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
- The real estate market is segmenting into a "have and have not" dynamic globally, with capital cities and quality assets expected to outperform amidst patchy Western economic conditions.
- The U.S. real estate market is estimated to be in the "fifth and sixth inning" of a recovery cycle, with asset values in markets like Manhattan approaching 2007 levels and a shift toward a seller stance in certain areas.
- Europe remains in the "second and third inning" of the cycle, characterized by severe distress and dislocation relative to the U.S., particularly in Southern Europe (Spain, Italy) where severe deleveraging is required.
- Capital flows are anticipated to move from the U.S. to Europe, specifically targeting debt instruments and the U.K., over the next couple of years, driven by arbitrage opportunities in the distressed region.
- The U.K. is expected to exhibit a two-tiered economy where London grows as the primary global capital port with an "infinite appetite" for core assets yielding 4%+, while the rest of the country faces a weak or suspect recovery.
- Financing for U.K. development projects outside London is projected to remain difficult, while income-based spreads in the U.K. may tighten by an additional 100-plus basis points over the next seven to eight months.
- Investors are expected to shift toward direct investment, club deals, and separate accounts to increase control, with a renewed focus on lower-yielding city-center assets rather than high-yielding suburban properties.
- The residential market in London faces a bubble risk driven by developments priced at £3,500–£4,000 per square foot, sustained by global political turmoil and foreign capital, though it could collapse if capital returns to home countries or currencies strengthen against the sterling.
- Japan is expected to offer opportunities driven by better financing and lower cap rates rather than significant economic growth, while China and India are forecast to continue experiencing significant growth over the next couple of years.
- In India, significant foreign investment withdrawal is expected to force developers to sell existing assets, whereas in Southern Europe, court delays in mortgage enforcement and receivership could last 18 months to two years.
- Logistics and distribution sectors are expected to benefit from e-commerce and changing working practices, while secondary and non-destination retail face larger impacts from home working compared to central London office space.
- Major companies are expected to continue acquiring major office headquarters in cities like London to attract intellectual capital, requiring slightly less space but maintaining prime locations.
- Institutional ownership of single-family homes in the U.S. may grow contingent on the creation of a CMBS market for financing, potentially shifting the U.S. homeownership rate from 64% toward the 50s.
- Capital is expected to trickle from saturated central London markets into regional areas as institutional investors seek large-scale acquisitions, with increased competition anticipated as U.S. players refocus on Europe.
- Hedge funds are projected to continue engaging in European real estate transactions, while new private capital pools are expected to enter the European lending side via mezzanine lending.
- The residential market in London could extend beyond the current period with government assistance, though Kennedy Wilson has not acquired residential assets since 2011 due to a lack of downside protection.
- Interest rates in Europe are expected to remain flatter for longer compared to the U.S., and capital structures will likely be designed with more appropriate covenants and headroom to handle exogenous events.