In its fifth year, the MIPIM Institutional Investors’ Summit: MIPIM RE-Invest 2016 brought executives from 37 institutions from 21 countries including 7 sovereign wealth funds, 22 public and private pension funds, 6 insurance companies and 2 family offices with a combined over USD 500 bn allocated to real estate together to discuss markets, property sectors and investment strategies.
Viewed from within the real estate industry, assets seem to be too expensive, particularly for core assets in gateway markets. But, viewed relative to other assets classes, real estate continues to be viewed as a good value. Certainly, the spread between real estate yields and risk-free returns continues to be highly favorable.
As a result, a “wall of capital” continues to flow into commercial real estate with major institutional investors increasing allocations to the sector in search of better yields in the ongoing low interest rate environment.
While investors inherently prefer core assets in dominant gateway markets, particularly London and New York, low yields and peak pricing are forcing them to explore broader geographic regions and alternative asset classes for quality assets at attractive returns.
Good deals are still available, but it requires considerably more effort and creativity to source them. With the current aggressive pricing in core markets and as we move later into the growth cycle and face increasing political risks, investors see more downside risk than upside opportunity.
Investors seemed less concerned about looming interest rate increases this year relative to last year, but political uncertainty seems to be on the rise across the globe, most notably in the UK, US, Poland and Brazil. Political uncertainty, particularly the potential for a British exit from the EU (BREXIT) does weigh on the minds of investors, but most believe London will remain an attractive investment market.
Some investors are moving toward a more defensive position. But, with continued pressure to deploy capital into real estate, there are no signs of a pullback from the market.
Most investors recognize that it is late in the investment cycle, but there are few indications that the economies across Europe and North America will turn recessionary anytime in the near future.
The peak pricing of core assets in gateway markets is hopefully a plateau that can be maintained, but investors continue to look more broadly for investment opportunities, both in terms of geography and asset class, to diversify their portfolios, avoid overconcentration in pricey gateway markets and enhance yields in this low return market.
Overall, the mood of RE-Invest participants remains optimistic, but the task of deploying an ever-growing pool of capital is increasingly daunting.
Image : zhu difeng