Real estate investments that proffer high returns will always have appeal. Unfortunately, the siren song of that elusive alpha sometimes leads to dubious decision making and warped perceptions of risk. That became all too evident at the peak of the most recent cycle when leverage — and the overuse thereof — became the primary tool of opportunistic fund managers and investors. In the post– Lehman Bros bankruptcy world, however, investors are faced with a very different investment environment.
From the Current Issue
Recent years have shown the limitations of econometric forecasting that most property funds and their advisers have become accustomed to using. Foresight scenario techniques, on the other hand, provide us with a different way to understand the future. Every day, we are faced with uncertainties ranging from pandemics — will swine flu or something worse sweep the world? — to climate change — will extraordinary weather events flood our homes or underground railways? — or financial meltdown — will a recession eventually lead to a financial depression?
Institutional investors in international commercial real estate have one key objective: to perform transactions with satisfactory risk-return ratios. They look globally to achieve their goals and in many cases set their sights on emerging regions, attracted by high growth expectations and diversification prospects.
During the past four years at KTI Finland, I have had the privilege of being involved in the annual INREV management fees and terms studies; these examine the fee structures and levels found in European non-listed property funds. Although much has changed between 2007 and 2010, many of the issues that were relevant then remain so today. From the fees perspective, the non-listed real estate fund market in Europe remains diverse in its practices, both in the number and nature of the fees charged and in the bases on which those fees are charged — making comparisons between investment vehicles challenging at best.
Real estate has always been one of the most attractive investments, and Ukraine is no exception. The domestic property market in this European emerging nation is heavily under-developed in all the sectors — office, retail, industrial, hotel and residential. The main driver behind the skyrocketing of prices before the crisis of 2008 was the lack of quality properties, and on some measures the Ukrainian market was one of the most expensive in Europe.
Despite the uncertain economic outlook, there has been a strong rise in mergers and acquisitions (M&A) activity across world markets in recent months. Some deals have gone through, some have failed or been rebuffed, and some are still in play. Various reasons have been put forward for this higher incidence of M&A activity — a return of confidence and a willingness on the part of investors to put their heads back above the parapet, high cash balances and historically low borrowing costs, and a feeling that it’s time to go shopping, to take out competition. But the principal rationale for M&A activity at any level is usually the search for efficiency gains and synergies through consolidation and economies of scale, and efficiency gains often come at a price.