Property markets are set for a recovery and while the rebound may be quicker than many investors expect, not all of them will be equally well placed to take advantage of it, according to Lowell Baron, president and chief investment officer of Brookfield Asset Management’s US$268 billion (A$403 billion) global real estate division.
Over a career spanning three decades, Baron says he’s seen multiple real estate cycles, and while each is subtly different, they share some general characteristics. This cycle is unusual, he says.
Baron says investors are facing “one of the unique moments of arbitrage in the market where investor sentiment hasn’t caught up with the reality on the ground”, and it’s the kind of opportunity that probably only comes around once in a decade.
“Because you’re at this point in the cycle where things are changing rapidly and many investors are just trying to catch up a little bit and deal with their legacy issues, there’s really not that much competition out there for these kinds of opportunities,” Baron says.
“The market only gives you these opportunities once every decade or so, and I think we’re in one of those moments, and we’re certainly feeling it. We’ve probably invested about US$5 billion to US$6 billion ($7.5 billion to $9 billion) into real estate investments in the last six months and we’re very, very excited about everything that we bought.”
Baron says that what’s been happening in property markets around the world is “essentially just a repricing of capital, which is therefore repricing the value of real estate”.
“What it actually means, though, is that post that repricing, it’s a really interesting time to invest in real estate, and you have to really bifurcate between what happened on the capital side versus what’s happening with the fundamentals for real estate,” he says.
And the fundamentals are that the oversupply that has typified previous cycles is absent today.
“Here we’re in a place where those fundamentals, from a supply standpoint, are very good,” he says.
“So, I think we’ll see a recovery here that happens much faster than we’ve seen in previous cycles.”
‘The greatest bifurcation’
Exactly how investors experience the anticipated recovery will depend on how they’re positioned right now, Baron says, and they fall broadly into two groups.
One group is those that “have the capacity of resources, time, as well as capital to be able to move forward”, Baron says. Some of those “will get invested early on in this new cycle and will get the benefit of doing that.”
And the other group is those that are “looking backwards, who are still too distracted by their legacy portfolio, or who need capital to be returned from that portfolio in order to invest it into something new”, he says.
Baron says it’s going to take time for this group to deal with legacy issues, and “they’ll end up sitting out probably the beginning of this new investment cycle, and probably only coming back in once we see much more capital flows happening and values start to come back, so that they can start to recycle some of the capital from their existing assets”.
This is “the greatest bifurcation between investors that we’ve seen in a long time”, Baron says.
“If you went back four or five years, almost every investor you spoke to would have thought in a very similar way,” Baron says.
But today, “there are some who are fully leaned in, who are trying to invest tremendous amounts of capital into what they think is a very attractive time period; and there are others who are just literally sitting on their hands and saying, I can’t, I’m not prepared to do anything until I figure out my issues.”
Baron says these different starting points underline the fact that property investing is becoming a more nuanced and complex activity than it has been at times previously.
As a growing number of global pension fund investors – including Australian superannuation funds – come to this realisation, they’re beginning to demand different things from the partners and organisations they invest with, Baron says.
“This could be for the superannuation funds and Australian pensions in general, but it could also equally be for many of our pension fund investors around the world, what they are looking for has shifted over the years,” he says.
“It goes back [to] many investors at some point saying, you know, I could do a lot of this myself, I will invest directly. That pendulum has shifted more and more towards understanding what the largest alternative asset managers can bring, and what they can bring are the broadest and the deepest platforms.”
A complex game
Baron says asset owners increasingly are looking to partners to deliver expertise “across all the geographies and across essentially all of the property sectors [that] allows them to pick and choose the places to invest in a way that has a lot more experience and expertise than any one investor, pension fund, superannuation fund, can do on their own”.
“So, what I think has happened is we’ve seen many of these investors start to consolidate who they work with, to fewer managers but with larger mandates,” he says.
“They’re focused on the ones that they are comfortable with and trust, but really also the ones that have these deep and broad operating platforms that can create that operating cash flow growth in all these different asset classes.”
Baron says Brookfield is experiencing this first-hand.
“What they’re asking us to do when they consolidate with us is a lot more than they would have asked in the past,” he says.
“In the past it might have been ‘I’m happy to invest with you in this fund or that fund’, or ‘I’ll invest in these two or three funds’; today, it’s ‘help me think holistically about my overall real estate exposure, my real estate balance sheet, and how can you be strategic with me and make sure I have the right exposure to the right geographies, to the right sectors; [and] dynamically thinking about that [and] shifting it over time at the right time periods’.”
This demands deeper working relationships between asset owners and asset managers, Baron says, which “could include investing in some of the funds, but also specific joint venture arrangements, co-investments, strategic direct acquisitions in order to pick up exposure in certain places”.
“It just becomes a much more customised and deep relationship, where we understand their needs and their wants, we understand their overall balance sheet, and we find ways to make it work so that gives them everything they need for their overall exposure,” he says.
Baron says super funds’ growth is a starting point for their increasingly sophisticated outlook and requiring better ideas on where to invest growing pools of capital, but also says “the experience over the last few years has shifted the way people think about real estate”.
“Real estate’s not a monolithic industry,” he says.
“The ability to understand the differences between geographies and sectors and where to invest and when to switch on and off different places, it’s just made it that much more complicated.
“You need to be that much more sophisticated, and I think that’s become more apparent to them.”
Baron says the well-publicised stress in markets created by over-leverage, high interest rates and “a lot of debt maturities happening in the next 18 months” is creating motivated sellers and owners who “need extra equity to be infused into their assets, which they’re looking externally for”.
For investors with capital available to invest today, and who are not overly hamstrung by issues associated with existing real estate assets, the playbook is clear.
“Very simply, you can invest in very high-quality assets, and get control of them or ownership of them from stressed or motivated owners that need the liquidity, which means you’re acquiring at very, very good prices, well below replacement cost, well, well below the peak pricing, at very high yields,” he says.
