What’s Ahead for Global Real Estate?
What’s Ahead for Global Real Estate?
Matt Malone, Privcap:
Hi, I’m Matt Malone from Privcap. I’m very happy to be joined today by Sean Bannon of Zurich Alternative Asset Management, Aureon Herron-Hinds from RSM, and Peter Merrigan of Taurus Investment Holdings. Welcome.
Unison: Thank you.
Malone: Here we’re talking today about the globalization of real estate capital. I’d like to take a little time to talk about the macro picture for the next 12 to 18 months. What’s the opportunity set going forward? What do we think things will look like in supply and demand? And what’s your outlook for the next year and a half? Peter?
Peter Merrigan, Taurus Investment Holdings:
From a real estate perspective, the outlook for the U.S. is still pretty positive, depending on the sector. We’re spending a lot of time still investing in multi-family and industrial, which a lot of other people are doing as well, but there’s still good demand and dynamics there. In some markets, there’s a bit of oversupply, particularly in the multi-family space, but for the most part supply seems to be relatively on track. So, we still think there are good opportunities from that perspective. From the perspective of the foreign investor, what we’re seeing is that they first start out looking at what are the opportunities at home? And if they are in a market where they’re making a lot of money and there’s good returns and that type of thing, then the U.S. becomes less attractive. If they’re in a market where there are very low returns available, then the U.S. becomes more attractive. So, I don’t think we’re going to see a very significant spike in interest rates in the U.S.—I think it’s going to be fairly stable in near term. With the 2% to 2.5% treasury rate, that it’s still an area where there’s positive investment dynamics for our foreign capital coming into the States. And it’s a good yield alternative, relative to what they’re seeing in Germany, for example, where you have negative interest rates.
Malone: Sean? What’s your outlook for the next year, year and a half?
Sean Bannon, Zurich Alternative Asset Management:
We remain really constructive on U.S. real estate, generally. I think the supply and demand fundamentals are very good, broadly speaking. Obviously, there are pockets of supply, and certain product types that are pretty remarkable and need to be underwritten very, very carefully. And we’re trying to do that in a few different spots, probably more in the multi-family side than any other.
On the fundamental side, it’s very, very good. On the capital side, I think it’s very difficult to look at the pricing today and really take issue with it. There’s no question but that it’s expensive. But, if you look at what yield expectations are from equity sources, and what still continues to look like very responsible debt being originated, we don’t have the same kind of either interest rate environment or underwriting standards that we had during the last cycle. I think you can draw a lot of comfort from that.
Merrigan: Something else we’ve noticed in the last, I’d say, 12 to 18 months is what I would call a flattening of yield expectations with investors from different countries. We have about 15 different countries that invest with our firm; investors from 15 different countries that invest with our firm. The yields have come down, the expectations have come down across the board, and I think it’s just really a lack of alternatives anywhere else. So, it’s fairly consistent, regardless of where they’re from or what their expectations are at this point.
Malone: Aureon, do you anticipate a busy next 12 to 18 months, meaning that the activity you’re seeing in an advisor capacity [will continue], as it has for the past couple of years?
Aureon Herron-Hinds, RSM:
Absolutely. I think that will continue and I’m happy it will continue. One of the things, though, that I think is certain from a U.S. perspective is that there will be tax reform. And, in thinking about that, I think we’ve all agreed that there is not much of an expectation that there will be a tremendous impact on what we’re seeing with respect to investors in the real estate market and in funds themselves. But, as investors continue to invest through funds and not directly in real estate and as foreign investors continue to invest through fund vehicles, the expectation is that there will be increased enforcement of these regulations that require the automatic exchange of information.
For that reason, I think that in the future we can expect that there will be more exchange of information, more enforcement of that exchange of information. And that investors won’t be moved by the requirement and that, eventually, they provide that information.
Malone: Peter, what markets outside the U.S., if any, do you think might increase as an attractive spot for foreign capital or pick up in the next 12 to 18 months?
Merrigan: Some of what we’ve seen recently is that, with the dollar having gained strength, you know you’re starting to become more attractive for U.S. investors. We have a lot of U.S. investors as well. And we invest into Germany, so I see pretty good demand from the U.S. clients who go to Germany. Also, perhaps to the U.K., although with Brexit still ongoing, there’s a bit more uncertainty there. But there’s definitely interest. I think you’re seeing a big wave of Asian capital coming to London now. We have a significant investment in London that we are in the process of selling right now and it seems that most of the buyers that are showing up appear to be from Asia. I think that will continue. The last thing I will say is that, after a long time of being down, the emerging markets are finally starting to come back. And interest is starting to turn in that direction.
Malone: Sean, what are your expectations, in terms of other markets?
Bannon: Here, I’d say in the U.S.—we’re pretty U.S.-centered, but I think the house view where we do invest internationally is pretty consistent with a lot of the surveys you see out there in [places] like the U.K., London and Madrid. I think Berlin, Amsterdam and at least three Australian cities have shown up recently pretty high on the list in terms of Brisbane, Melbourne and Sydney. It’s not something that I spend time on personally, but based on what I’ve seen and heard, I think certainly Europe seems like a very attractive spot right now to make an investment, given where Europe is in its cycle.
Malone: Aureon, from a tax and regulatory front, can you talk a bit about tax reform? Are there any other things that you think are sort of the short-term horizon that are relevant to the real estate investor?
In terms of tax reform, the one thing that’s certain is the uncertainty itself, right? So, I think that, as the administration unfolds, the plan here in the U.S.—we’re anxiously waiting for something that we can really wrap our arms around, but the reality is that, on a go-forward basis, there will be some changes. [For example], decreases in certain tax rates. Investors should think about the deductibility of interest and where that may lead.
I keep going back to withholding requirements and what they will be in the enforcement thereof. It’s still a very real consideration, where you could potentially have exposure for potential withholding in places and for things that you weren’t previously required to withhold onto.
Merrigan: I’m a general partner and we do withholding for our clients. We’re required to and it’s common practice for us. What I’m curious about though is if they usually withhold at the maximum rate before they figure at the time of sale. What would be a change that would be more attractive from that standpoint? Because once the money is sent back, it’s generally not going to come back into the U.S., so there’s reason for the withholding. What would you anticipate might be that change?
I think that, as we think about treaty provisions where we could previously take advantage of treaty rates with other countries—
Merrigan: So, reducing the withholding rate?
Reducing the withholding rate from 30% down. Currently, under the Foreign Account Tax Compliance Act, it’s either 30% or it’s nothing. And we don’t recognize those reduced treaty rates for FATCA purposes. We do under other provisions, like chapter three of the U.S. Internal Revenue Code, where you can take advantage of a reduced treaty rate. The concern there, though, is will other countries follow suit? While I’d like to say that we’ll see reduced withholding, the reality is that there will be withholding going forward. And we can only hope that—as these rules are refined and as things are better defined on a go-forward basis and more standardized globally—there will be a consensus.