Value-add, repricing, ESG: Takeaways from MIPIM RE-Invest


30 / 03 / 23 - 9 minute read

MIPIM RE-Invest: an unparalleled opportunity to understand investors’ thinking in the current economic and geopolitical climate.

As part of PATRIZIA’s participation at this year’s MIPIM earlier this month, the company acted as one of the sponsors of the RE-Invest programme, which provides an opportunity for representatives from sovereign wealth, pension and insurance funds, family offices and others to debate investment strategies in a closed-door environment.

Mahdi Mokrane, Head of Global Investment Strategy, Research & Investment Solutions at PATRIZIA, took part in the debates and says that delegates were asked a simple question: what is keeping you awake at night? “One of the common answers was dealing with uncertainty, particularly around inflation, interest rates and market volatility,” he says. “I describe the situation as a ‘permacrisis’.”

According to Mahdi, many RE-Invest participants recognised that this had changed in how some investors regard risk. “Many investors, consciously or unconsciously, are moving from an objective way of looking at risk to a more subjective way,” he says. “Emotions now increasingly taint judgement.”

That was, in part, predictable. After all, the rapid economic and geopolitical changes seen last year came off the back of an uncommonly long period of low interest rates and a global pandemic. “Inflation surprised everyone, which then, of course, led central banks to act,” says Mahdi. “Investors believe the Fed [Federal Reserve System] waited too long to react and did too little in the beginning and then did too much in the back end; that is to say now.”

Market volatility

From a purely real estate perspective, the situation led to market volatility, with most markets - particularly the UK - undergoing significant repricing. However, as delegates assembled in Cannes, it was already clear - and would become all the more so during the week - that rapid rises in interest rates were also causing havoc in the banking sector and pressuring financial stability.

Silicon Valley Bank’s collapse, the causes of which are still being debated but are overwhelmingly likely to include the rate rises, created a domino effect. “It was just a domino of small regional banks that just couldn't cope,” Mahdi reflects. “They were not really regulated in the same way as the systemic banks and, for a variety of reasons, became very exposed to interest rate hikes.”

The situation led to many investors asking themselves what the real value of their assets actually is. It isn’t an easy question to answer, especially at a time when it isn’t clear when and where prices will settle. “What is fair value today?” asks Mahdi. “What view do you take on the different components of risk? How do you price risk, particularly when transactional activity dries up?”

These are pressing issues for investors that largely rely on acquiring assets and watching them accrue capital value. However, Mahdi says he drew some comfort from PATRIZIA’s positioning relative to many of its peers. “We have very much focused on protecting returns of the assets we already manage and culling portfolios when markets were still hot,” he says. “What we now need to build on is the value creation side of our business and capture market opportunities. Let's focus on solutions.”

 

What we now need to build on is the value creation side of our business and capture market opportunities.

Mahdi Mokrane

Rare opportunities

Participants in the RE-Invest debates were also on the lookout for solutions. Those with significant ‘dry powder’, for instance, knew that the current repricing presents significant opportunities. One investor commented that in London there is the opportunity to acquire significant commercial assets at a better price than for best part of the last 15 years.

Mahdi comments: “Some markets, such as the UK, adjust very quickly. That’s happened again as it did following the global financial crisis. We saw it in Q4 last year and we'll see it in Q1 this year. The indexes have moved very sharply. Q4 was the biggest adjustment in capital values ever seen. Continental Europe is traditionally slower to adjust, but investors actually prefer a quick adjustment because it provides greater clarity and provides more confidence to put capital back to work.”

Others are looking at different strategies. “Many investors also find comfort in alternative property types,” Mahdi says. “Think about student housing. Think about senior living. Think about affordable or mid-market affordable residential. Prices may be coming down, but that conversely means that the cohorts of renters actually increase in periods of uncertainty and when mortgage rates rise. Also, the demographics aren’t going to change any time soon.”

The ongoing rise of ESG

Finally, participants in the RE-Invest programme at MIPIM agreed that investing in assets with strong environmental, social and governance (ESG) credentials provides an ongoing opportunity, no matter what is happening in the wider economy in the short- to medium-term. “There was no question about acknowledging the importance of ESG,” Mahdi says.

On the one hand, investing in new, future-proofed buildings seems like a safe bet. So too does investing in retrofit programmes to bring existing stock in proven urban centres up to the standard required by modern occupiers. However, Mahdi says that there was an acknowledgement that the numbers are more difficult to stack up elsewhere because of the high complexity and costs of retrofitting assets.

“Given the cost of CAPEX [capital expenditure] and the quantum of spending, what's going to happen to the other 90-95% of the stock that is not prime?” he asks. “In central Paris, London or Munich, you can spend capital and you'll get a very decent return in a decent period of time, so it works in terms of your cash flows. But if you were in suburban Paris or in another secondary European market, that's just not going to stack up.”

He adds: “There was an acknowledgement that something needs to happen to make that equation add up. There was a perception that ESG regulation just doesn't work today. Something's got to give and we should be ready.”

 

According to Mahdi, many RE-Invest participants recognised that this had changed in how some investors regard risk. “Many investors, consciously or unconsciously, are moving from an objective way of looking at risk to a more subjective way,” he says. “Emotions now increasingly taint judgement.”

That was, in part, predictable. After all, the rapid economic and geopolitical changes seen last year came off the back of an uncommonly long period of low interest rates and a global pandemic. “Inflation surprised everyone, which then, of course, led central banks to act,” says Mahdi. “Investors believe the Fed [Federal Reserve System] waited too long to react and did too little in the beginning and then did too much in the back end; that is to say now.”

Market volatility

From a purely real estate perspective, the situation led to market volatility, with most markets - particularly the UK - undergoing significant repricing. However, as delegates assembled in Cannes, it was already clear - and would become all the more so during the week - that rapid rises in interest rates were also causing havoc in the banking sector and pressuring financial stability.

Silicon Valley Bank’s collapse, the causes of which are still being debated but are overwhelmingly likely to include the rate rises, created a domino effect. “It was just a domino of small regional banks that just couldn't cope,” Mahdi reflects. “They were not really regulated in the same way as the systemic banks and, for a variety of reasons, became very exposed to interest rate hikes.”

The situation led to many investors asking themselves what the real value of their assets actually is. It isn’t an easy question to answer, especially at a time when it isn’t clear when and where prices will settle. “What is fair value today?” asks Mahdi. “What view do you take on the different components of risk? How do you price risk, particularly when transactional activity dries up?”

These are pressing issues for investors that largely rely on acquiring assets and watching them accrue capital value. However, Mahdi says he drew some comfort from PATRIZIA’s positioning relative to many of its peers. “We have very much focused on protecting returns of the assets we already manage and culling portfolios when markets were still hot,” he says. “What we now need to build on is the value creation side of our business and capture market opportunities. Let's focus on solutions.”

 

What we now need to build on is the value creation side of our business and capture market opportunities.

Mahdi Mokrane

Rare opportunities

Participants in the RE-Invest debates were also on the lookout for solutions. Those with significant ‘dry powder’, for instance, knew that the current repricing presents significant opportunities. One investor commented that in London there is the opportunity to acquire significant commercial assets at a better price than for best part of the last 15 years.

Mahdi comments: “Some markets, such as the UK, adjust very quickly. That’s happened again as it did following the global financial crisis. We saw it in Q4 last year and we'll see it in Q1 this year. The indexes have moved very sharply. Q4 was the biggest adjustment in capital values ever seen. Continental Europe is traditionally slower to adjust, but investors actually prefer a quick adjustment because it provides greater clarity and provides more confidence to put capital back to work.”

Others are looking at different strategies. “Many investors also find comfort in alternative property types,” Mahdi says. “Think about student housing. Think about senior living. Think about affordable or mid-market affordable residential. Prices may be coming down, but that conversely means that the cohorts of renters actually increase in periods of uncertainty and when mortgage rates rise. Also, the demographics aren’t going to change any time soon.”

The ongoing rise of ESG

Finally, participants in the RE-Invest programme at MIPIM agreed that investing in assets with strong environmental, social and governance (ESG) credentials provides an ongoing opportunity, no matter what is happening in the wider economy in the short- to medium-term. “There was no question about acknowledging the importance of ESG,” Mahdi says.

On the one hand, investing in new, future-proofed buildings seems like a safe bet. So too does investing in retrofit programmes to bring existing stock in proven urban centres up to the standard required by modern occupiers. However, Mahdi says that there was an acknowledgement that the numbers are more difficult to stack up elsewhere because of the high complexity and costs of retrofitting assets.

“Given the cost of CAPEX [capital expenditure] and the quantum of spending, what's going to happen to the other 90-95% of the stock that is not prime?” he asks. “In central Paris, London or Munich, you can spend capital and you'll get a very decent return in a decent period of time, so it works in terms of your cash flows. But if you were in suburban Paris or in another secondary European market, that's just not going to stack up.”

He adds: “There was an acknowledgement that something needs to happen to make that equation add up. There was a perception that ESG regulation just doesn't work today. Something's got to give and we should be ready.”