On Tuesday 30th of October, Simone Pozzato, Director of Investments at Hines, and Aurélien Collignon, Associate Director at FORE Partnership, jointly introduced to a varied assembly of 20 professionals capital markets from real estate perspective.
Simone and Aurélien began with a quick reminder of the fundamentals of capital markets and their role in financing economic development – equity versus debt, private versus public, primary versus secondary, retail versus institutional investors. To appreciate the size of global markets, we navigated through The Money Project, a unique visualisation of the world’s money and markets. In focusing on real estate, Simone and Aurélien reflected on how global agricultural real estate appears to have roughly the same value as commercial real estate, while residential real estate represents 75% of global real estate. No surprise then the increasing interest from institutional investors!
Pressing on with the fundamentals, the duo proceeded to present the full spectrum of risk profiles in real estate investment, from core to ground-up development, illustrated with asset examples and concrete target return figures according to the pricing observed in today’s stage of the real estate cycle. We also looked at the return composition – and thus income profile depending on the risk profile – from there making a smooth transition to the different types of capital: from income-focused investors to more “patient” capital.
Drawing upon IPE, INREV and Preqin data, Simone and Aurélien presented the audience with the big picture: type of institutional investors, largest LPs, GPs, real estate allocations, investment styles, geographies. After explaining the sources and different allocations of capital, we then examined how capital assembles to create investment products – JVs, clubs, funds, REITs – and what these investment structures imply in terms of ownership, control, regulatory oversight and risk, and therefore the type of investors they appeal to.
After establishing these fundamentals Aurélien proceeded to lay out the rationales of real estate debt investment and the differences between debt and equity investors: lenders focusing more on the downside and potential adverse events. From senior to junior through mezzanine loans, he detailed their respective pricing and fit within an investment structure.
To wrap up and open new avenues of thinking, Simone and Aurélien briefly brought up new ways of raising equity and debt, namely crowdfunding, blockchain and the likes.
A few takeaways from Simone and Aurélien’s masterclass:
- Alignment of interests is key: investment and fee structures must ensure optimal alignment of interests between investors and managers
- Real estate cycle means pricing: as capital flows to core products, they become more expensive and yield lower returns, and generally investors seek higher-yielding opportunities along the risk curve
- Time mismatch between investors and managers: investors’ intentions are often shaped on the basis of past data and are less relevant once the investment strategy is implemented as the cycle moved forward, while managers have a better understanding in their capacity of gatekeepers of the markets they cover. Should investment strategy be formulated only based on past evidences?
The ULI would to thank Hines for providing the event venue. ULI is also grateful to Simone and Aurélien for their dedication and time in organising our first Capital Markets masterclass. This will be followed by two events in the course of 2019, focused on capital raising and investment instruments.
Words by Enzo Giovanetti, La Française Group