Real estate investment strategies get more creative for 2018

In the coming year, real estate investors will become increasingly inventive with their strategies — often opting for recapitalizations, refinancings and more private, unpublicized deals.

05 janvier 2018

In the coming year, real estate investors will become increasingly inventive with their strategies — often opting for recapitalizations, refinancings and more private, unpublicized deals.

The level of published transactions has gone up and down in the last few years, increasing in 2015, declining in 2016, flattening this year and — JLL predicts — declining again by 5 to 10 percent, in 2018.

However, this is not down to lack of demand or weak markets, Arthur de Haast, Chairman of JLL’s Capital Markets Board, explains. “Shortage of product is a key challenge at the moment. A lot of product has ended up in the hands of big institutional investors and they will hold assets a long time, possibly even for decades. And that means there is less churn in this market now.”

This is true across a range of sectors from European airports to offices in Boston and retail in Toronto.

Rethinking old strategies

Institutional investors continue to accumulate capital and are becoming more resourceful about locating homes for their money. With several all chasing the same opportunities, they are finding it ever more challenging to acquire the assets they traditionally invested in – the office, retail and logistics sectors of New York, Washington DC, London, Paris and the other large, core, liquid markets.

In response, recapitalization is one option that more investors are using to funnel new money into well-established developments. The $512 million recapitalization of the Steadfast Income REIT and its joint venture with Blackstone’s non-traded REIT is the kind of more complicated deal that de Haast expects to see more of in 2018 and beyond. A non-traded multifamily REIT with $2 billion of assets in the US, Steadfast wanted to monetize part of its portfolio in order to provide liquidity to some of its shareholders. It achieved this through the joint venture which also enables its investors to retain an active role and to continue earning fees as the joint venture makes acquisitions in future.

Most of these deals are “under the radar”, de Haast adds. “It is fairly rare that they become public.” Indeed, while the global volume of published deals is falling, the private side of the market is significantly on the rise, he notes.

The increase in these more complicated deals marks a turning point for the market as a whole. In 2017 giant deals dominated the reporting on this sector — with CIC’s $13.7 billion acquisition of Logicor in the logistics field being one of the largest in the real estate sector.

But, while such enormous transactions will continue to occur, de Haast believes there will also be more joint ventures, private deals and other variations on the vanilla deal. “The whole investment strategy is evolving,” he notes. “Investors are changing the way they access real estate – and single asset investment sales are no longer the only strategy.”

Refinancing is also proving to be a popular option. “Investors who want to keep control of the asset by maintaining their equity stake are going to the debt markets,” says de Haast. In the US, for instance, multiple lenders were interested in refinancing 717 Texas Avenue, a trophy office tower in Houston owned by Hines and Prime Asset Management. In the end, Goldman Sachs was chosen and it has now provided $163.5 million of funds. Brookdale Senior Living is another example, having just signed its biggest loan deal ever — a $975 million arrangement with Fannie Mae — to finance local accommodation schemes across 16 states.

Another approach is to make indirect investments through specialist funds — such as Blackstone Real Estate, the private equity specialist which built up Logicor through a series of 50 acquisitions before selling it, and Brookfield Asset Management, the fund manager which sold Gazeley, in another mega deal, for $2.8 billion to Global Logistics Properties.

Pension funds push innovation boom

Looking beyond 2018, a more varied real estate investment strategy will become more commonplace, de Haast believes. Institutions will continue to amass more capital — as workers are encouraged to put more into pensions in the developed economies and China and other emerging markets create new financial services sectors.

The asset management and investment industry is responding and moving into new areas of expertise within real estate. It is recruiting teams which specialize in a broader range of areas such as debt finance, joint ventures, funds and new sectors such as student accommodation and healthcare. “This does require a different approach to investing, compared to buying a core office building with a single tenant and a long lease’” says de Haast. “Instead they might buy a portfolio of 200 logistics properties which require more intensive day-to-day management and picking the right operating partner.”

Appetite for the right deals will not be lacking, even if they are more complicated than traditional offers. “There is very strong demand for recaps, financing deals, funds and the various emerging sectors — from healthcare to student housing — which make up alternatives,” says de Haast. “Institutions have been holding a significant amount of cash which they will want to deploy when they can.”

There are other signs too that the real estate side of capital markets is growing over the long-term. Institutional investors are actually increasing the absolute amounts they put into real estate, as well as expanding the proportion of their portfolios invested in bricks and mortar. In a time of political uncertainty, the sector is particularly recognized for its potential for growth and income generation.

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