If the overflow lunch crowd at the Pension Real Estate Association's conference was any indication, institutional investors and money managers are eager to get a fix on real estate's place in an uncertain global economy.
Some 900 plan sponsors and real estate investment managers registered for PREA's 21st Annual Plan Sponsor Real Estate Conference at The Fairmont Chicago from Oct. 17 to Oct. 19, up from 887 who signed up for last year's conference, said Gail Haynes, president of the Hartford, Conn.-based trade group.
It was clear from the speakers that this summer's rocking and rolling in the U.S. public markets and Europe's troubled economy has not shaken investor interest in real estate. During a panel discussion, Lawrence Schloss, deputy comptroller for pensions and chief investment officer of the $119.6 billion New York City Retirement Systems said the city's pension funds expect to commit $1 billion to $1.4 billion per annum over the next three to five years.
“You have to be careful now. People, who bought debt in September 2008, got crushed. People learned that they have to be much much more cautious,” said Mr. Schloss, speaking on a panel about the impact of macroeconomic trends on institutional real estate investment.
Joining Mr. Schloss were Nancy Lazar, co-founder and vice chairwoman of International Strategy & Investment, broker-dealer and investment research firm; Dennis Lopez, global chief investment officer of Paris-based real estate investment firm AXA Real Estate; and Komal Sri-Kumar, chief global strategist, TCW Group Inc., Los Angeles. Ron Insana, senior analyst, CNBC moderated the panel.
Mr. Sri-Kumar noted that non-U.S. institutional investors will invest in equity real estate in the United States today because the U.S. looks better than Europe.
“In order to invest in Europe you should wait for the debt situation to get worse, and for that to be reflected in better European real estate valuations,” he said.
However, this does not mean that U.S. investors will keep their money at home.
“U.S. is becoming a smaller and smaller part of the world relative to other countries because emerging markets are growing more rapidly. Consequently, the U.S. investor will have to become a more global investor,” Mr. Sri-Kumar said.
Brazil and India are “higher risk investments today,” because they have been growing too quickly for too long, and inflation has become a bigger problem with worker compensation gains running roughly 10% to 20%, Ms. Lazar said.
According to some members of a panel on the debt markets, the real estate loan picture looks a lot like the movie, “Ground Hog Day.” Troubled real estate loans are again being extended rather than foreclosed.
There are zombie loans and property owners who are out of money, however, only a small percentage is still resulting in foreclosures and/or recapitalizations, said Joseph K. Azrack, managing partner, head of real estate at New York-based Apollo Global Management LLC.
“It won't change until regulators and banks reinstate mark to market,” Mr. Azrack said.
Kim Diamond, New York-based senior managing director and co-head of structured finance at Kroll Bond Rating Agency Inc. who spoke on the same panel with Mr. Azrack agreed. She said smaller loans are more likely to be foreclosed; larger loans are getting extended.
Roughly 60% of commercial mortgage-backed securities are being paid off at maturity, she said. Of the rest, 3% to 4% are being liquidated or foreclosed, Ms. Diamond said.
“Kicking the can down the road is a rational survival strategy for banks right now,” Ms. Diamond said.
The banks' balance sheets are not strong enough to incur losses at the moment and so they are extending the loans, she said.
Some $600 billion worth of junior loans, representing about a third of the $1.4 trillion of real estate debt, is coming due over the next six years and will need to be refinanced.
“If not from banks, where will the money be coming from,” Ms. Diamond queried.
Rounding out the panel — which was moderated by Spencer Haber, chairman and CEO of H/2 Capital Partners LLC — were David Ertel, chairman and CEO of Bayview Asset Management LLC and Ethan Penner, executive managing director and president and founder, CBRE Capital Partners.