When the real estate world descended on the Croisette in Cannes this March, the economic, political and financial challenges currently impacting global investment infused the espresso-filled conversations throughout the week. The MIPIM annual conference covers all aspects of the property world including; presentations on integrating ESG criteria into investments, round tables on the future of the office and expert views on how technology will impact our built environment, to provide just a few examples. While the value of such cannot be under-stated, it is the individual meetings between investment groups and advisors at small café tables where the most valuable insights are gathered and long term relationships are built. Year on year, MIPIM attracts more senior ranking members of global teams and this year, drew investment groups from as far away as Japan, further bolstering the reputation of the event.

I had the pleasure of attending MIPIM along with our colleagues Alex Foshay and Joe Morris from the Newmark Inc. International Capital Markets team. Some of the key takeaways from our meetings are outlined here.

The Real Estate Barometer

By way of background, the private commercial real estate [CRE] market is one which is woven into the fabric of the broader economic, interest rate and financial markets. However, the long-term nature of CRE’s investment horizon means that valuations adjust to external conditions at a slower rate. On one hand, this provides CRE investors with more time to make decisions, while on the other, the long-term horizon of such decisions adds further weight to the underwriting required.

On a macro level, there was some optimism at MIPIM that inflation had peaked. It was acknowledged that it would take some time for inflation to return to a level that central banks are actually comfortable with but that interest rate hikes are already slowing. There was a sense that future stability in interest rates, albeit at higher levels than the recent past, will enable smoother underwriting and should narrow the bid-offer spreads seen in CRE in the last 12 months.

CRE debt strategies were one of the central themes this year. An increasing number of large investment groups, even those which have historically invested for higher returns, are now launching debt funds. This trend is driven by the desire to capitalise on the estimated €150 Bn of real estate commercial loans that will require refinancing in Europe by 2025. For incumbent lenders, debt covenants are coming under pressure and refinancing terms are tightening the availability of debt to borrowers. Higher yields, larger margins and lower leverage are creating a favorable environment for new lenders. This is providing opportunities for private credit / alternative lenders and also for preference equity investors to provide solutions for shortfalls in the capital stack.

Direct CRE equity investments remain a focus, albeit the volume of deals is lower than the historical average. The quantum of pension fund capital that can invest in direct real estate is currently limited by the denominator effect. This is where the underlying fund criteria has a set % value of the fund that can be invested into direct real estate, relative to equities, bonds, alternatives, etc. However, a number of core investment groups representing other forms of long-term investment capital are continuing to remain active, particularly in some northern European cities, where asset repricing has moved faster than in other jurisdictions. Assets that are being priced to sell, are providing good buying opportunities for active cash buyers and from a seller’s perspective, it is encouraging competitive tension in bidding processes to maximise value. Underwriting is of course more difficult in the current environment. The most experienced groups are combining their macro, economic and financial forecasting teams with fundamental CRE assessments to source the best deals.

What, Where and Why

The priority asset classes that investment groups are interested in currently are:

– Living sector – including PRS and student accommodation

– Industrial and logistics – serving large core markets

– Select office – in prime city centre locations with top ESG ratings and strong tenant profiles

Those familiar with the challenges in the US office market, particularly on the west coast where tech sector redundancies have been most prevalent, might be surprised to hear that European office investment remains a key focus. In Europe, the post-COVID return to office has been stronger and fundamentals appear more sustainable. There is a sense that the pendulum will swing back to a hybrid environment with many sectors bringing people into the office at least 3 days per week to increase revenue, efficiency, and innovation. The caveat being, that to attract the best staff, companies will need to provide the best quality office space and amenities in the most central locations. This direction of travel will play through in core office investment strategies and will drive the environmental upgrading of secondary stock in prime locations.

Certain niche investment groups are keen on the life sciences and hotel sectors where they have in-depth knowledge of the sectoral trends. Not surprisingly, retail investments were rarely mentioned throughout the week. Retail has become a more complex sector for investors as the leasing environment has shifted to a risk share model between landlord and tenant and requires greater specialism from the landlord.

Residential – PRS and build to sell housing – remains a core and defensive asset class in many locations due to supply demand imbalances. A number of groups we spoke with are looking to make platform investments into large scale development & asset managers with strong pipelines. This is something which will be of particular interest to those in the Irish market as we continue to source solutions to the housing crisis.

In a European context, transactions are currently happening in locations where liquidity is greatest and asset owners have been either required to, or have decided to, sell at a new price level. This includes for example the UK and certain cities in northern Europe and the Nordics. Investment groups are positive on Irish real estate from a macro-economic and investment location perspective. Many must weigh the relative pricing to other locations and the % allocation of their funds to Ireland as a whole. That said, we are likely to see increased investment appetite in Irish CRE in the latter half of 2023. This will continue to include investment groups seeking large ticket majority and JV opportunities with top tier promoters in the market.

Going Forward

Through the EU Taxonomy and the SFDR regulations, the Environmental, Social and Governance [ESG] minimum criteria for buildings and those that occupy them, are taking hold faster than many expected. Examples of how this is manifesting itself include the following, to name a few:

– Capital providers setting minimum ESG standards on Investment and Fund Managers

– EU regulations soon requiring banks to only lend against assets exceeding set building ratings

– Corporate mandates requiring carbon impact assessments of a service provider’s full business to pass prequalification stage

In Europe, ESG is now a core part of the corporate ecosystem. Real assets including each business’s building or tenancy will come under the microscope going forward. The CRE industry has positioned itself through regulation to ensure new assets align and exceed these targets.

This is a brief summary of some of the main take-aways from MIPIM 2023. Clients navigating the volatile external forces and direct CRE industry challenges require in-depth advice and insight. While real estate fundamentals will always be core to decision making, the wider impact of financial markets and global economic trends are crucial elements of the process.

At Cantor Fitzgerald, along with our colleagues in Newmark Inc., the group’s combined investment banking and real estate expertise, positions us to provide best-in-class capital markets and financing solutions for clients. Our experienced global team welcome the opportunity to discuss any real estate, capital markets or financing needs that you may have and can provide further insights on solutions that are available.