Panel
MI Summit 2013 - London: Global Real Estate: A Tiered Market
Milken InstituteFiona D'Silva, David Evans, Jonathan Goldstein, Anthony Myers, Francine Lacqua, Kelly Hampal, Diane Sobin
- Heron Tower Refinancing Resolution: Jonathan Goldstein confirmed that Heron International has successfully concluded refinancing negotiations for Heron Tower with Starwood as the senior debt facility, ending a publicized period of uncertainty.
- Heron Tower Partnership Stability: The existing partnership structure and ownership percentages for Heron Tower remain unchanged despite the press coverage; the project is viewed as a high-quality asset with strong long-term viability.
- U.S. Market Cycle Status: Blackstone's Anthony Myers compares the U.S. real estate market to the "fifth and sixth inning" of a baseball game, noting a recovery trend with values in markets like Manhattan approaching 2007 levels and a shift toward seller behavior in specific areas.
- European Market Cycle Status: Myers characterizes Europe as being in the "second or third inning" of recovery, significantly behind the U.S., with the UK ahead of the continent and Southern Europe (Spain, Italy) still facing severe distress and deleveraging needs.
- Asia Market Divergence: Heron International distinguishes between China (high growth), Japan (low growth but low financing costs allowing for ~6% cap rates), and India (significant foreign capital withdrawal leading to overleveraged developers selling assets).
- Capital Flow Arbitrage: Capital is migrating from the U.S. to Europe driven by distressed pricing and yield opportunities, with Spain becoming a key focus for Kennedy Wilson due to Sareb deleveraging.
- Lending Market Shift: Traditional bank lenders have largely exited European commercial real estate financing, creating a vacuum filled by hedge funds, private real estate companies, and non-bank senior debt funds like Starwood.
- UK Lending Spreads: In the UK, lending spreads for income-rich properties have tightened by over 100 basis points in the last six to nine months, with some deals under 200 basis points in London, raising concerns about potential over-leveraging in prime assets.
- Regional vs. Core Polarization: Significant divergence exists between prime capital cities (London, Paris) and secondary markets; non-core assets face financing challenges (e.g., 500 basis point spreads on 55% LTV) but offer acquisition opportunities at depressed prices.
- Jurisdictional Risk Warning: Experts emphasized the critical importance of local legal frameworks, noting that enforcement and insolvency processes in Southern Europe (Spain, Italy, France) are significantly more complex and slower than in the UK or U.S.
- Investment Strategy Shift: Institutional capital has shifted from commingled funds (down to ~40% of 2008 levels) toward direct investment, club deals, and joint ventures to gain greater control, reduce fees, and manage exits.
- UK Residential Bubble Concerns: Jonathan Goldstein identified a potential bubble in London residential markets, with off-plan prices reaching £3,500–£4,000 per square foot, driven by foreign cash buyers and creating a disconnect for local workers.
- London Development Risks: Developers face "no downside protection" by acquiring land at peak prices with expectations of $3,500+ per sq ft values; Kennedy Wilson has not acquired residential land since 2011 due to this lack of margin of safety.
- Global Turmoil as Catalyst: Anthony Myers and others noted that global instability (particularly in the Middle East) acts as a self-sustaining driver for capital flight into safe-haven assets like London residential property, prolonging the bubble.
- Future Rental Market Viability: Blackstone has acquired nearly 40,000 single-family homes in the U.S., betting on institutional ownership but remaining undecided on whether the sector will evolve into a permanent rental asset class or remain a temporary play until CMBS financing matures.
- Remote Work Impact Consensus: Panelists agree that while flexible working will increase demand for logistics and non-destination retail, major tech companies (e.g., Salesforce, Google, Amazon) will continue to require large London HQs to foster human interaction and attract top talent.
- Political Housing Risk: The reliance on foreign cash buyers in London is creating a political and social issue where local workers cannot afford to live in the city, potentially leading to long-term economic sustainability concerns.
- Fed Tapering Impact: David Evans indicated that while U.S. Fed tapering will raise interest rates in the U.S., the immediate impact on European rates and spreads is uncertain and likely to be limited compared to the U.S. market.
- Secondary Asset Opportunity: Kennedy Wilson and other firms are focusing on secondary UK assets and regional markets (outside the M25) where pricing is depressed and yields are attractive, contrasting with the crowded and expensive London prime market.