Real estate secondaries are becoming ever-more mainstream, so sister publication PERE assembled a group of four real estate professionals with expertise in the market at its London office for its second annual roundtable.
Two secondaries specialists from the US – Ronald Dickerman, president of Madison International Realty, and Kenneth Wisdom, managing director of Portfolio Advisors – were complemented by two managers with broader remits, but considerable experience in the secondaries sector: Eric Byrne, head of global multi-manager and securities at UBS Asset Management, and Dimme Lucassen, fund manager at Aberdeen Asset Management.
Secondaries investing is viewed by a growing number of investors as a way to access the real estate market more quickly and at a lower risk than investing directly in property through the primary market, says Lucassen: “It is the concept of investing into good quality real estate at a discount while having better visibility and not having the J-curve. The whole proposition for us is it is a risk-reducing entry into real estate. You can do direct, but we would argue that there are advantages to doing secondary and that is something you should consider.”
Firms currently fundraising in the secondaries market certainly believe that there is sufficient investor appetite for the sector to fill their war-chests. Real estate secondaries is still not a large market, however, and questions remain over whether there are enough secondary positions available to ensure that capital can be deployed.
When invited to choose the most significant secondaries story published by PERE this year, the participants unanimously pick one the increase in the total volume of secondaries transactions last year.
[quote]The primary issue is dealflow and access to dealflow[/quote]
Wisdom explains why that is a key consideration. “The primary issue is dealflow and access to dealflow,” says Wisdom. “It is not a fluid market, so a lot of resources need to be spent to build relationships over time and access deals. Whether you can deploy the capital depends on whether you have the dealflow because the hit rate is low.”
He estimates that for every 11 or 12 potential deals that come across his desk only one leads to a transaction. That is why few investors do secondary deals on their own, instead buying into funds or working through intermediaries. “Very few institutions are set up to do that because they are managing a portfolio and they have other responsibilities. Constantly underwriting to get a few deals done would really take over their time and resources.”
A steady stream of potential transactions is vital to the secondary market, but once the process of rationalisation among the big institutional investors is complete what other market dynamics will generate the dealflow?
The participants identify investor fatigue as another major driver of the secondary market sales. Dickerman explains: “The converse of lower for longer is fatigue. Interest rates have stayed low and the economy has been growing for longer than people expected. You have investments that were placed in service more than 10 years ago – funds that have extended beyond their initial hold period because managers are saying, ‘Wait a minute the economy is still growing, interest rates are low and there is still value growth. Why would I sell these assets?’ And underlying investors are saying, ‘We invested 15 years ago. It was a 10-year vehicle and I already gave you an extension’.”
Such situations can lead to wholesale recapitalisation of a vehicle, but sometimes not all of the LPs in an ownership structure want to move on. Byrne says: “I have seen a couple of examples in the core and core-plus space where there is a misalignment of investors – someone wants to leave for repositioning or other reasons and someone wants to stay. The biggest challenge then is about how you remove the conflicts of interest about what price you come up with.”
Expanding their remit also helps secondaries funds to maintain the supply of potential transactions. “What you’ll see is a broadening of the definition with more direct secondaries and more recapitalisation instead of fund transactions. That is the natural reaction to a contraction in fund secondaries,” says Byrne.
Madison closed its latest vehicle, the $1.39 billion Madison International Real Estate Liquidity Fund VI, in July. Investors in the sector are usually prepared to give secondaries specialists some “runway” in terms of the style of transactions in order to generate returns in a tight market, says Dickerman. “Most of these private equity vehicles that we manage have multi-year investment periods, so investors are willing to give us the opportunity to be disciplined and to make decisions about when to deploy,” he adds.
Lucassen reflects that it is easier to deploy capital within the real estate secondaries space than it is in private equity secondaries because of a lower level of competition. “People get the capital deployed within the timeframes they agree. A lot of the questions come from people familiar with private equity secondary trading where the market is very different. When a portfolio gets traded of interesting private equity secondary stakes you will get 20 to 25 bidders. For real estate private equity secondaries in Europe there would typically be two or three. Real estate private equity trading is where private equity trading was 10 years ago. It is the perfect place to get your capital invested because it’s really opaque and it is not that crowded,” he argues.
There are also more fundamental forces at play that will continue to drive the secondaries market in the long term, suggests Dickerman: “We have all observed real estate becoming a global asset class. In China, the Middle East, Europe and the US you can sit down with any institution and they will have a view about where real estate should or does fall in their portfolio.
“Capital is flowing all over the world and on the other hand markets are ebbing and flowing. We know real estate is the ultimate local business and it is an illiquid asset class. Secondaries are the natural way for investors to prune their portfolio and make portfolio allocation decisions in an illiquid asset class.”
The secondaries market is now a small, but important, component in the global real estate investment machine. In the near term, the sector is unlikely to match the peak seen in 2015, but fundraising continues apace and there are indications that the deals will continue to flow.
[box]Ronald Dickerman, president, Madison International Realty
Dickerman founded real estate private equity firm Madison in 2002. The company, which has offices in New York, London and Frankfurt, manages real estate assets of around $5 billion. It focuses on capital partner replacements, equity monetisations and recapitalisations of commercial properties and portfolios, and also provides joint venture equity to real estate owners and investors in the US, UK and Western Europe.
Kenneth Wisdom, managing director, Portfolio Advisors
Wisdom joined private equity, credit and real estate firm Portfolio Advisors in 2002 and serves as lead member of the firm’s real estate investment and advisory team. Portfolio Advisors has $36 billion in assets under management.
Dimme Lucassen, fund manager, Aberdeen Asset Management
Lucassen joined Aberdeen four years ago as a fund manager within its property multi-manager team. The team comprises 20 professionals operating out of offices in Singapore, Philadelphia, London and Stockholm, and manages both primary and secondary real estate investments.
Eric Byrne, head of global multi-manager and securities, UBS Asset Management
Byrne has worked for Swiss Bank UBS for 20 years and was appointed to lead its real estate multi-manager platform three years ago. He was formerly chief operating officer for real estate and has been a member of the firm’s senior management team since 2007. Byrne’s team manages around $7 billion of assets, primarily for institutional investors.[/box]
Reporting by Stuart Watson.