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.
The real estate market as a whole is facing headwinds. Some investors are calling the top of the market and looking forward with trepidation to an imminent downturn. R&A research predicts a 25 percent decline in global fundraising this year, while JLL says investment volume for the first nine months of 2016 was down 8 percent at $454 billion, and the secondaries market is dependent on primary transactions to fuel future activity.
[quote]Some investors are calling the top of the market and looking forward with trepidation to an imminent downturn[/quote]
Kenneth Wisdom believes that uncertainty has already had an impact in the secondaries market: “A large part of that decline we have seen in dealflow is because of the volatility we have seen in the marketplaces – capital markets got off to a slow start, oil pricing is down, there is the geopolitical risk with Brexit and the US election. If you have a secondary interest the current value is marked on an historical perspective, but the purchase price is based on the future, so if you have a period of volatility changing your perspective going forward you are going to see the bid/ask spread widening in pricing.”
UBS’s Eric Byrne suggests that while investors in the US may be wary of buying expensive property at the top of the market, Asian money will continue to flood into real estate funds. “It seems to vary by region. In the US, the core open-ended funds are now seeing redemptions for the first time in five or six years, but that is investors taking some money off the table in the core market to rebalance, reduce manager relationships or move up the risk curve. Asia-Pacific and Japan are just waking up to the possibilities of investing in core real estate, so you have a huge wave of capital coming in from China and Japan.”
Dimme Lucassen has a theory about the fall in transaction volume: “I think the reason why volumes are down is because of the lack of quality product being brought to the market. Investors don’t want to sell because what are they going to invest into if they sell?”
He argues real estate remains an attractive asset class in the current climate, and one for which there is continued strong demand. “If you look at the queues for the open-ended funds and the capital being raised for secondaries strategies that drop in fundraising doesn’t come across. A lot of people may find real estate conceptually expensive, but there are many investors that are overweight in terms of their bond portfolios and they want a real income stream to meet their liabilities. That is going to bring a lot of capital into real estate,” he says.
The pressure created by capital seeking a place in the overcrowded core real estate market is helping to drive demand for secondary positions in core funds from buyers who would not previously have considered doing so through such a route, suggests Byrne. “There is a huge amount of interest coming from Asia looking for core real estate. They want real estate in a low interest rate environment and they want to get their money to work quickly. There are also tactical investors who like one region or one sector more than others and they are using the secondary market core space to rebalance their portfolios,” he says.
The popularity of that strategy means that instead of trading at a discount to net asset value secondary positions have begun to trade at a premium of up to 5 percent, says Byrne. “That helps deal with the perception in Europe and Asia where they are less keen to sell in the secondary market at a loss. If you are getting a genuine premium that triggers more sellers to come into the market.”
Ronald Dickerman claims that an increasing number of investors are becoming frustrated with the return profile and operations of open-ended funds. “That is something of a shot in the arm for the secondaries market. Notwithstanding we are not investing in core assets like a core fund, the idea is that there is absolutely a more quantifiable and potentially lower risk profile for secondary investing because you have an existing portfolio that is fully specified, that is seasoned with an operating history with the sponsor where you can do your due diligence on their track record,” he says.
[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.