As the global real estate community converged on the south of France this week it was digesting a stellar 2014.
In the UK, investment volumes at £63bn were higher than the peak of the last cycle. Total returns were also a near-record at 17%.
Similarly, European markets have bounced back with overall investment up 13% and capital values rising. There are more lenders in the sector than ever with diverse sources of capital. Private equity has raised permanent capital for debt, the slow but scary rise of peer-to-peer lending continues and you know those German banks are back in the market.
Again, it seems there are lenders who put money out without much concern over their returns. Sounds too good to be true. In my experience, when things look too good to be true, duck: there is about to be an explosion. Wear protective gear - or my tag line: buy flip flops and hit the beach.
However, I am not bearish, which, if you know me, may shock you. I am actually going to advocate more real estate ownership and lending (well, sensible lending) as a rational alternative form of investment. The key emphasis being on alternative. I look at 10-year bond spreads: Spain 1.26%; Italy 1.33%; Germany 0.33%; Switzerland 0.02%; and UK 1.75%. Those rates reflect low risk and I think they are too good to be true. Shouldn’t I earn more when I lend those countries money for 10 years? There must be a better return for risk.
The lesson from the last crisis was you have got to keep an eye on the macro. The world is a smaller, more correlated place than we all expected. But today if you want to make money - which maybe better expressed as if you want to protect your money - real estate may be a happy home. My advice is to focus on decoupling regions from cities, and to look at term and cash flow versus current yield. And sorry to be clichéd, but location, location, location. Think micro markets, not larger market plays.
For instance, I am thinking about selling a building we own in the City. It will be new with a 13-year lease to a single, very secure tenant. Location good, rent attractive. The brokers think it should sell now at a 4.25% yield. I think the 4.25% looks market, but as we know, the real estate market lags real markets (that’s catchy!). An investor receiving a 4.25% yield in sterling plus a lovely brand new building represents a cheap investment, if you ask me.
So I want to trade at a lower cap rate, which might mean waiting, as I think we will see more yield compression on the right product. The argument that real estate needs to provide an illiquidity premium has merit, but not as much premium with rates so low. If you are rich enough, liquidity may be an overrated virtue and real estate may be the best alternative investment for term and stability.
This is why good times are not really back yet. Good times are about growth. Good times in real estate are about finding land in Docklands and having the nerve to ‘build it and they will come’. And they did. My new ‘good times’ are comparing single property assets to government bonds. Touting real estate for relative value is not flash, but dull and sensible. No need to wear a hard hat and duck.
Ellen Brunsberg is CEO GE Capital Real Estate Europe