The crisis is challenging for even the most experienced real estate investors. Russell Chaplin, a speaker at the marcus evans European Real Estate and Investments Summit 2009 addresses the most critical issues troubling real estate investment officers in Europe today.

Interview with: Russell Chaplin, Global Real Estate Strategist, UBS Global Asset Management

The global economic turbulence has thrown many institutional investors into disarray. What they initially considered smart investing or lucrative assets, fell short of expected performance. Many are taking this period to reflect on previous investment strategies and portfolios. Russell Chaplin, a speaker at the marcus evans European Real Estate and Investments Summit 2009 taking place in Monaco, 23 - 25 November, shares his thoughts on the challenges real estate investment officers are currently faced with, the opportunities that have been created by the crisis and his outlook for 2010.

What are the challenges real estate investors are faced with in Europe at the moment, and what can be done to overcome them?

Russell Chaplin: A key challenge in Europe at the moment is the appropriate pricing of risk in the markets, because various markets across Europe have fallen in value at different speeds and it is not wholly clear how far through the overall downturn we are. So, for investors looking to step into the European markets, at the moment, it’s a question of appropriately pricing the risks that they’re taking and assessing those accurately. That is one of the key issues. Another key issue would be the general availability of debt to be used for real estate acquisitions, which is far lower than it was two or three years ago, and the margins related to that debt are far higher. Whilst there is some debt available, it’s only available for certain types of assets and I think that causes issues for investors, particularly those seeking higher risk return objectives.

What opportunities has the global crisis created? Currently, what are the lucrative investment opportunities in the market for investment officers?

Russell Chaplin: One of the opportunities is related to the debt market; because the debt market has been functioning so poorly over the last two years, one opportunity that has arisen is for what would be traditional equity investors to turn into debt investors and begin to finance property investments in the absence of the availability of bank debt. Secondly, because there has been a general lack of transaction evidence in this period, there is a lot of uncertainty about appropriate pricing. For those who are equity rich at the moment, given the decreased availability of debt, 2009 and 2010 probably represent an excellent opportunity to deploy capital.

Should investment directors modify their strategies or portfolios because of the crisis?

Russell Chaplin: I think that many investors were searching particular attributes from real estate, which would typically be a high level of cash yield, some capital growth related to economic growth and some partial inflation hedging capability; these continue to be available in the long term for real estate, along with its continued ability to diversify risk in a multi-asset portfolio. Many investors accessed the market in 2006 and 2007 in a form of real estate investment which decreased the propensity for real estate to deliver the characteristics they were actually seeking. So, the investments were typically with relatively low cash yields, with relatively high leverage which increased volatility and higher correlation with equity markets. Investors have now taken that on board, and if they are willing to re-enter the market at the moment, I think that they would be doing that on the basis that they’d originally wanted to invest in real estate: the diversification benefits, high cash yield and some capital growth. There are of course those who would want to go into higher risk return strategies, and they’re still available across the globe, although over the last couple of years those have become better priced than they were in 2006 or 2007, so actually represent better opportunities now than they did previously.

What long-term investment strategies would you recommend to real estate investors in Europe?

Russell Chaplin: It depends on what you want to achieve from investing in real estate. Some people want to invest in real estate for its diversification benefits and high cash yield, and there are some who want to invest in real estate to try and deliver high absolute returns. Some people are a blend of the two. So the appropriate strategies depend upon exactly what you’re seeking out of real estate at that particular point in time. Those strategies are still available in the market and with the timing for deploying into those strategies a lot better than it has been in the recent past. Those in my opinion, are the appropriate uses of real estate in a multi-asset allocation framework; one is much more towards the low risk, low return end of the spectrum, more bond like, while the other one is much more equity like. It’s about the appropriate pricing of those strategies going forward that’s important.

What initiatives do you think could encourage more real estate investment in Europe?

Russell Chaplin: There are a lot of initiatives underway at the minute and organisations like INREV have been very active at trying to ensure increased transparency, better governance and so on, for unlisted funds. We are a long way down that path and things are improving on an ongoing basis. One initiative continuously being worked on, is the benchmarking for private real estate investment funds across Europe, which is currently only really available in a couple of markets. As that transparency increases, then investors will feel more comfortable that they can compare the performance of funds in which they invested in with the overall market on a like-for-like basis. That is likely to encourage investors into the market as benchmarking becomes more readily available.

What are your projections for 2010? What developments do you expect or predict that could affect real estate investors?

Russell Chaplin: I believe 2010 is a period which investors would probably be best served exploring the income end of the risk spectrum. For us, value-added and opportunistic strategies are likely to make more sense in the developed markets beyond 2010; the core income producing end of the risk return spectrum seems to be a current opportunity and one that’s likely to persist into 2010. In terms of the various markets across Europe, there are quite a wide range of opportunities. I mentioned earlier that various markets have adjusted at different paces and some of those already look better than others while for some we’re going to have to wait for them to adjust to a level that would justify taking the risk of investing there. We’re looking at 2010 as being a period of delivering relatively high cash yield on real estate. For those investors deploying new equity into the market in 2010, if they are able to access the market at reasonable prices, they are likely to get back cash yield through 2010 and 2011. And by the end of 2011 we may be in a better place and begin to see some capital growth come back into the real estate markets across Europe, although there are some markets and property types which we would expect to recover earlier.

Sarin Kouyoumdjian-Gurunlian
Press Manager
marcus evans, Summits Division
Tel: + 357 22 849 313
Email: press@marcusevanscy.com

This unique forum will take place at Le Méridien Beach Plaza, Monte-Carlo, Monaco, 23 - 25 November 2009. Offering much more than any conference, exhibition or trade show, this exclusive meeting will bring together esteemed industry thought leaders and solution providers to a highly focused and interactive networking event. The summit includes presentations on selecting the most lucrative investment options in the market to maximise investment returns, the global economic forecast and on obtaining refinancing solutions.

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