Over two days at the end of May, European property professionals gathered for IPD's European conference with an agenda to discuss how real estate markets had reorganized after the crisis which started almost three years ago and how they were positioned for new opportunities and challenges ahead.
But the mood among the 200-plus delegates, from the Netherlands, Germany, France, UK, Southern Europe, South Africa and the US, at Amsterdam's Okura Hotel were less optimistic in light of the latest economic shock to markets namely, the debt crisis engulfing Greece.
This was the 12th IPD European conference, but the first event hosted in partnership with IPE Real Estate. At the inaugural IPD/ IPE Real Estate Congress 2010, European institutional investors, private investors and sovereign wealth funds gathered to challenge some of the 'sacred cows' of the property investment market and put forward an eclectic range of challenging papers.
Greek tragedy casts doubts over recovery
Chairing the conference for a fifth consecutive year, Piet Eichholtz, Professor of Real Estate Finance at Maastricht University, set the context for the two-day event with a more current focus. "It did appear that the tough times where behind us, but then Greece happened, so the question is now whether there is real recovery or whether what appears as a recovery in some markets is in fact a mirage," Eichholtz posed to delegates in his introduction. "If it exists, how do we profit from it; who will profit from it and by doing what?"
Prior to the events of the last month, Sabina Kalyan, head of European strategy at CBRE Investors argued that up until a month ago, there was "an incipient rental recovery nothing fantastic given that the economic recovery was going to be weak, but lending was starting to unfreeze and then the Greek crisis happened". IPD/ IPE Real Estate Congress 20102010 In the conference's opening session, Kalyan elaborated to delegates: "The eurozone is about to enter a period of deliberately engineered fiscal deflation and that any economic growth forecast that you have seen that wasn't made in the last week is very, very optimistic to put it as kindly as possible and the chances of a doubledip recession have increased substantially."
But the debt issues facing Greece are not just a one country, or indeed European, problem, she insisted. "We are now entering a period where the restructuring of public sector balance sheets is going to be the dominant driver of macro economic and capital market trends."
The need for the unprecedented transfer of bad debt from the private to public sector balance sheet was in part due to poor underwriting, argued Allianz Real Estate head of investment strategy Joe Valente, which he said had "reached an all time low in 2007". When the recovery started to manifest itself, investors seeking leverage had a thin market at best to source debt from and "with the British and Irish banks out of the market, the pool of European banks was restricted to just the German and large Spanish players," said Kalyan.
Prices driven by liquidity, not fundamentals
Kalyan said she was amazed more forced sales had not occurred and that this was a "complete frustration for those of us who are equity investors who want to get back in the market". She continued: "This has led to very bizarre pricing with yields really being compressed for prime assets and a historically very wide gap between prime and secondary yields."
Kalyan asked delegates to consider whether the prime-secondary yield differential accurately reflects greater leasing risk or whether it reflects the fact some investors are "just paying silly prices for prime".
Market prices, Valente argued, are driven by liquidity, or lack of it, not fundamentals. "In every single market and sector whether New York offices or Singapore retail there is liquidity on the way up, but it is when things begin to turn that the mystical substance 'liquidity' disappears just when you need it. It is that which drives pricing, together w