: People are getting much more demanding and impatient and they want more choice – product proliferation.

For Prologis the biggest area to create sustainable competitive advantage is culture – allowing young people to take on responsibility- to create a platform that allows you to make decisions more quickly and to that you can make mistakes and learn from them. This results in being able to move faster. Also, establishing a company of enduring excellence is the key to long-term success.

‘Data is the single most important opportunity for real estate’. One day there could be a data company within Prologis that could be as profitable and as important.

He envisages that solar power is going to make transportation costless, distance is going to become less important, infrastructure is important as transportation will efficiently and silently go throughout the night. Time will become important as is location, it’s important to be close to metro, dense areas so you can be ahead of the competition. 

This Brexit discussion was an interesting and enlightening debate from both sides of the Brexit negotiations. Matthew Elliott, Vote Leave and Karel Lannoo, CEO, CEPS, Centre for European Policy Studies eloquently presented their pitches but their positions were clearly divided. For Matthew Brexit is a ‘win, win situation for both the UK and EU and ‘no deal is better than a bad deal’, he was very positive that they could reach a good deal and within the timeframe. For Karel it was a clear ‘lose, lose’ situation and he was of the opinion that’ a bad deal was worse than no deal’ and optimistic that a deal could be reached in the time frame. He characterised the UK as a ‘reluctant insider’ soon to be an ‘unhappy outsider’. However, both parties agreed that negotiations must be constructive and it is mutually beneficial to find a good deal.

There was an abundance of questions from the floor, 63 in total, the debate will continue.

Interesting poll facts: 82% of delegates believe that the UK does not have a clear negotiating position on Brexit and 74% are not optimistic about a positive outcome for both the EU and the UK. 

Brexit is a reality; it’s happening and we need to plan for it. Occupiers are as uncertain as we are, they are also navigating uncertainty. Colliers have undertaken a study to compare cities of influence. Dublin would benefit the most from any company moves out of the UK and Colliers research showed more favour to Paris, with Paris already scoring better relative to London, where it not for its less flexible labour situation.

Peter believes there will be a minimum relocation after Brexit ‘We are seeing a lot of smoke in the press but how much fire are we seeing behind it.’

Tilman Hickl showed how real estate is sought after by self-made billionaires worldwide. They have a strong home bias for commercial and residential real estate.

Dos and don’ts for attracting billionaires as investors – build trust, always deliver special treatment, take time to explain, don’t ever underestimate them, never say no and don’t keep them waiting.

Fund managers can attract self-made billionaires by providing customisation, show them the deals (especially market special deals), be responsive – answer requests speedily, always seek contact and be prepared to co-invest.

Anders Borg, Economist talked about the importance of embracing urbanisation and used China as an example of a country that has successfully transformed by doing this.

Anders believes there will not be a roaring European recovery but there is an upside to what we see today. There will be a global workforce, and we will see large migration flows.

Anders shared three pieces of advice with the audience to survive in the long term:

1. Stay strong, adjust while you have the strength;
2. Build close relationships with your clients;
3. Be radically agile, have the mindset to accept the fact that change is coming.

Interesting poll facts: 54% of delegates believe political risk is the biggest threat to the real estate markets in Europe in 2017. Half of the delegates believe that technology will transform the real estate markets in the long-run. 

The Annual Conference 2018 will be held in Dublin on Tuesday 11 and Wednesday 12 April, 2018. 

Mark the date in your agenda.