MIPIM 2011 Wrap-up by Philippe Tannenbaum


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This comprehensive slideshow takes stock of the global economy, the real estate market, and the post-crisis recovery, and offers forecasts for the year to come. It also includes details of surveys conducted among MIPIM participants and the highlights of the week's keynote, including Boris Johnson and Nouriel Roubini.

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MIPIM 2011 Wrap-up by Philippe Tannenbaum

  1. 1. MIPIM 2011 – WRAP-UP<br />Real EstateInvestment Post-Crisis: <br />What have welearned? Whatisnext?<br /><ul><li>Philippe TannenbaumSenior Advisor, IEIF
  2. 2. François Ortalo-MagneRobert E. WangardProfessor of Real EstateWisconsin School of Business</li></li></ul><li> Risk aversion at a peak and the consequences of it<br /><ul><li>A Two-Tiermarket
  3. 3. Financing more difficult
  4. 4. Looking for the lowestvolatilities
  5. 5. Regulationreinforced and becoming a real threat</li></li></ul><li>A Two – Tiermarket<br /><ul><li>Due to uncertainty about the economy and a high aversion to the risk, the recovery has focused on the prime segment solely
  6. 6. This is true for all the markets which performed strongly
  7. 7. The US
  8. 8. The UK as well</li></ul>« Secondary property defined as the top quartile of regional offices by yield, as measured by IPD has been left behind in a recovery that has lifted the value of prime UK residential and commercial real estate: prices of secondary properties are 48% below peak levels, with no recovery in sight »<br /> Wall Street Journal – Feb 2011<br />
  9. 9. A two- tier market<br /><ul><li>And France</li></ul> Which offers a complementary approach through the stock market<br />Successful: pure plays only, big caps, prime offices and shopping malls<br />
  10. 10. How sustainable can a Two-Tier market be ?<br /><ul><li>Due to the uncertainties on the valuations of the secondary property, banks might decide to halt financing and refinancing that class of assets. Also, they might decide to sell their holdings in order to crystallize the losses.
  11. 11. New sales and lack of buyers due to the lack of financing: secondary property valuations might fall further.
  12. 12. There might be new covenants breaches.
  13. 13. Secondary assets still included in the investor’s portfolio’s: new losses still to come ? And consequently, new redemptions? Funds might have to sell prime assets in order to finance them, thus diffusing the fall</li></ul>Is the Two-Tier market leading to a Two-Steps crisis ?<br />
  14. 14. Financing more difficult <br /><ul><li>It is not the banks that created the problem
  15. 15. The problem came from the vanishing of the securitization and of the private equity</li></li></ul><li>Come-back of the private finance?<br /><ul><li>Recent launchings show a renewed interest from the private financing, mainly through mezzanine
  16. 16. But Mezzanine is risky</li></ul> Not the same access to<br /><ul><li>cash-flow
  17. 17. guarantees
  18. 18. Riskier financing in a risk averse environment means: Higher yields requirements, </li></ul>And at the same time: focusing on prime property<br />Is it realistic ?<br />Source: Prequin<br />
  19. 19. Looking for lower volatilities <br /><ul><li>High profitability means high volatility
  20. 20. Risk adversity means: looking for lower volatilities
  21. 21. Lower volatility means: lower profitability
  22. 22. The products do exist. The issue is: are investors prepared to enter these new territories ?</li></li></ul><li>Looking for lower volatilities <br />A perfect illustration: Switzerland, and the option for stability<br />
  23. 23. Low volatility, low performance:the model exists<br />GermanHousingprices: no risk, no return<br />
  24. 24. Lowvolatility, low performance:the model exists<br />German Commercial Property: more or less the same story<br />
  25. 25. Are investors prepared tothe new approach ?<br /><ul><li>France has an excellent product with its housing sector</li></ul>Low volatility<br />Fundamental support<br /><ul><li>However, there are no private investors in the sector –by example, there is only one Housing Siic
  26. 26. On the other hand, note that the US Housing Reits top performed in 2010: 47% of total return </li></ul>RPX – IEIF Index of prices in the residentialsector Paris / Ile de France<br />
  27. 27. Risk aversion: the Regulatory side<br /><ul><li>Under preparation at the moment are:</li></ul> Solvency II: Insurance companies solvability, <br />Basel III: Banks solvability and liquidity, <br />AIFM: Alternative Investment Fund Managers, <br />EMIR: Organisation of Derivatives Markets), <br />UCITS : Asset Management<br /><ul><li>And more to come:</li></ul>Green Paper on Pension System…<br /><ul><li>Supposed to come intoeffectrapidly; by example, Solvency: end of 2012 – beg. of 2013</li></li></ul><li>The Regulatory Side<br /><ul><li>What is behind the regulation:
  28. 28. the risk is measured , asset class by asset class, and translated into proportional capital requirements
  29. 29. also, there are disclosure and transparency requirements
  30. 30. Due to a low relative volatility, direct property will be favored for Insurance companies, as well as mortgage loans for Banks: there will be lower capital requirements for these assets
  31. 31. Nevertheless, for the banks, capital requirements could be higher for secondary property. This could accelerate the disaffection for that part of the property sector and the movement of freeing up the balance sheets</li></li></ul><li>The Regulatory Side<br /><ul><li>Indirect property:
  32. 32. the funds status is not yet clear( or understandable)
  33. 33. the listed property sector will be treated as part of the stock market, supposed to be the most volatile, therefore the most capital requiring. This could lead to reductions in the insurance companies’ holdings
  34. 34. In France, an IEIF calculation indicates that 1/10th of the market cap of the listed property companies could have to come back from the insurers’ portfolios. This is not really significant, but this could cap the market prices
  35. 35. Due to the new reporting requirements, all actors will have to bear heavy additional costs</li></li></ul><li>The bigger picture:Debt still a major threat<br /><ul><li>The public debt remains too high, in all advanced economies
  36. 36. On the long term, this could reveal unmanageable
  37. 37. There are two solutions
  38. 38. Repayment : a heavy burden, with a risk of recession and later, due to the lack of cash, a risk of deflation. The worst case scenario for real estate
  39. 39. Inflation: real estate friendly (but not for the listed sector, which will have to absorb the rates increases)</li></ul>Source: IMF / Soc. Gen.<br />
  40. 40. The outlook<br /><ul><li>The case for a positive outlook
  41. 41. The case for a less positive outlook
  42. 42. Recovery in the prime segment
  43. 43. Private finance seems to be back
  44. 44. Secure products are available
  45. 45. Regulation: good for property
  46. 46. Inflation is good for the real estate
  47. 47. A Two-Tier market is a threat for the market as a whole
  48. 48. Private finance : not realistic
  49. 49. Secure products: where are the takers?
  50. 50. Regulation: bad for indirect property
  51. 51. Inflation is bad for the stock markets
  52. 52. Deflation is a real threat</li></li></ul><li>As a Judge of Peace<br /><ul><li>The VIX Index : The higher the index, the more stressed the markets
  53. 53. It is interesting to notice that the Index is currently trading at some relatively low levels. Those are far from the levels reached in crisis times.
  54. 54. In other terms, the markets seem to be confident for the future</li></ul>Source: CBOE<br />