Webinar: Cross-Atlantic Considerations for Real Estate Investors

Transcription

1 Webinar: Cross-Atlantic Considerations for Real Estate Investors 29 November 2017 PAGE 1

2 Depth, Experience, and Objectivity REIT Research The source for in-depth research covering over 115 companies across North America and Europe. Real Estate Analytics Proprietary analytics and actionable intelligence to help private and public commercial real estate investors make the best possible investment and portfolio management decisions, mitigate risk, and raise capital more effectively. REIT Research Advisory & Consulting Tailored solutions for investors and operators across all major asset classes and geographic markets. PAGE 2

3 Advisory & Consulting REIT Capital Markets Pre-IPO Advisory Spin-Off/Conversion Mergers & Acquisitions Investor Strategies Real Estate Advisory Portfolio Strategy Portfolio Valuation Corporate Real Estate Transaction Advisory Corporate Strategy Strategic Advisory Shareholder Value Services Board Services Capital Markets Strategy Customised Research Sector Analytics Public Securities Analysis Market Research Bespoke Research PAGE 3

4 Presenters Introduction Presentation Alistair Bush Senior Associate Green Street Advisors 1 Jim Sullivan President Advisory & Consulting Group Green Street Advisors John Lutzius Managing Director International Green Street Advisors 1 ¹ Europe team members are employees of Green Street Advisors (UK) Limited, an affiliate of Green Street Advisors. These employees are licensed through the Financial Conduct Authority. PAGE 4

5 Cross-Border Real Estate Investing Benefits & Challenges International real estate investments provide numerous benefits, but successful execution is challenging Estimating absolute look-forward returns is challenging; judging relative returns across markets even more so Risk-adjusted, unlevered IRRs across geographies and property types should be the starting point for analysing international RE investment opportunities Green Street produces systematic estimates for all major property types in the US and Europe Signals from the listed market should be incorporated into private-market investment strategies PAGE 5

6 Section I. Cross-Atlantic Value in Perspective PAGE 6

7 Finding the Right Starting Yield Local yield metrics on both sides of the Atlantic have material differences that can be misleading in cross-market comparisons As important, each measure has serious flaws and each overstates the underlying economic yield from real estate Local-Market Valuation Yield Metric Comparison Reflected in Metric? Year-ahead rent growth Operating expenses Leasing costs Maintenance capex Cap Rate Sometimes Net Initial Yield Economic cap rate incorporates each of these elements and provides a superior starting yield for cross-border comparisons PAGE 7

8 US Offers Highest Expected Absolute Returns US commercial real estate offers higher initial after-cap-ex yields on investment, but stronger expected growth on the Continent tightens the IRR race Nevertheless, the US now offers higher absolute IRRs Economic Cap Rate Growth Rates Expected Unlevered IRR Long-Term Continent 3.8% 2.8% 1.5% 5.6% UK 3.7% 2.1% 1.6% 5.4% US 4.7% 2.7% 1.3% 6.1% Winner! PAGE 8

9 But Scaled to Sovereign Bonds the Continent Shines The yields on 10-year sovereign bonds differ substantially between the US, UK, and the Continent Comparing average real estate IRRs to sovereigns helps assess how investors are pricing risk Expected Returns vs. 10-Year Sovereigns Real Estate vs. Sovereign Bonds Real Estate / Sovereign Multiple Spread (bps) Expected Unlevered IRR 10-Year Sovereign Continent 0.8% 5.6% Winner! 7.0x 480 bps UK 1.3% 5.4% 410 bps 4.2x 370 bps US 2.4% 6.1% 2.5x Continent UK US PAGE 9

10 Cross-Atlantic Private Market Returns by Sector The UK and the Continent dominate the top quartile, while the US dominates the bottom Green Street Sector Return Premium Over Sovereign Bonds Expected 10 Year Sector Return Govt Bond Return Premium to 10 Year Govt Bond (Basis Points) 2 UK Self Storage 8.6% 1.3% 740 German Residential 5.9% 0.4% 550 Most US Manuf Home 7.9% 2.4% 550 Attractive Nordic Diversified 6.1% 0.8% 530 UK Small Caps 6.2% 1.3% 490 Continental Retail 5.7% 1.0% 470 French Diversified 5.3% 0.8% 450 US Net Lease 6.8% 2.4% 450 European Industrial 5.7% 1.3% 440 US Self Storage 6.7% 2.4% 430 US Single Family 6.7% 2.4% 430 US Apartment 6.6% 2.4% 430 S.E. Diversified 5.6% 1.4% 420 US Health Care 6.5% 2.4% 410 Swiss Companies 4.0% -0.1% 400 London Specialists 5.3% 1.3% 400 US Student Housing 6.2% 2.4% 380 US Hotel 6.1% 2.4% 380 US Mall 6.1% 2.4% 370 UK Majors 5.1% 1.3% 370 US Industrial 5.9% 2.4% 350 Least US Strip Center 5.8% 2.4% 350 Attractive US Office 5.2% 2.4% 280 PAGE 10

11 Listed-Market Signals for Private-Market Investors All RE investors should look to the signals from the listed market, even if they never invest in listed securities When share prices are at meaningful NAV premiums/discounts, it means that private and public market players have widely divergent views on how RE should be priced 30% Observed Premium / (Discount) to Green Street Spot NAV Continent UK US 20% 10% 0% -10% -20% "Whatever it takes" "Taper Talk" ECB QE Brexit Fed Hikes Rates -30% Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 PAGE 11

12 Section II. The Big Worry: Shopping Centres PAGE 12

13 US Retail Significantly Overbuilt, Albeit Less So For A Malls Retail real estate is undergoing a rapid evolution, resulting in wide ranges of opinion on what properties are worth A key difference between retail real estate in the US vs the UK and the Continent is the sheer amount of space per capita C/D Malls 0.9 B Malls 1.3 A Malls 1.3 A Malls 0.7 US Retail GLA per Capita C/D Malls B Malls 1.3 UK USA Sweden Finland United Kingdom Malls only Other retail (1) Netherlands France Spain Italy Germany PAGE 13

14 Ecommerce is the Key Risk Across the Markets Ecommerce is having a profound impact on traditional retail real estate Most of the retail sales growth pie is now going to ecommerce, which has been a huge positive for the warehouse sector, but created a large headwind for retail Market Share of Online Purchases (% of Total Retail Sales) % Internet Users (LHS) Online Market Share (LHS) Online Sales Growth 2017 (RHS) 100% 90% 80% 70% 60% 50% 40% 93% 17.8% 12% 86% 88% 89% 16% 14% 15.1% 14% 13.9% 10.0% 25% 20% 15% 10% 5% 30% UK France Germany USA 0% PAGE 14

15 US Shopping Centres Overly Dependent on Department Stores Another key difference is the prominence of department stores in US malls Struggling retailers present an opportunity for redevelopment at higher-quality malls, but a source of substantial risk for lower-quality mall owners. A++ Shopping Centre Tenant Types by GLA Luxury 7% Other Super 13% Market 0% Department Store 53% Luxury 3% Super Market 1% Other 15% Department Store 29% F&B / Entertainme nt 8% F&B / Entertainme nt 21% Apparel 19% Apparel 30% PAGE 15

16 Hypermarket Anchors Much Healthier Than Department Stores Hypermarkets anchor nearly all shopping centres in France, and most shopping centres on the Continent have a grocery element While Hypermarket sales on the Continent have leveled off, they have avoided the pummeling experienced by US department stores US Department Stores vs. French Hypermarkets Sales Performance Department stores sales evolution in the U.S. (excl. L.D.) French Hypermarket Sales rebased to 100 in Sep-93 Sep-95 Sep-97 Sep-99 Sep-01 Sep-03 Sep-05 Sep-07 Sep-09 Sep-11 Sep-13 Sep-15 Sep-17 PAGE 16

17 UK Shopping Centres Face High Occupancy Cost Ratios Retailers can only afford to pay a certain amount of their sales to rent, operating costs, and rates (i.e., property taxes) and remain profitable High UK OCRs were a key contributor to poor UK shopping centre performance during the GFC Illustrative A-Mall OCR Breakdown 25% Rent Opex, Maintenance, Other Taxes 20% OCR = 20% 15% 10% OCR = 13% 1% 3% 6% 3% OCR = 14% 1% 3% 5% 9% 12% 10% 0% US A-Centre UK A-Centre Continental A-Centre PAGE 17

18 Retail s Loss is Industrial s Gain The listed owners of even the highest quality malls trade poorly By contrast, there is a feeding frenzy for industrial in both the listed and unlisted markets Retail Industrial 15% REIT Sector Premium / (Discount) to NAV -23% -48% A Malls B Malls Industrial 22% 3-Year REIT Sector Total Return -1% -15% PAGE 18

19 Section III. Financial Centres at Late Cycle PAGE 19

20 Trophy Buildings Have Achieved Record Pricing London and New York office remain popular destinations for global real estate capital most recently, Asian buyers have been the most aggressive bidders A couple of recent deals in London, each developed by REITs during the financial crisis, have set pricing records New York London 245 Park Ave $2.2 billion $1,380 / SF Sold by Brookfield, NYSTRS Walkie Talkie 1.3 billion 1,800 / SF Sold by Land Securities Cheesegrater 1.26 billion 1,900 / SF Sold by British Land PAGE 20

21 But Overall Transaction Activity Volume Has Fallen Significantly Headline-grabbing transactions are not necessarily representative of how investors are pricing the broader market Office Deal Volume in Manhattan vs. Central London $70 $60 $50 Manhattan (LHS) Central London (LHS) Yield Gap (bps) (RHS) ($billions) $40 $30 $20 $ (Bps) $0 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17-20 Source: Real Capital Analytics PAGE 21

22 Listed-Market Cautious on Both New York and London Brexit concern a factor, but New York traded at a discount well ahead of London A strong case can be made made that global RE capital will find better risk-adjusted returns buying NY and London office properties via listed companies than through unlisted vehicles New York & London Office REIT Trading Premiums / (Discounts) to NAV New York London 40% 30% 20% 10% 0% -10% -20% -30% -40% Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 PAGE 22

23 Section IV. Summing Up PAGE 23

24 Summing Up Unleveraged, risk-adjusted IRRs provide a solid foundation for global RE investment models Projected returns need to consider geography, property type, and transaction structure Alignment of interest with partners and other decision-makers can affect risk as well Cap-ex associated with long-term ownership is generally underestimated across the globe o Can differ markedly between property types (e.g., self-storage vs hotels) Comparisons between bond yields and real estate returns are producing some odd results Listed and unlisted markets now have very different views on malls and NY/London office PAGE 24

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