EMAIL DETAILS

http://www.ft.com/intl/cms/s/0/1dfed590-c4ea-11e0-9c4d-00144feabdc0.html#axzz1V2a4EMT7

Investors snap up real estate

Investors fleeing the volatile bond markets are pushing the prices of “trophy” real estate assets so high that yields are barely keeping up with inflation in some developed economies, according to Partners Group, a Swiss investment house.

The trend is pushing institutional investors to look farther afield into developing markets for property and other investments in “real” assets.

Prices for elite properties in the US, UK, Germany, France and Japan have surged as investment flows in the first half of 2011 approach those seen near the 2007 peak, according to Partners. That has pushed yields as low as 3-4 per cent, barely keeping ahead of inflation in some developed countries.

“Many institutional investors have been tactically shifting some of their fixed income allocations to real estate,” said Stephan Schäli, head of private equity at Partners. “Over the last year, [investors] have been looking for safety and yield and trophy assets were perceived as offering that, but yields have been so low that inflation leaves them on risky footing.”

Luba Nikulina, global head of private markets at Towers Watson, a consultancy, said: “The megacities are overheated. We are seeing quite a lot of demand for trophy properties, so people need to move to secondary-type assets.”

David Blake, a professor at London’s Cass Business School, added: “It’s easy for funds to go overweight on these asset classes, because risk is being underestimated as a result of poor pricing transparency.

“If everyone piles in at the same time this will lead to a speculative bubble. There isn’t enough of this stuff globally in countries with stable political systems, where you have the confidence that you can invest and then later get your money out.”

Those investing in prime locations include the Canada Pension Plan Investment Board, which has increased its holdings of unlisted assets, such as real estate, from 8.8 per cent to 31.6 per cent of its portfolio in the past five years.

In the last fiscal year alone, the fund invested in two midtown Manhattan skyscrapers, a 25 per cent stake in a London retail development next to the 2012 Olympics site and a 42.5 per cent stake in a portfolio of prime Australian industrial properties.

Partners, which manages €20bn ($28.5bn) in private investment programmes, is advising institutional clients to concentrate instead on mid-sized cities in Asia and Latin America where property yields can be a full percentage point higher than in the larger cities.

While the latest market turmoil, driven in part by the ongoing eurozone debt crisis, a downgrade of US debt and jitters over France’s credit rating, is unlikely to change the long-term strategy of pension funds, it only adds to pressure to switch some money out of fixed income into other asset classes.

Many institutions are now said to be looking at less-familiar asset classes such as private debt, but are cautious about making moves.

“What we tend to see is that it’s those investors who already have exposure to real estate and infrastructure equity are the ones willing to move into debt,” said Sanjay Mistry, head of private debt at Mercer, a consultancy.

Mr Mistry said investors were being drawn in by a shortage of bank financing to replace what Mercer estimates are $150bn in European collateralised loan obligations, financial vehicles created in the run-up to the 2008 crash, which expire this year and next.


Eric D. Schwerin
Rosemont Seneca Partners, LLC
1010 Wisconsin Ave., NW
Suite 705
Washington, DC 20007
(202) 333-1880
eschwerin@rosemontseneca.com
P Consider the environment before printing this email.