P RO PE RTY IN PE RSPE C TIV E
issue 5 spring 2009
Credit crisis to economic crisis
> 1
Asset Management third parties
>13
Paris office market update
> 5
Regulation Dutch fund sector >14
Changes in Portfolio >16
Update on US apartment markets > 9
From credit crisis to economic crisis – How will real
estate do?
The knock-on effects of the credit crisis on the global real economy have deepened significantly since Q4 2008. The most significant risk for now seems to be an adverse loop
between the financial system and the real economy or, in simple terms, a systemic crisis.
Up to now, it seems that the vast majority of the
actions taken by governments and central banks
have been (i) to minimise the systemic risk in
the global financial system and (ii) to introduce
Keynes-like measures whereby governments try
to keep the economy going with infrastructural,
sustainability and education projects (economic steroids). In the meantime, downward
value adjustments of toxic assets on banks’ ba­
lance sheets have been going hand in hand with
capital injections by national governments. It
seems that no one at any government level is
really calling for a full write off of all troubled
balance sheet items in one go, because they
realise that such write-downs would lead to the
virtual bankruptcy of banks right away. Instead,
new routes are being sought to get toxic assets
off banks’ balance sheets and, at the same time,
stay away from transfer pricing on these assets
so that tax payers’ money is not wasted on poor
assets at high prices. This will be the challenge
for the period to come. Until balance sheets
have been entirely cleaned up, confidence
will remain shaky and bank financing unavai­
lable to businesses and private individuals. It
seems that even the US is considering typical
European-style steps like the nationalisation
of banks in order to regain confidence. By US
standards, there is little closer to communism
than nationalisation.
Global financial problems have made international relations between individual countries
overly clear. The US is the centre of the current
spring 2009
financial hurricane, with the effects of the decline in the US residential market infecting US
consumer spending, the global financial system and consequently, global consumer spen­
ding. We have tried to sum up the most striking
myths of the past couple of years that have now
all been debunked (without suggesting that we
did not believe in some of these statements at
some stage):
•• The wall of money still exists;
•• The euro is a safe haven in times of crisis;
•• Asia is an economic centre on its own, which is
hardly affected by outside influences;
•• The US trade and budget deficit is nothing to
worry about.
a number of interesting
m y th s i n th e r e al e s tat e
i n d u s t ry s e e m t o h a v e
back f i r e d as w e l l :
•• Everyone can be successful in real estate and
real estate shows stable returns;
•• Open-ended investment structures provide liquidity when you need it;
•• Alignment of interest between the Investor
and Real Estate Manager is not of great importance;
•• Gearing increases returns without changing
the risk profile.
It is easy to be cynical in these markets, but
we believe that is not the right attitude to get
through these difficult times. It all comes down
to being pro-active, making sure that the major
1
pitfalls are circumvented, not losing your head
or your confidence, not making long-term plans
beyond 6 months and staying in touch with your
investors, tenants and financiers.
We are often asked how the current global
trends will affect the real estate industry in the
long-term and what current market trends imply for the timing of making new real estate investments. Our answer is as follows:
the g lo b a l d e l e v e r a g i n g
curre ntly tak i ng p l ace
leads u s t o t h e f o l lo w i n g
concl u s i o n s :
•• All capital intensive industries like banks, insurance companies, pension funds, leasing
companies (cars, planes etc.), hedge funds,
money market funds, private equity funds,
real estate investment companies and real estate development companies will require asset
sales in order to stay solvent…;
•• …leading to a situation in which market reco­
very can only be slow instead of quick as ba­
lance sheet trouble in the capital industry is of
tremendous proportions…;
•• …radical changes to business models of many
capital intensive companies are also needed
Graph 1: Inflation rates in the US, Europe and Asia
Europe
Asia
US
7%
6%
Inflation rates
5%
4%
3%
2%
1%
0%
2004
2005
2006
2007
2008
2009
as many sources of revenue have nearly disappeared...;
•• …which in turn will lead to consolidation between players in almost the entire capital intensive industry…;
•• …and the market will operate with less leve­
rage in the future…;
•• …at least until the next bubble comes along
sometime in the future.
As has been said, being cynical does not help
anyone, as positive things should arise from
this crisis as well. There simply must be positive things…and there are already some positive
signs on the horizon. These signs are not telling
us that the worst is behind us, but they are tel­
ling us two things: (i) that most investors are no
longer able to postpone sale of (some) assets,
resulting in the start of substantial repricing of
the market and (ii) that we will probably have
a better understanding of what stage of the
downturn in the global economy we are in by
the second half of 2009. This would already be
a tremendous improvement compared to the
vacuum we are currently in. The positive things
we see happening are:
•• The US is undeniably the centre of the current global downturn, and will arguably be in
financial distress for a prolonged period on a
national, regional, company and consumer
level …;
•• …but the sound demographics of the US are
still intact and an improvement of the situation in the US will trickle through to the rest of
the world in time…;
•• … simple metrics like the monthly cost of
house rents in comparison to the cost of house
ownership seem to be providing for a bottom
in the US residential market…;
•• … which is already moving US renters back to
buying homes in US cities that have seen the
biggest hits…;
•• …which in turn will give US consumers some
of their confidence back once this becomes a
market trend…;
•• …and even Asia has learned that it is depen­
dent on the US economics, which will force
all the continents to work together in order to
solve the problems…;
Source: Global Property Research, Datastream
2
property in perspective
Currency clockwork
•• …and at the same time all the globally implemented national stimulus packages/steroids
will at some stage turn the current deflatio­
nary trend into an inflationary trend again…;
•• …implying that overgearing of the entire capital-intensive industry will gradually linger due
to rising inflationary trends…;
•• …and even real estate as an asset class will become interesting again relative to liquid asset
classes like equities and bonds as real estate
tends to perform better in an inflationary environment, even if economic growth remains
subdued for some time...;
•• …resulting in a number of new key driving factors since relative pricing is of no importance
at all anymore (the fact that a property is 25%
cheaper than last year does not really tell you
anything) and absolute return requirements
will become key again…;
•• … and last but not least, acquisition prices
can only be measured by comparing the acquisition price of a property to its replacement
cost (which is the cost of building the same
property from scratch), which has happened
in previous crises as well.
in what wa y w i l l r e a l
estat e c h ang e ?
1 Real estate will return to its ancient characteristics (who still remembers them?) Real estate as an asset class will return to its historic
characteristics of being an asset class driven
by a stable and generous cash flow, which
should again be in line with the specific risk
profile of the assets. What we mean is that no
one will be able to underwrite deals anymore
on the assumption of continuously rising
rents, continuously declining net yields, resulting in real estate investments that hardly
provide for any cash return anymore. In other
words, operational cash returns will become
of more importance than capital gains once
again.
2 Core real estate will be preferred by institutions Core real estate investments will become popular again at the expense of value
added (redevelopment of assets) and opportunistic (development of new assets) real estate investments. This will be especially true
for large institutional investors like pension
funds, endowments and insurance compa-
Figure 1: National stimulus packages
Large Stimulus Plan
Modest Stimulus Plan
Small Stimulus Plan
Source: Brookings
spring 2009
3
nies. All of these institutions need to recover
their balance sheet ratios for a period of years
and therefore simply need low risk investment
portfolios generating high, sustainable cash
returns. Their demand for core real estate will
therefore increase again substantially after
years in which core investments were least
preferred and were accused of being unsexy
and uncool.
3 Limited partner due diligence is a new field
of excellence Until the market faces reco­very,
investors will face trouble in their investment portfolios. Until then, investors will
focus their attention on limited partner due
diligence in both existing as well as new investments. An investor that seemed safe and
sound three years ago might be weak and insolvent now. This could lead to a situation in
which formerly renowned investors consider
defaulting on capital calls and look at ways of
putting their stake in an existing fund up for
sale in the secondary market. An interesting
anecdote in this respect is that rumours in the
market are that Calpers (amongst the three
largest pension funds in the world) might default on capital calls in their existing funds,
which is a sign of the times. We have heard
some institutions indicate that they might
shift their focus away from closed-end funds
with several limited partners towards single
investor mandates in order to make sure that
limited partner risk is no longer an issue in
future investment programmes.
4 HNW investors will lead the way once again
Due to the weak position of institutions, High
New Worth Investors and family offices acting
on behalf of high end private money rather
than institutional investors will become the
first to try to benefit from the opportunities
that the real estate market is undoubtedly
going to offer. This is exactly what happened
in the recovery of the savings and loans crisis
in the early 90s. Institutions will lag behind in
the recovery phase.
4
5 Views on leverage will change totally The
more leverage the better was the motto in recent years. It now seems that investors have
come to realise the detrimental effects of too
high leverage, which seems to have come
to some as a shock. We are already hearing
investors telling us that they are now consi­
dering only investing in new real estate funds
with only 0 – 30% leverage, whereas, until 12
months ago, the same investors told us that
60% leverage was too low. We believe that the
market view on which leverage levels are considered to be conservative is going to undershoot in the period to come. It will take some
time, but this will normalise again over time
as well. How much time is hard to tell.
we have summed up our
r e co m m e nd ati o ns to
investors on how to
b e n e f i t f ro m c u r r e n t
m ar k e t co nd i ti o ns :
1 Local demographic, economic developments
and acquisition prices will determine future
returns.
2 Absolute returns and acquisition price versus
replacement cost are the determining factor.
3 Track-record of the real estate Manager and
control over investments are crucial.
4 Invest in newly set-up funds instead of taking
over stakes in existing funds, as existing
funds have existing problems.
5 Be prepared to invest on an all-equity basis,
as refinancing can be done at later stage.
property in perspective
Odyssée building, Paris- Massy, France
Paris office market update
The Greater Paris, or Ile-de-France (‘IdF’), office market is currently suffering from similar
problems to many other major markets around the world. Last year saw weakening investor demand for office buildings and consequently rising yields. On the back of slowing
Gross Domestic Product (GDP) growth, rents have started on a downward trend since mid
2008. Gross take-up, a measure of leasing activity, is expected to decrease significantly.
As a result, some investors have drawn the conclusion that the IdF office market should
be avoided altogether. We will take a closer look here at the dynamics and unique characteristics of the IdF office market to assess how bad gross take-up is likely to be during the
next few years. In addition, we will comment on why we believe IdF deserves a second look,
unlike some of the other major markets in the current environment.
The slowdown in the global economy has resulted in a decrease in domestic and foreign
demand for French products and services. As
a result, France’s GDP decreased from 2.1%
in 2007 to 0.7% in 2008. Fewer financing possibilities, the result of the current credit crisis,
are threatening French businesses’ capacity to
invest and this is forcing them to downsize or
file for bankruptcy. As a result, take-up in the
IdF office market is expected to decrease significantly. Although we agree that take-up is most
likely to decrease significantly, we also believe
that because of IdF’s unique characteristics,
leasing activity will remain sufficient to support
investment.
The IdF office market should be assessed in the
light of its broader context. The area has a large
population of some 11.5 million people, and is
the economic, governmental and cultural centre of France. Economically, IdF is the sixth richest region in the European Union, and its GDP
is nearly as large as the entire Dutch economy.
The region’s office market is one of the largest
in the world. Its long term vacancy rate of approximately 5% is reflective of its desirable location and a result of its being one of the most
economically diversified regional economies of
any metropolitan area. The IdF office market
experienced its last major downturn during
the early nineties. Vacancy increased from approximately 2% to 10% by 1995. By 2001 however, vacancy had already come back down to
2%. Although this implies that IdF has not been
immune to violent cycles, the fact that vacancy
never topped 10% during the crisis of the nineties supports the general statement that IdF is a
very stable market, especially in comparison to
a large number of major American office mar-
spring 2009
kets, for instance, or the London or Amsterdam
office market.
Unique to France, office leases typically have
a 9-year term, with a termination clause at the
end of the 3rd and 6th year. Although landlordunfriendly, the typical relatively short term
means that most tenant improvements (which
most IdF tenants put in themselves) have not yet
fully depreciated after the 3rd or 6th year and as
such they give tenants the incentive to remain
in their premises until expiration – passing up
their right to terminate their lease early. In ge­
neral, it is safe to say that most occupiers remain
in their premises for at least 9 years. Our experience in the market is in line with this statement
– this is not to say that tenants will not try to
renegotiate their lease if the economics of doing so work in their favour. Today’s difficult economic environment may cause some tenants to
terminate leases a bit earlier, but in general we
do not expect vacancy to increase substantially
as a result.
During the last few years, substantial rent indexations have caused contract rents to significantly exceed market rents. This is the result of
office leases in France increasing annually by the
increase in the construction costs index (INSEE),
which has outpaced market rent growth during
the past 9 years. An illustration of this effect is
provided in graph 2. Contract rent for a tenant
who signed a lease in 2001 at the then applicable market rate, has increased by approximately
4.2%/year making a total increase of 33% by
2008. Currently, contract rent exceeds market
rent by over 30%.
5
Graph 2: Contracted Rent vs Market Rent
Market Rent
Contract Rent
430
410
Rent per sqm per year
390
370
350
330
310
290
270
250
2001
2002
2003
2004
2005
2006
2007
2008
Source: INSEE/Immostat
Graph 3: Gross Take-up
Period 2000 to 2008 (upper x-axis)
Estimate for peroid 2009 to 2017 (lower x-axis)
4,0
3,5
3,0
Million sqm
2,5
2,0
1,5
1,0
0,5
0,0
2000
2009E
2001
2010E
2002
2011E
2003
2012E
2004
2013E
2005
2014E
2006
2015E
2007
2016E
2008
2017E
Source: CBRE/The IBUS Company
The 12-year period 1997–2008 saw substantial
gross take-up in the IdF office market. On ave­
rage, take-up was 2.5 million square meters
during this period. In our view, there is a certain
6
inevitability that a large portion of businesses
that signed their leases during these years will
take the opportunity during today’s downturn
of reducing their total cost of housing by mo­
property in perspective
Eiffel tower, Paris, France
ving to a new location, especially if current landlords are not willing or able to offer substantial
lease incentives. We are already spotting a trend
of primarily larger occupiers (>5,000m2) star­
ting to quickly revise their corporate real estate
stra­tegy in order to improve their business efficiency and profitability. One example is that
of the LCL Group which has recently decided
to relocate from La Défense and the Central
Business District to Villejuif (part of the Eastern
Inner Ring).
It is typical in France that occupiers’ real estate
expenses are based on the lettable area to which
the common area of a building or part of it is
added. Business efficiency and profitability can
be significantly improved by moving to new or
redeveloped premises which have a higher ratio of net usable area. The layout of newly built
or redeveloped premises is more flexible, has
limited loss of space and circulation area and
is designed to reduce operational expenses to
a minimum while meeting environmental requirements. As a result, the area that can actually be used is significantly larger than in an
older building, of which there are many in the
central areas of IdF, and therefore the total cost
of housing can be reduced by 10% to 15%.
Based on IdF’s broader context, its lease structure (terms and indexations), historical gross
take-up and occupiers’ current preferences, we
forecast gross take-up for the coming years as
shown in figure 2.
Benoit du Passage, managing director of Jones
Lang Lasalle France (‘JLL France’) recently said
he expects take-up in 2009 to be approximately
1.8 million sqm. As shown, our forecast implies
a 25% decrease in take-up for 2009 compared
to 2008 (to approximately 1.8 million sqm as
well) and a further decline of 19% for 2010. For
Figure 2: Map Paris IdF
€ 127 per sqm
€ 138 per sqm
€ 196 per sqm
€ 189 per sqm
€ 411 per sqm
285€/m2
€ 258 per sqm
€ 529 per sqm
€ 412 per sqm
€ 318 per sqm
€ 220 per sqm
€ 392 per sqm
€ 206 per sqm
-/- 89% to -/-19%
-/- 6% to +7%
€ 127 per sqm
+15% to + 69%
€ 158 per sqm
+130% to + 445%
Average gross annual rent in
2008 per sqm per year
Source: Keops/Immostat
spring 2009
7
2011, we expect a recovery in activity levels with
a 25% rebound from the 2010 level. Although
this re­presents a substantial decline in take-up,
we feel that an average of 1.7 million sqm for the
years 2009 – 2011 is sufficient to view the entire
IdF office market as likely to show healthy takeup figures in the coming years.
We think that recent history is a guide for the
near future and a clear trend in demand flows
has already emerged during the past two years.
For instance, during 2008, demand for office
space in the Inner Ring (in which average rent
was approximately € 204 per sqm per year) increased by 122% whereas in the Paris Centre
West area, for instance, of which the Central
Business District is part and where rental rates
are among the highest in IDF, demand has
dropped by 38%. Graph 3 provides a more detailed overview of gross take-up growth during
2008 as compared to 2007 as well as year end
2008 average rental rates.
cost reduction and rationalisation of their businesses and these issues are expected to move
even further up the corporate agenda during
2009 and 2010”, adding that “there is a preference amongst occupiers at the moment for new
developments outside the centre of Paris […].”
The IdF office market has unique characteristics which clearly distinguish it from other major office markets around the world and within
France. The highly diversified and very large
economic base it represents provides a relatively
stable environment for landlords. In addition,
its dynamic character (tenants shifting from
one submarket to another within the city), the
result of lease structures in combination with
occupiers’ preferences, provides for a continued
sufficient level of leasing activity for landlords
to benefit from.
The eastern part of the Inner Ring as well as the
Western Crescent, the western part of the Outer
Ring (areas where more than half of the forecast new and redeveloped office buildings are
concentrated), will continue to be attractive for
tenants during the next two to three years due
to the availability of affordable and efficient office space. Take-up is thus likely to continue its
increase in these areas at the expense of ot­hers.
Du Passage appears to generally agree with
us, stating that “occupiers are being driven by
8
property in perspective
Lobby of Parkside Commons, Boston MA, United States
A, B & DC: an update on US apartment markets
Ever since the United States’ for-sale housing market started its most recent decline, its
for-rent apartment market, already in good shape, practically became the sole asset class
benefiting from the decline. However, as the pace of job losses increased and monthly
losses reached mindboggling heights, downside risk in the for-rent apartment market has
finally increased as well. We will give a brief update on the national market and comment in more detail on those for-rent apartment markets in which we are currently active:
“A”tlanta, “B”oston and Washington “DC”.
After peaking in mid-2004 at 69.2%, home
owner­ship in America declined to 67.5% by
the end of 2008. At first, as the total number
of households largely kept pace with the total
housing inventory, the decline in home ownership benefited the for-rent apartment market.
However, by the time the for-sale housing decline turned into a full blown crisis, the broader
economy had been affected and job losses of
approximately 4.4 million (and counting) since
January 2008 have started to affect renter psychology and alter near-term fundamentals.
Job creation is the key to a successful for-rent
apartment market, as jobs are a primary driver
of household formation, which in turn is the primary driver of housing demand. With job losses
now more severe than during the downturn in
the early eighties (-/-3.2% of total non-farm
jobs now versus -/-2.4% during 1981-82), new
household formation is slowing down dramatically, lowering demand for for-rent apartments.
The most recent data is now capturing this
decline in demand, as reflected by reported
increased vacancies (+ 90 basis points since
January 2008) and rare negative effective rent
growth in the fourth quarter of 2008 at an
annualised rate of 1.6% (the first q-o-q decline
since the first quarter of 2003). It is evident that
the for-rent apartment market has now joined
the retail and office markets in a downwards
cycle.
IBUS has historically focused on for-rent apartments in three major East Coast markets, each
with their own unique economic characteristics.
We will comment on how these markets are
holding up.
Graph 4: Unemployment rates
ATL Unemployment Rate
BOS Unemployment Rate
DC Unemployment Rate
US Unemployment Rate
7,0
6,5
6,0
Unemployment rates
5,5
5,0
4,5
4,0
3,5
3,0
01-11-2008
01-12-2008
01-10-2008
01-09-2008
01-08-2008
01-07-2008
01-06-2008
01-05-2008
01-04-2008
01-03-2008
01-01-2008
01-02-2008
01-12-2007
01-11-2007
01-10-2007
01-09-2007
01-08-2007
01-07-2007
01-06-2007
01-05-2007
01-04-2007
01-03-2007
01-01-2007
01-02-2007
2,5
Source: CBRE/The IBUS Company
spring 2009
9
atlanta, g a
As the hub city in the Southeast, Atlanta be­
nefits from a diverse economic base and has
emerged as a strong demographic growth city.
Over the next five years, demographic trends
are expected to remain relatively favourable,
with a­verage annual increases in population
of 2.52%, household formation of 2.41% and
income growth of 1.40%. However, Atlanta is
facing significant challenges in the current
economic environment, which may make these
forecasts hard to achieve. Through December
2008, the area’s unemployment rate stood at
7.6%, which already represents a significant increase of 310 basis points on a year ago.
The downside risk is that near-term job creation
remains negative as the recession continues,
which may push the unemployment rate significantly higher still. Even though the pipeline
is expected to slow by 54% in 2009, with land
plentiful and relatively affordable, few barriers
to entry over the years have enabled substantial
development. In addition, failed for-sale condominium developments in the last few years
have created a ‘shadow inventory’, placing further pressure on the for-rent apartment supply
as for-sale condominiums are being converted
to for-rent apartments.
As a result of the above, Atlanta has seen a spike
in vacancy to 10.2% in 4Q2008, compared to
8.2% a year ago. Added to that, it has seen annualised negative effective rent growth of 2.4%
in the fourth quarter, as rent concessions return to the market. We expect further job cuts
throughout 2009 (on top of the 91,000 jobs
lost in 2008) which will cause vacancies to rise
further and effective rent growth to turn more
negative in the near term.
Atlanta’s diversified economic base has its
benefits, but the lack of significant exposure
to growth industries makes the city a follower
rather than a leader in terms of job creation.
With unemployment in Atlanta closely mirro­
ring national trends in the last year, we believe
it is likely that Atlanta will undergo strain for
some time to come. Based on the above-mentioned dynamics of the area, its local economy
and where the area is today in terms of vacancy
and effective rents, we expect Atlanta to recover
more slowly than our other areas of focus and
thus represent less of an opportunity for investment in the short to medium term.
Graph 5: Vacancy rates
Atlanta
Boston
District of Columbia
US
11%
10%
9%
Vacancy rates
8%
7%
6%
5%
4%
3%
06Q1
06Q2
06Q3
06Q4
07Q1
07Q2
07Q3
07Q4
08Q1
08Q2
08Q3
08Q4
Source: REIS
10
property in perspective
Bellingrath, Buckhead, Atlanta GA, United States
Graph 6: Effective rents
Atlanta
Boston
Washington
US
1700
1600
1500
Rent per sf per month
1400
1300
1200
1100
1000
900
800
700
1999
2002
2001
2002
2003
2004
2005
2006
2007
2008
Source: REIS
b o sto n, ma
Unlike during the economic recession in 2001,
which hit Boston particularly hard when the
unemployment rate more than tripled from a
low of 2.0% to more than 6.0%, the area has
fared better in the most recent downturn. This
is largely due to Boston being relatively little exposed to those industries that are currently being hit hardest. Boston has diversified its local
economic base during recent years – lowering
its overall risk profile. But more importantly,
some of its major industries (most notably biotechnology, education and healthcare) are less
exposed (thus far) to extensive job losses in the
present downturn. The current unemployment
rate stands at 5.8%, not much higher than the
long term average of some 4.9% and reflective
of a less dramatic increase when compared to
the 2001 recession.
Historically, Boston has had relatively weak demographic fundamentals, especially population
growth. Relatively high barriers to entry (most
notably zoning laws and scarcity of land) have
however put some constraint on supply, kee­ping
the apartment market mostly ba­lanced (stable/
viable sector). It has resulted in a vacancy rate
spring 2009
lower than the national average. Vacancy currently stands at 6.0%.
We believe Boston’s for-rent apartment market
is relatively well positioned and should weather
the downturn better than Atlanta and the nation as a whole for that matter. In addition, a
strong recovery in terms of effective rent growth
is something that we would expect from Boston
as soon as growth of the broader economy picks
up pace again.
washin g to n, d c
Washington, DC remains the ‘golden child’
of U.S. cities during periods of economic distress. As the region’s largest employer by far,
the federal government should at least keep
employment growth in the region steady in an
otherwise weak national job market. Compared
to the nation as a whole, which experienced a
2.2% job loss in 2008, DC only suffered a 0.9%
job loss.1 In addition, the influx of new political jobs in the Obama administration will create
short-term job growth. A number of industries
are already adding to their ranks in the District
in the hopes of obtaining their share of the economic recovery spending proposal.
11
Currently, supply should only be affected by
previously announced construction projects
coming online and struggling condominium
projects. The for-rent apartment vacancy rate
currently stands at 4.8%, which we forecast will
only rise modestly, as we expect additions to
supply to slightly outpace demand. With supply
and demand thus expected to be reasonably in
check in DC, we expect effective rents to continue to rise, albeit at a subdued pace compared
to the strong growth over the last few years.
We expect the capital region to remain a strong
medium- to long-term growth area given its re­
latively stable employment base. The combination of turmoil in the credit and capital markets
and DC’s unique dynamics stemming from the
government’s presence in the area puts the area
at the top of our watchlist for investment in forrent apartments.
short u p d a t e o n t h e
cap ital and cr e d i t m ar k e t
The for-rent apartment market has not been
immune to the credit crunch, though it has
fared better than all other major real estate asset classes. If it had not been for the continued
lending by the government-sponsored entities
(GSEs), Freddie Mac and Fannie Mae, in 2008,
the residential market (both multi-family and
single family mortgages) would be facing a lot
more pressure. Year-end results are not yet avai­
lable, but mid-year results show that the GSEs
increased multi-family mortgage origination by
66% on the year before as conduit lending dried
up entirely.2 While the privately funded credit
markets will eventually return, credit from parties other than the GSEs is likely to remain incredibly scarce for the near term. By acting as
the only lender and consequently setting the
price (terms) of debt for for-rent apartments,
the GSEs are keeping pricing artificially low. As
a result, we continue to view the extent to which
the GSEs will carry on acting as the lender of first
and (practically) only resort as a downside risk.
co ncl u s i o n
Clearly, the risk profile of for-rent apartments is
changing as negative job growth is now getting
the best of the initial increase in demand, which
the for-rent market saw as a result of the fall-out
from the for-sale market. We expect cap rates to
continue to rise over the next few quarters as investors compensate for the increased risk.
While it is unlikely that the GSEs will pull back
entirely from the lending vacuum that currently
exists, it is imperative for private lenders to,
once again, enter the marketplace in order for
‘normalcy’ to return to the market. From a future
acquisition point of view we are highly aware of
the risks that come with this single source of financing (especially given Freddie and Fannie’s
lack of financial stability) and would advise
investors to think twice about overly relying on
pro forma exit yields based on this artificially
cheap financing still being around a few years
from now.
While it is true that recent job losses create
short-term pressure on the for-rent multi-family
market, we do believe that in some markets its
long term viability is less of an issue. As cap
rates continue to increase (which we expect they
will), we are confident that for-rent apartments
in strong locations, which achieve stable cash
yields early on in the investment, will become
available. For the time being, we are likely to focus most on the Washington, DC area in terms
of acquisitions, while keeping a close eye on
developments in Boston and Atlanta. The inevitable next upcycle is likely to present plenty of
opportunities. Consequently, in today’s ra­pidly
changing real estate environment, we think
‘Early is the new wrong!’
1 Source: Bureau of Labor and Statistics, Bank of
America Securities, Merrill Lynch
2 Source: Mortgage Bankers Association
12
property in perspective
Asset Management for third parties
All investment decisions made by The IBUS Company are based on extensive research. All
this research is done by the IBUS in-house research department. Real estate markets are
known for being driven by not only local demographic and economic trends but also local
cultural trends. IBUS performs these asset management capabilities on its real estate
funds and separate accounts. However, in these challenging times for real estate, IBUS is
being approached to perform these services also on portfolios, owned by third parties.
Property in Perspective is a good example of
IBUS research. In order to highlight the re­
levance of research to our firm, we believe that
sharing this knowledge with our clients leads to
better investment decisions in the longer term.
IBUS sheds light on new items and markets in
every edition of Property in Perspective. The
findings in Property in Perspective are outspoken and can be used as guidance for our own
internal investment decisions. The question of
why things are the way they are is the most vital
one in the IBUS research. This can also be des­
cribed as the ‘know why’ of real estate.
The research approach taken by IBUS for new investments can be summed up as follows:
Macro level: In order to determine whether or
not to invest in certain countries or sectors,
IBUS researches the economic and demographic development of the targeted area. More
important than just looking at the current state
of economic and demographic development,
is digging into what drives the current state of
the local economy and demographics of the
area. By doing this, the drivers of the growth
can be determined and thus the sustainability
of growth in the longer term. Vital questions
to be answered in this phase are: (i) What are
the main economic driving sectors in a certain
country? (ii) Is a country a net importer or net
exporter (has turned out to be of major importance in the current economic conditions)? (iii)
What are the demographics of the country (including the push from the countryside to the
city)? and (iv) How well financed are the central
and local governments?
also have a considerable impact on the understanding of an area.
Micro level: The analysis ends with a detailed
screening of tenant’s lists, property-related
costs and the long-term development of individual streets and neighbourhoods.
The entire analysis mentioned above boils down
to a clear picture of potential for future rents,
prices and positioning of individual property (or
properties) in their specific submarkets.
All this information is entered into a financial
model which includes all the income and expenses during the holding period of the assets.
This model forms the basis of all investment decisions taken by The IBUS Company.
IBUS offers these services to real estate owners
that are in need of a party that takes care of all
asset management related decisions on their
real estate holdings. The need assistance on asset management can be a result of changes in
the owner’s in-house team, changes in market
conditions etc. Asset management for third
parties comprises the whole process star­ting
from making strategic decisions to start investing in certain real estate markets, ma­king
the decision to in- or outsource day-to-day
property management and make a hold or sell
analyses for certain properties. For questions on
these services, please contact Pepijn Morshuis
at +31 (0)20 - 755 90 00.
Area level: This phase is similar to the macro
level. However, politically driven trends such
as the geographic direction(s) a certain city or
region will be growing towards over time if the
decisions of the local municipality are followed
spring 2009
13
Regulation of the Dutch real estate fund sector – Quo
Vadis
There has been a lively debate in recent years in the Dutch real estate fund sector on how
supervision and regulation of the sector should be taken care of. In this article, we have
tried to summarise which steps have been taken thus far, where things have gone wrong
and how regulation in the Dutch real estate fund sector could be achieved.
The Netherlands Authority for the Financial
Markets (‘AFM’) is the Dutch equivalent of the
SEC in the US and the FSA in the UK. The AFM
oversees all activities on the Dutch financial
markets. The goal of the AFM is to ‘improve
market transparency, create a level playing field
and make sure that the interests of investors (including private investors) are protected’.
In April 2005, the AFM published a study entitled “Vastgoed CV’s en maatschappen – Een
verkennende analyse” [Real estate limited partnerships and real estate partnerships – An exploratory study]. The conclusions of this study
were as follows: (i) information flow to investors
needs to be improved; (ii) there is anecdotal evidence of increased integrity risks in the Dutch
real estate fund sector (risks of insider deals
between directors and fund initiation firms,
excessive valuations of real estate in initiated
funds and disputed realism in projected fund
returns) and (iii) regulation of the sector should
be improved either through regulation by the
AFM or self-regulation or a combination of the
two. Under the legislation that existed in 2005,
the AFM could only screen real estate funds at
the gate (i.e. at the moment a new fund was
launched) after which no recurring screening of
the fund or the fund initiator was required.
This AFM study led to political involvement in
the Dutch fund industry from 2005 onwards in
the sense that politicians called for a code of
conduct for the Dutch fund sector. The intention was to achieve self-regulation of the sector
but if that did not work, new legislation would
be applied.
The debate in the sector has resulted in the
establishment of the Stichting Transparantie
Vastgoedfondsen (‘STV’) [Foundation for
Transparency in Real Estate Funds]. The STV
was an initiative by fund initiators: MPC (currently Hanzevast Capital), Annexum, Westplan,
14
Vastgoed Syndicering Nederland and The IBUS
Company. The mission of the STV is to operate
as an independent platform in the real estate
fund industry, screen prospectuses of newly
initiated real estate funds and improve transpa­
rency within the sector. All subscribers to the
STV agree to have all of their prospectuses reviewed by the STV resulting in a published opi­
nion by the STV.
Apart from the STV, two other initiatives were
launched to increase transparency in the sector: the Vereniging Vastgoed Fondsen (‘VVF’)
[Association of Real Estate Funds] and the
Vereniging Vastgoed Participanten (‘VVP’)
[Association of Real Estate Participants]. The
VVF was established by around fifteen, typically
somewhat smaller fund initiators, whereby the
VVF developed a number of reporting guidelines
and a plan for member’s product reviews. The
VVP in principle backs investor interests but is
open to membership by both investors as well
as fund initiators.
The AFM has had interaction with initiatives like
the STV and VVF from their inception. Arthur
Doctors van Leeuwen (the chairman of the AFM
until 2006) once stated that it is his belief that
self-regulation will be successful if 75% of all
initiators become members of the STV and/or
VVF. The Dutch real estate fund sector consists
of roughly 75 fund initiators of which 23 subscribe to the STV and 27 are members of the VVF.
Many smaller fund initiators have not become
members of either the STV or the VVF. Over time,
the co-existence of the STV and VVF could, in a
way, be regarded as competition to each other,
at least to the outside world.
Although a number of AFM requirements are
covered by the STV and the VVF, the AFM has
insisted on introducing a number of additional
items, which are beyond the scope of both the
STV and the VVF. One of these is the AFM’s in-
property in perspective
sistence on a procedure for investor complaints
and supervision on reporting on funds. Neither
the STV nor the VVF have the legislative powers
to enforce these requirements. It is important to
stress that the AFM has stated that it does not
see a role for itself as a regulator for the entire
sector as it is beyond its current mandate.
Early 2006 legislation in the Netherlands, the
Wet toezicht Effectenverkeer (‘WtE’) [Dutch Act
on the Supervision of the Securities Trade] and
the Wet toezicht Beleggingsinstellingen (‘WtB’)
[Dutch Act on the Supervision of Collective
Investment Schemes] changed things substantially. These changes have had a major impact
on the supervisory landscape for both real estate
fund initiators and real estate funds. The newly
introduced legislation is much stricter both on
fund initiators as well as on newly introduced
funds. Remarkably, at the same time, the 2006
legislation offers more opportunities to offer
fund products exempt of any supervision as
long as a certain set of rules is met. In practice,
this has led to a situation in which funds with
a participation size of EUR 50,000 or higher
are exempt of any supervision. This seems like
a strange situation which is hard to explain to
anyone. In the meantime, a number of fund
initiators, just like IBUS, has applied for permanent regulatory approval from the AFM and
has received that approval. These initiators have
voluntarily chosen to be subject to AFM supervision as this is regarded as a stamp of approval
in the market.
Since the new legislation was introduced in
2006, there has been a combined effort on the
part of the AFM, STV, VVF and VVP to achieve
full self-regulation of the sector. Although the
intention of this effort was pro-active, it turned
out that the proposed agenda was too ambitious. Too many items needed to be achieved at
too short notice, which turned out to be unre­
alistic as they need to apply to 75 fund initiators
in a very diverse sector. Added to that, the pro­
blems in the real estate market caused by the
credit crisis have led a number of fund initiators
to focus on other items like cost-cutting and increasing their scale of operations first instead of
impro­ving transparency. Moreover, the business
model of a number of fund initiators is tilted to-
spring 2009
wards capital-raising by means of a placement
fee at the start of a fund. Now that investors
are cautious about investing in new funds, the
affected fund initiators need to readjust their
business model. This removes the urge to work
on transparency at short notice as the economic
viability of the business model is of higher importance. As a result, coordination between the
AFM, STV, VVF and VVP has been suboptimal
and this platform backfired in December 2008.
Since December 2008, things have moved to the
point when the initial founding members of the
STV plus a number of large bank-affiliated real
estate fund initiators have returned to the table
again to screen what is needed to achieve regulation. These parties have funded the STV initiative so far. Creating an independent regulatory
platform is obviously a more expensive strategy
than creating a platform that relies on time and
energy from its members. The price for hiring
independent staff for an independent organization is simply higher. For every initiative, the
scale of operations is a relevant issue but this
is especially true for an independent platform.
In order to make the current initiatives like the
STV (and the VVF) more effective, the number of
contributing members needs to increase otherwise the risk is that future funding will become
an issue going forward. One important item to
improve transparency in the sector is screening
of directors. This could already have a positive
impact on the ‘shady’ image of the Dutch real
estate fund sector. Director screening is currently beyond the mandate of the AFM, whereas
this seems an issue which fits well to the role of
the AFM. Except of the director screening, the
above mentioned group will try to achieve the
additional requirements of the AFM of setting
up a procedure for investor complaints, procedure relating to disputes and supervision on
fund reporting. In order to make this happen,
the AFM and the Dutch legislator need to offer
their support as any attempts to regulate the
sector will stand no chance in succeeding without their help. Moreover, backing of fund initiators of either the STV or the VVF both morally as
well as financially is crucial as well. This shows
that a lot of work still needs to be done in order
to arrive to (self ) regulation in a fund sector that
shows such a wide diversity.
15
C HANGES I N P ORTFOL I O
During the last six months the following changes took place in the IBUS Real Estate Portfolio
United States
Disposal of Northwoods office building in Columbus, Ohio
This building was sold at the end of 2008 for a total amount of USD 5.25 million (USD 43.75 psf ). The Northwoods buil­
ding was acquired in 1997 for an amount of USD 9.36 million (USD 86 psf ). The building was part of a fund that owned
another office property in Valley Square in Minneapolis, Minnesota. In the years after acquisition, vacancy in the buil­
ding declined from 37% to 5% in 1999. Between 2003 and the moment of disposal, vacancy rates rose again to over 50%.
The primary reason for this vacancy was the fact that demand for office space was concentrated in the CBD of Columbus
instead of the suburbs, and the Northwoods building is located in the suburbs. The vacancy is therefore not expected to
decline in the short term.
Bad Doberan, Germany
Krijgsman 6
P.O. Box 8010
1180 LA Amstelveen
T. +31 (0)20-755 90 00
F. +31 (0)20-755 90 90
E-mail: info@ibus.nl
www.ibus.nl
United Kingdom
Disposal of high street shop in Dorchester, United Kingdom
This building was sold at the end of 2008 for a total amount of GBP 1.5 million. Based on an annual rental income of
GBP 88,000 (O2 is the tenant), the property was sold at a net initial yield of 5.54% (after transfer costs to the buyer of
5.6725%).
The IBUS Company is an independent group established
in 1992 by Onno Husken, former Chief Executive Officer
of Wereldhave N.V. and Kempen & Co. IBUS develops and
invests in office, retail, residential and hotel properties in
the United States, Europe and Asia. Since inception, 48 real
estate funds, with a total investment consideration in excess
of € 1.2 billion, have been introduced with private and insti­
tutional investors. Over the years, more than half of these
investments were successfully sold. IBUS also uses its real
estate knowledge and experience to advise financial institu­
tions, listed companies and institutional investors. These
The properties mentioned above are or have been part of investment funds for private individuals or institutional inves­
tors.
assignments are directed towards portfolio analysis, asset
allocation policy, investment strategy and second opinions
on direct and indirect real estate investments. IBUS is based
in offices in Amstelveen (The Netherlands), Washington DC
(United States) and Ho Chi Minh City (Vietnam).
16
property in perspective