CBRE on the US real estate secondaries market

CBRE is readying for an increase in one-off transactions that take advantage of immediate pricing opportunities, says senior managing director Philip Barker.

CBRE expanded its real estate secondaries advisory business to the Americas last month. The New York office will be led by senior managing director Philip Barker who says activity in the region has been concentrated around larger portfolio sales brokered by private equity specialists, thus creating a demand for real estate-focused advisors.

Philip Barker
Philip Barker

Why is now a good time to open a New York office?

We have seen a steady increase in global secondary trading volume over the last year or so, with a lot of interest now focused on the United States, which is five times the size of the European market. With the recent strength of the dollar, overseas investment in the US market has proven to be an excellent investment. The international flight to quality in US treasuries for example, despite the low yield, has resulted in a windfall for foreign investors who didn’t hedge their currency exposure.

For example, a euro-based investor that bought US bonds has experienced a remarkable 37 percent total return for the last 12 months (20 percent for a UK investor), compared to the domestic yield of just 4.7 percent without the currency benefit.

Overseas investors in US real estate have seen even more staggering total returns, when you combine the income and larger capital appreciation components of this inherently higher yielding market.

Consequently, we are seeing some foreign holders of US LP interests looking to take advantage of these outsized gains by selling their holdings in the secondary market. In some instances, this strategy may help mitigate lacklustre returns in their domestic holdings and even outperform overall portfolio returns. Moreover, US real estate is still producing terrific returns and is not lacking for interested secondary buyers, domestically as well as internationally. This environment is creating excellent ongoing opportunities for secondary trading in the States, which we are able to focus on more directly from New York.

What makes real estate secondaries transactions in the Americas different from other regions?

Historically secondaries in the Americas have very much been associated with distressed selling, certainly during and as a result of the global financial crisis. Distressed selling was definitely a major driving factor globally during that extreme period of uncertainty too. In Europe, we have seen the secondaries mechanism subsequently being used much more as a rebalancing tool than an urgent exit plan.

European multi-managers are much more likely to use secondaries as part of everyday portfolio management and see little stigma attached to the product. That is not always the case in the US where more generalised one-off deals or opportunistic trades have been less prevalent. Activity has often been concentrated around the larger portfolio sales, executed by traditional private equity advisors, as opposed to dedicated real estate experts.

What expectations do you have for the real estate secondaries market going forward in 2015?

We anticipate bespoke solutions becoming more relevant and frequent; however, we suspect that there will also be a marked increase in one-off transactions that take advantage of immediate pricing opportunities by both buyers and sellers as they arise, rather than as a systematic program with a finite time limit – such as the larger portfolio sales.

Interestingly, we are seeing very healthy interest in core and core+ strategies, both on the buy and sell side. These are often being priced – and traded – at a premium to net asset value, which for some US investors creates what we refer to as “sticker shock”. The reality is that for a core/core+ strategy, particularly those funds with a long investment queue, paying a premium for immediate entry is a sound economic decision. Being able to participate in even these modest core income returns certainly outweighs the opportunity cost of leaving your cash in short-term money market instruments whilst you wait for your turn to come up on the redemption queue. When you factor in any capital appreciation, these premiums can quickly be amortised into the first few quarter’s yield to provide more than compensatory value for paying a premium.

How does competition among real estate secondaries advisory firms compare to the private equity advisory market?

My understanding is that for every $100 raised in private equity funds, there is $6 raised in private equity secondary funds. Historically for every $100 raised in real estate private equity, there is only $1 raised for real estate secondaries funds. That’s clearly an illustration of the difference in scale of the two markets, but also the relative lack of liquidity and availability of real estate secondaries. This is beginning to change with more dedicated real estate secondary players and subsequently dedicated real estate advisories playing an important support and educational role in the industry.

Real estate private equity funds are growing dramatically, take Blackstone’s recent $15 billion-plus fundraise, and Lone Star just closed on their latest fund north of $5.9 billion. Whilst I’m not advocating that these funds will be trading secondaries anytime soon, it’s a clear testament to the appetite for indirect real estate investments, and can only raise the profile of the asset class further within the investment community.

Given the scale and depth of CBRE within the real estate world, there is a multitude of different synergies that come into play. Support from our client services department, research and investment property sales teams is invaluable in generating a more cohesive and informed platform to develop secondaries strategies for our clients. We have an infrastructure secondaries group in the UK that is beginning to gain traction that ultimately will focus internationally. The benefits of having a dedicated secondaries team on the ground in the US are already becoming apparent as we talk to existing clients and develop new relationships in the region.

Having a global real estate perspective is key to understanding the implications of international capital flow – providing big picture analysis to local market situations.

What type of real estate secondaries advisory work has CBRE been involved in?

CBRE, Inc. started its secondary advisory business out of the UK in 2010. Since then the firm has successfully executed over $5.5 billion dollars of secondaries transactions on behalf of our clients. The majority of business has been LP to LP exchanges, but we have also been involved in valuation advisory and general partner restructuring/recapitalisations.