TUCSON, Ariz. -- Global investment opportunities in both private and public markets were hot topics at PREA's ninth annual plan sponsor real estate conference last month. Many plan sponsors were exploring which possibilities make sense for their pension funds. Another hot topic of discussion was cash-strapped real estate investment trusts teaming up with wealthy pension funds to invest in deals arranged by investment bankers.
Trying to predict the future of the real estate business, managers speculated that the next few years will see more consolidation in REITs and real estate advisory firms, as well as more globalization and securitization of loans. Only the strongest will survive and prosper. Information technology will also play an important role in real estate investing, making it cheaper and more efficient for institutional investors, predicted Joseph Azrack, chairman and CEO, AEW Capital Management, Boston.
Opportunity funds will still exist, though they might be marketed as international funds.
But real estate cycles change so quickly, you never know what a year will bring, observed Barry Sternlicht, chief executive officer, Starwood Hotels & Resorts Worldwide, Inc., Phoenix. "Just last year, U.S. REITs had all the money. Now it's all here in this room," he quipped, referring to the executives from pension funds and investment managers in attendance. "Private capital will set the benchmark for value," he said.
In a plan sponsor panel, the consensus was that the premium would have to be terrific to justify global investing. Peter Lewis, associate director of real estate, Massachusetts Institute of Technology, Cambridge, Mass., said he would want a relative premium of 1000 basis points if he were to invest in Asia. Charles Woo, director of real estate, Charlesbank Capital Partners, Boston, which manages private equity for Harvard University, would look for a 30% premium to justify the risk. The greatest risk overseas is currency, he said.
Commingled funds had their fans and foes on the panel. Mr. Lewis, of MIT, said he uses them because the real estate fund is too small to run separate accounts. Mitch F. Pleis, director of real estate at the California State Teachers' Retirement System, Sacramento, observed that they provide the best vehicle for accessing high-risk returns. But Robert Maynard, chief investment officer, Public Employee Retirement System of Idaho, Boise, said he will never use "blind commingled funds again, because you're locked in, even after the people who work on the fund change." He conceded that overhead for the staff was higher without commingled funds.
MIT's Mr. Lewis said he is considering doing joint ventures with REITs, while CALSTERs' Mr. Pleis said that the opportunity funds were putting together those kinds of deals. "The issue is control, and in the low risk portion of our real estate, we want to have control," Mr. Pleis said.
Mr. Woo, of Charlesbank, concurred that control could be a problem, because REIT shares may not be that liquid.
Another panel focused on whether U.S. pension funds should be investing in global real estate. Interest in Asian real estate has been exploding as the economy there has imploded, creating reasons to buy, said Bernard Winograd, chief investment officer, Prudential Real Estate Investors, Parsippany, N.J. "The pricing is compelling, providing a historic opportunity to buy those assets. In addition, the coming of EMU is going to make it easier for European property companies to export ideas from one country to another. Currency considerations will be gone," he noted.
But there are still many practical problems, pointed out Ngee Huat Seek, director of real estate, Government of Singapore Investment Corp. Real estate markets are local and nothing beats local knowledge, because the laws and the political considerations are all different than in the U.S., he said.
"You really need to understand the local culture and customs when investing in private global markets," added James Quille, president, Lend Lease Global Properties, Atlanta. Property is the same worldwide, until you add currency risk, political risk and transparency problems. He advised investors not to attempt to export a trend and then try to replicate it somewhere else.
The panelists discussing global private market opportunities warned that after taxes, returns may not offer a premium. The key benefit to global investing in real estate is diversification, which many pension funds already get through their international equity investments. Representatives of two pension funds attending the conference who have not yet invested in global real estate emphasized that they would do it only for yield, and see no reason to do it now.
A quick-response survey of those at the conference showed that only 8% posted returns of 21% or higher on their direct real estate investments so far in 1998, while 22% reaped returns of 21% and over in 1997; 22% posted returns of 11% to 14% in 1997, while 46% reported returns in that range for 1998. Only 3% expected returns of over 21% in 1999, while the bulk, 56%, predicted returns of 11% to 14%.
Some 54% said they believe private equity real estate is best used for risk management diversification, while 29% said they view it as a return enhancer. Some 64% of those who generated excess returns from private equity real estate portfolios said they came from unrealized gains.
Among plan sponsors (at the conference), 29% have never invested in public REITs and don't plan to in 1999 and 17% will invest the same amount as they did in 1998, while 31% will invest more than they did in 1998. Some 36% plan to invest more in private equity in 1999, while 40% will invest at the same level as in 1998. Some 45% of sponsors said the greatest opportunities are now in private equity, while 27% said they're in public real estate. Yet 44% said that because of the recent developments in the capital markets, investments in real estate are riskier than they were a year ago. But 35% said they were less risky.
In 1999, 71% of plan sponsors plan to put the most new money into direct property holdings, while 24% expect to invest in opportunity funds.
Some 21% said they will add their first global investment in 1999, while 39% said they have no plans to invest in global real estate next year.
