San Diego County Employees Retirement Association

Transcription

1 San Diego County Employees Retirement Association View of the World

2 THE MARKET IS RECOVERING Real estate values have recovered substantially since the market trough This recovery has been occurring across property types $110 $100 $90 Peak to Trough Capital Return (1Q 2008 through 4Q 2010) $80-39% $70 $60 15% $50-59% $40 NFI-ODCE OECF Value Diversified 19% $30 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 1

3 TO DATE, THE RECOVERY HAS BEEN DRIVEN BY CAPITAL FLOWS Investors are searching for yield and relative security This has resulted in capital flowing into real estate, and a flight to quality within real estate Core assets have recovered the most (Millions) $10,000 $5,000 $0 -$5,000 -$10,000 Open-End Commingled Fund Queues -$15,000 Dec-07 Sep-08 Jun-09 Mar-10 Dec-10 Deposit Core Deposit Value Redemption Core Redemption Value 2

4 A FLIGHT TO QUALITY REMAINS Large capital flows have not yet had a substantial impact on pricing in secondary markets and locations, or pricing of assets with significant property-lifecycle risk 40% 20% Commercial Property Price Index (CPPI) 0% -20% -40% -60% All Properties Distressed Properties NY, DC, SF* Peak to Trough Since Trough Source: LaSalle Investment Management * Not Distressed, over $10 million 3

5 THIS CREATES OPPORTUNITIES This dynamic creates opportunity for investors who are willing to bear lifecycle risk and who can mitigate that risk by executing with experienced operators Risk-adjusted returns for leasing activity are outsized by historical standards 15% 13% 11% 9% 7% 5% Unlevered Return Targets Apt. Industrial Office Retail Hotel Non-Core Core at Appraisal Pricing Core at Transaction Pricing Sources: Core OECF discount rates (transaction pricing assumes 100 basis point premium to appraisal pricing based on a sample of recent transactions). Gross unlevered return targets of non-core funds currently in the market (tracked by Townsend) 4

6 THERECOVERY HAS NOT YET BEEN DRIVEN BY FUNDAMENTALS The recovery has been supported by a stabilization of fundamentals, but has not been driven by their recovery 2.5% NPI NOI Growth (4 quarter moving average) 93% NPI Occupancy Annual % Change 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% 92% 91% 90% 89% -1.0% 88% -1.5% -2.0% 87% 86% Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 5

7 INCOME GROWTH ISEXPECTED Although fundamentals have not yet recovered, supply is limited Managers anticipate significant income growth in 2011 Square Feet (Millions) Example: US Office Completions 8% 6% 4% 2% 0% -2% Total Fund Level 2011 NOI Budget vs 2010 Actual Same Store Basis 60-4% Source: CBRE 6

8 DISTRESS DOES NOT TELL THE ENTIRE STORY In the U.S., opportunities are not being driven by purely distressed sales A relatively orderly liquidation is underway for high quality assets Troubled banks tend to hold lower quality assets in inferior locations, often with substantial vacancy Billions $400 $350 $300 $250 $200 $150 $100 $50 $- United States Commercial Mortgage Maturities by Lender Type Other Banks CMBS Banks For high-quality assets, access comes through (i) note purchases and foreclosures and (ii) structured solutions with existing borrowers Source: Foresight Analytics, SNL, Intex, Trepp, Morgan Stanley 7

9 RISKREMAINS A FOCUS Unexpected economic weakness could impact all assets classes Capital market events, such as the removal of QE II, could impact capital flows and increase return requirements Traditional measurements of risk, such as standard deviation, do not adequately capture the risks associated with investing in private markets. Manager risk, asset risk, market risk and capital structure risk must all be taken into account NPI Cap Rates vs. 10-Yr. Treasury 10% 9% 8% 7% 6% 5% 4% 3% 2% 10-Yr. Treasury Yield NPI Appraisal Cap Rate 1% 4Q10 NPI Cap Rate 0% Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 8

10 Core Market Geography Non-Core Market Comment Sentiment Sentiment Comment Fall Spring Fall Spring Continuing positive outlook for core markets helped by strong economic backdrop. Pricing slightly less attractive with valuation gains now working through. Queues in popular funds delaying entry point. Canada One off opportunities will be attractive but competitive landscape. US Opportunities in the form of broken financial structures are apparent but requires focused asset management. Strong demographics. Markets remain undersupplied. Brazil Urbanisation continues, therefore development strategy in retail and residential. Weak fundamentals will reassert themselves. Exception is London. UK Expect further bank sales as regulation bites. Mezz and secondary shows interesting pricing. Some recovery in northern markets and prime Paris. Slow recovery. Western Europe Anticipate some banking assets to flow out as BASEL II impacts. Economies continue to improve Nordics Still some distress to work out best exploited with niche managers Some refurbishment/releasing opportunities in core markets will reward. Central Europe (Poland) Despite improved cap rates markets still look favourable relative. Markets still feel overpriced relative to fundamentals. Southern Europe Significant banking stress still to be worked through. Limited core opportunities. Domestic capital will keep yields low. Still emerging China Some selective opportunity but from outside Tier I cities. New infrastructure, e.g. High speed rail, will offer development opportunities FDI policy still prohibits core asset investment. Still emerging India Growing interest with improved development economics Core markets remain under pressure. Exception is logistics. Japan NPL still looks like an attractive access point Core markets look sound, supported by improving wealth. Australia Selective opportunities but hard to find 9