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Senior Editor, Real Estate Jonathan Brasse [email protected], +44 20 7566 4278 Editor ISSN 1558–7177 • VOLUME 16 • ISSUE 8 • OCTOBER 2020 Evelyn Lee [email protected], +44 20 3640 7511 Senior Reporters Arshiya Khullar [email protected], +1 212 796 8324 Kyle Campbell Insight Cover story [email protected], +1 646 545 4428 Reporters Christie Ou [email protected], +852 2153 3247 2 26 Merle Crichton US election Private real estate [email protected], +44 20 7566 5470 Has Chinese capital been beaten Eugenia Jimenez watches as Trump and Biden face off out of Western markets? [email protected] +44 20 8194 2997 Predictions Brookfield’s Flatt Senior Special Projects Editor Strained geopolitical relations Graeme Kerr sees bids at higher valuations 6 have pushed Chinese foreign [email protected], +44 20 3862 7491 Data centers direct investment in private real Special Projects Editor Helen Lewer ADIA powers Gaw’s vehicle 8 estate to historic lows. Yet not all [email protected], +44 20 7566 5478 PERE Japan Korea Week Chinese investors are stopping Contributor Stuart Watson Due diligence issues top their activities in the West Managing Editor, Production: Mike Simlett investor concerns 10 Production Editors: Daniel Blackburn, Diversity How LaSalle is building a Adam Koppeser more diverse recruitment pipeline 12 Copy Editors: Eric Fish, Nicholas Manderson Art Director: Mike Scorer High-flyers The appointments Head of Design: Miriam Vysna and promotions that matter 14 Senior Designer: Lee Southey EDITOR’S LETTER 16 Designers: Denise Berjak, Pio Blanco Head of Marketing Solutions, Real Assets Group: Performance Welcome to the Nick Hayes ‘equitization’ of private real estate 18 [email protected], +44 20 7566 5448 Marketing Solutions Manager: Net leases Fast becoming Annie Liu real estate’s bond replacement 20 [email protected], + 852 2153 3843 Subscriptions and reprints Diversity Kalsi’s BentallGreenOak [email protected] has set a hard bar on diversity 21 Customer Service [email protected] Editorial Director, US: Rich Melville Editorial Director: Philip Borel Analysis Director, Product: Amanda Janis Interview Director of Research and Analytics: Dan Gunner Managing Director, Americas: Colm Gilmore 22 Managing Director, Asia: Chris Petersen How much are flex office 34 Chief Commercial Officer: Paul McLean assets worth now? Brookfield’s contrarian view Chief Executive: Tim McLoughlin The covid-19 crisis has accelerated Chief executive of real estate Brian two different shifts in how properties Kingston tells PERE why the $550bn with a space-as-service component manager remains keen on retail and will be valued New York offices For subscription information visit Roundtable: Germany stays perenews.com resilient, but future worries persist Capital watch 48 German real estate has, so far, ridden out the pandemic. But managers are In memoriam Marc Mogull on keeping a wary eye on the impact of how Trish Barrigan ‘was all about economic distress still to come 40 empowering people’ 52

October 2020 • PERE 1 ext month’s presidential US election Private real estate contest carries watches as Trump and Biden significant implications for square off US real estate Ninvestment, particularly considering the two final candidates’ conflicting primarily, from the threat of policies on capital gains and like- views on taxation and housing tampering, but Trump’s refusal kind exchanges, and only modest creation, writes Kyle Campbell. to promise acceptance of the changes to carried interest rules. “This is the most important outcome has fueled speculation. The TCJA also created the Qualified election we’ve seen in the last 20 As a result, 90 percent of real estate Opportunity Zone program, which years, specifically as it relates to real professionals surveyed by the law has been a boon to real estate estate,” says Craig Bernstein, chief firm Morrison & Foerster in July felt investors and developers. investment officer at Washington, he would do something other than Biden, on the other hand, vowed DC-based manager OPZ Capital. agree a quiet transition of power in to raise taxes on individuals making As the election nears, the outcome defeat. more than $400,000, corporations is too close to predict, especially in a “We saw that in 2000. It was landscape radically upended by the peaceful,” Ailman says of a covid-19 pandemic. Polling suggests contested election. “Obviously, there Democrat Joe Biden maintains a was some excitement in Florida. modest advantage in the popular But the markets managed through vote, but Republican incumbent it because they were not looking at Donald Trump is within striking such extreme points of view as we distance in several key states that are today.” could swing a winning outcome. For investors, the greatest concern Stark differences going into November 3 is not that At face value, Trump’s stance on one candidate or the other emerges taxation appeals more to real estate victorious, but rather, that neither investors. The signature achievement side concedes defeat. Christopher of his first term, the 2017 Tax Cuts Ailman, chief investment officer and Jobs Act, made temporary of the California State Teachers’ cuts to personal and estate taxes, Retirement System, flagged the and permanently slashed the possibility of a contested election corporate rate from 35 percent to during the pension’s September 21 percent. Real estate gained from board meeting. The worry stems, the preservation of longstanding

2 PERE • October 2020 Insight

and long-term capital gains for Most real estate executives do not expect Trump to leave quietly (%) those earning $1 million-plus. He 0 10 20 30 40 50 would also end the 1031 exchange program for real estate, which Leave claiming rigged results allows sellers of property to avoid paying taxes on their proceeds by Challenge in court then leave on time rolling them into another property investment. Bernstein, whose firm Refuse to leave focuses on tax-based strategies, says this could have a chilling Leave peacefully effect on transactions. “If 1031 exchanges were to be eliminated, Other the effects would be widespread,” he tells PERE. “Not only would real Source: Morrison & Foerster estate investors need to revisit their overall investment strategy to ensure it conforms with the revised administration. In early August, Barry over 10 years to grow the national tax code, but over the long term, Sternicht, chief executive of Miami housing stock. This includes we would also see a significant Beach-based Starwood Capital, providing support to rent-burdened decrease in overall investment sales told investors that the former vice- tenants, expanding the Low-Income transactions.” president’s proposals to end 1031 Housing Tax Credit, a critical Jeff DeBoer, head of the Real exchanges would have minimal financing component for affordable Estate Roundtable, the industry’s impact on his firm. “It isn’t required. housing investors, and giving direct top advocacy group, tells PERE It isn’t helpful and it’s unique to assistance to first-time home buyers. that while Biden’s plan to use tax real estate,” he said. “That’s an easy Trump, despite his storied career increases to finance social programs loophole for them to fill. I’ve never in the real estate industry, does not is “well intentioned,” it would be an used it in my life, by the way, so I have a formal plan for housing. This area of concern if he were elected. have never been affected.” summer, he said policies aimed at He says: “We look forward to having Biden is likely to find more increasing multifamily development that debate.” industry support for his plan to in low-density areas would “destroy Not everyone in the industry address affordable housing, which the suburbs,” which is out of is as concerned about a Biden calls for spending $640 billion step with the industry’s effort to remove barriers to new housing This is the most development. “If we want a more “ equal-opportunity world and society, important election we can’t be opposed to these kinds of things,” DeBoer says. “It’s all about we’ve seen in the last having the opportunity to educate 20 years, specifically yourself and be exposed to every opportunity that everyone else is. If as it relates to real you can’t live in certain areas, you don’t get that. So, I did not find [the estate ” president’s] comments or actions on this front appropriate.” Craig Bernstein OPZ Capital Industry preferences While private real estate professionals have made individual contributions to each campaign, the industry’s senior leaders have, by and large, remained on the sidelines this election cycle. One noteworthy

October 2020 • PERE 3 Insight

exception is Blackstone chief a continued divided government. MOST• READ executive Stephen Schwarzman, “Just like in a business, university or who donated $355,000 to the Trump any type of governing structure, if News also trending on Victory Fund this election cycle, everybody has the same opinion, PERENews.com last month according to online filings with it might not be as well informed as the Federal Election Commission. it could be,” he tells PERE. “If you Overall, he has spent $3.9 million can get things done in a divided n Round Hill in €200m multifamily backing Republican candidates. government, the policies tend to be first close Blackstone chief operating more sustainable over time.” The residential manager’s European officer Jonathan Gray, on the other Residential Income Fund II garnered hand, has donated more than $1.1 Volatility ahead commitments from pension funds, million to Democrat political action While the long-term implications insurance companies and asset committees. However, he has of the election remain to be seen, managers across Asia, North America avoided candidates at the top of market participants can expect a and Europe. ticket, aside from a $2,800 donation slowdown in the weeks ahead as to the short-lived campaign they wait for the fallout. of former Colorado governor Lisa Knee, a head of the national n GLP’s first open-ended private John Hickenlooper, a moderate private equity real estate group logistics vehicle Democrat. at accounting firm EisenerAmper, Launched at the end of 2019, GLP Related Companies chairman says sales activity always hits a lull Japan Income Fund is currently the Stephen Ross, an active donor who ahead of presidential elections. She largest such vehicle in the country, says this year is likely to be worse having reached ¥280 billion because of the disruption brought ($2.6 billion; €2.3 billion) in assets on by the pandemic. “In any election under management to date. cycle people are going to look at their overall investment strategy $640bn and business strategy, and they’re n Ceberus’s head of international Size of Joe Biden’s especially doing so today because real estate dies proposed housing plan of everything else that’s going on,” Ron Rawald, senior managing she says. “People are looking at their director and head of international back of house and making sure real estate at Cerberus Capital drew criticism for his friendship they have a disaster recovery plan Management, died in August, at 56. with Trump, skirted the presidential in place with the infrastructure to contest too. His donations total execute it.” almost $200,000 to candidates and In his address to the CalSTRS n Nuveen raising second Euro PACs from both parties, according to board, Ailman said he expects open-ended logistics fund the FEC, though the lion’s share has volatility to pick up by mid-October, Since the fund’s launch in July, the gone to Republicans. especially in the public equities firm raised €250 million of equity Firms that run their own PACs markets. Overall, the pension will so far from German institutional have taken a similar tack, donating adopt a “defensive” approach while investors. to both sides. The Carlyle Group, continuing to take advantage of for example, has raised nearly opportunities created by monetary $430,000 this cycle, according to the policy. n How US banks have kept non-partisan Center for Responsive “These markets are at all-time alternative lenders afloat Politics, distributing $46,000 highs, mostly due to the Federal The alternative lending market in to Democrats and $17,500 to Reserve and this put [option] the US has so far weathered covid- Republicans running for the House they’ve almost put on the market,” 19. As PERE’s sister publication Real of Representatives. he said. “It will be challenging, and Estate Capital explored in a deep The Real Estate Roundtable also we will have longer discussions dive analysis, US banks have been spends its own PAC money on a with the committee…and then a accommodating debt fund lenders bipartisan basis. DeBoer says an ideal lot of communication with you in by offering flexible terms, including outcome for this election would be October.” ■ holidays for their own credit lines.

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Predictions Brookfield’s Flatt sees bids at higher valuations

rookfield Asset Management’s Despite market uncertainty, the last quarter became the firm’s strongest-ever fundraising period chief executive Bruce Flatt (AUM, $bn) Bexpects the low interest rate environment to bode well for private 600 market assets, particularly real estate and infrastructure, reports Arshiya Khullar. 500 In the firm’s second-quarter earnings call in late August, Flatt 400 said just in the previous few weeks, he was starting to “see bids for real estate and infrastructure assets at 300 higher multiples than pre-covid.” In March, the US Federal Reserve 200 cut interest rates to near zero to support the economy during

the coronavirus pandemic. In its 100 September meeting, the Federal Reserve also said rates would remain 0 near zero until the economy reaches Q2 2016 Q2 2017 Q2 2018 Q2 2019 Q2 2020 full employment and inflation tops 2 percent, which economists believe Source: Brookfield Asset Management’s quarterly reports could take four to five years. “With a zero-interest rate environment here and it increasingly Fundraising boost opportunities. It is going to enhance looking like it will be here for five Alongside higher valuations, the real estate, infrastructure and all the years-plus, this will also have a benefits of low rates also extend to products that we offer.” meaningful impact in a positive way stronger fundraising momentum Brookfield Asset Management on the real assets that we already as institutional investors look to raised $23 billion across various own,” Flatt said. “The majority of increase their non-fixed-income pools of capital, including $12 billion our assets today have long-term, allocations to meet their return for its latest flagship distressed credit fixed contracts, either long-leased objectives. fund, making the second quarter property, contracted power or utility “The floodgates have only started the firm’s strongest-ever fundraising or utility-like assets. And with interest to open, and the reason is that if period. The fundraising momentum rates dropping, the value ascribed you are trying to earn 5-8 percent also included a €725 million first to these cashflow streams increases within an institutional pool of money, close for Brookfield Premier Real significantly.” there really is no hope to do that Estate Partners Europe, a European with traditional fixed income,” he perpetual core-plus real estate explained. “And as a result of that, fund. Brookfield’s total assets under other than holding cash for liquidity management have increased to “ The floodgates purposes or short bonds for liquidity approximately $550 billion, up from purposes or some form of long $519 billion in Q1 2020. ■ have only started to bonds just for safety, all other pools of former fixed income allocations open ” are going to come to lower risk Read PERE’s interview with Brookfield Property Partners’ Brian Kingston about Bruce Flatt alternatives, and therefore that is Brookfield Asset Management the firm’s approach to troubled real going to enhance private credit estate sectors amid covid-19 from p. 34

6 PERE • October 2020 Across the globe. Across the table.

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Data centers The big numbers ➔ ADIA powers Reducing investment numbers, office occupancy levels creeping northward and first closes were Gaw’s vehicle “Research shows among the numbers to stand out in the last month that diverse teams generate better aw Capital Partners has performance, corralled $1.1 billion for so there’s no Ga data center platform in downside to China, writes Christie Ou. The Hong increasing $11.6bn Total foreign investment into the US in H1 2020, according to CBRE Kong-based private equity real estate diversity, it can manager is seeking to capitalize on only be positive” growing internet usage and data storage in the country after the Alfreda Delle, outbreak of covid-19. managing 55% director of LaSalle Alongside that capital haul, PERE Year-on-year drop in revealed last month how the firm’s Investment Number127 of new hotels projected to global hotel transactions Management, on open in Canada in 2021, according in H1 2020, according Internet Data Center platform was to RCA the importance to a March report by Lodging expected to grow to $1.3 billion Econometrics of building a in the coming weeks. Gaw has not more diverse publicly disclosed the target size of recruitment the vehicle. pipeline. PERE further understands $10bn the United Arab Emirates-based Target size of GLP Japan Income Fund, sovereign wealth fund Abu Dhabi launched by logistics specialist GLP Investment Authority is the largest Ups of up to five global investors in the platform. & Two sources said the capital has downs been fully committed to five projects. Amount€200m raised by residential manager Round Hill Capital for Targeting an opportunistic return of the first close of its European Residential Income Fund II over 20 percent, the IDC platform “We can’t recover can be invested in both development until people projects and existing assets in China. actually return to Gaw declined to comment on New York. That the platform’s fundraising progress won’t happen until and its return target. But Christina the people who work in our offices Size of Brookfield’s$5bn Retail Revitalization Program, Gaw, managing principal and head come back” aimed at steadying distressed retail companies of capital markets for Gaw Capital Partners, said: “The demand for data In a Wall centers has been accelerated after Street Journal the outbreak of covid-19 and the article, Related 41% market has obviously become more Companies chief Occupancy levels for the $6bn competitive than before.” executive flexible office space sector in Volume of South Korea’s retail Europe as of July, according Jeff Blau calls for transactions as of September 1, “We are fortunate to be one of to Workthere according to RCA. the earlier batches of real estate New York workers managers to enter the market and to to return to their be able to partner with top operators offices. in the country.” ■ ➔ For more on private real estate perenews.com Capital raised€120m by Swiss Life Asset Managers for its new European industrial and logistics fund

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Participants in PERE Japan Korea Week in Strategy polarization September discuss Investors have further polarized their how they have been coping with preference for sectors and strategies the fallout from the since the outbreak of covid-19. The pandemic pandemic has accelerated investors’ interest in logistics and data centers, for instance. Meanwhile, they are further shying away from retail and hospitality, which have been directly impacted by lockdown restrictions. In terms of strategy, PERE Japan Korea Week Due diligence investors are either embracing the strategy “with highest stability” or issues top investors concerns “highly leveraged and speculative strategies,” says Lee. This also corresponds to POBA’s approach lthough real estate more severe for Japanese investors, of constructing its portfolio with investment volumes in which have traditionally been very core and opportunistic investments. AAsia-Pacific dropped 32 “process-oriented,” according POBA is looking at the residential percent in the first half of 2020, the to Masaki Arimura, executive sectors in the US and Japan for safer region is expected to be the first to director at PGIM Real Estate. He returns, and has recently invested in recover, with a gradual loosening of believes time allowance is critical distressed property loans. lockdown measures and restrictions, for Japanese investors to feel according to JLL, writes Christie Ou. comfortable in making investments Switching from equity to debt Meanwhile, the number of covid-19 during such an unprecedented With today’s macroeconomic cases continues to spike elsewhere, time. uncertainties and due diligence led by the US with close to 7 million challenges, some investors with confirmed cases. In September, Importance of managers lower risk appetite are switching more than 300 delegates around Given their inability to conduct from real estate equity investments the world gathered online for PERE’s on-site due diligence, investors to debt issuance or infrastructure first virtual conference, PERE Japan have become more reliant on projects. For example, Japan’s Orix Korea Week, to discuss how they managers for overseas investments Life Insurance paused its first real have been coping with the impact of to address the uncertainties of doing estate equity fund commitment the pandemic. Here are the event’s business in foreign markets. “We earlier this year due to the pandemic four key takeaways. believe the pandemic will bring and invested the capital into debt/ new revenue and new risk to the infrastructure products instead, Due diligence market. But we don’t have enough according to Kiyosei Sugioka, head The inability to conduct physical due resources to figure out everything. of alternative investment at Orix. But diligence due to travel restrictions It’s more practical to have your fund he noted the insurer will continue remains the top concern for both managers handling it,” said Takeshi to monitor the situation and resume South Korean and Japanese Ito at Japan’s AISIN Employees’ real estate equity investments once investors. Janghwan Lee, executive Pension Fund. Harry Song, head the pandemic stabilizes. “They don’t director, head of the alternative of overseas real estate at South need to do site visits and they can investment division at South Korea’s Korea’s Public Officials Benefit communicate with managers online Lotte Insurance, said the proposal Association, also planned to work for debt investments,” said Doyle of “untact” – or contactless – due more closely with managers for Kim, managing director and head diligence was disapproved by the overseas investments going forward. of the real asset investment finance local financial authority. “We saw The investor is currently in talks to department at Hana Financial this as a window to buy quality set up separately-managed accounts Investments. He also agreed that assets at discount prices,” he said. and Song expects this to be the investors can return to equity “But we received negative feedback main channel for the firm’s overseas investments with managers once the from the authority.” The issue is even investment next year. pandemic subsides. ■

10 PERE • October 2020 CREATING VALUE IS ALL ABOUT HAVING THE RIGHT VISION

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Diversity How LaSalle is building a your parents weren’t in it, you have no clue. If your parents didn’t own a more diverse recruitment pipeline commercial building, if your parents didn’t own a house, they probably just didn’t know.” aSalle Investment Management has committed Scholarship program Lup to $500,000 to building its The idea for the LaSalle Real Estate pipeline of Black and Latinx recruits, Scholarship for Black and Latino Kyle Campbell reports. minorities stems from the national The Chicago-based manager reckoning over racial inequity in the has created a five-year program to US brought on by the high-profile provide college sophomores from police killings of Black Americans those underrepresented racial this year. Delle, who is also deputy groups with $10,000 scholarships portfolio manager for LaSalle’s and a mentor from the firm’s flagship, open-end US Property executive team. Alfreda Delle, Fund, noted the current spotlight LaSalle’s managing director who on these issues inspired LaSalle oversaw the creation of the initiative, to seek ways of making a tangible said the goal is to bring on at least difference. “Now is the time to not one scholar per year as a summer just talk about [racial inequity], but intern and ultimately hire them into to act. In forming this scholarship full-time positions. program, we thought about what “When we think about increasing “ Now is the time could be impactful now and in the diversity and improving recruitment, long run as well.” it’s really about exposure, as well,” to not just talk about LaSalle granted scholarships Delle tells PERE. “We wanted to start [racial inequity], this fall to one student at each earlier on, before individuals have participating institution, including entered their careers, while they’re but to act ” Roosevelt University in downtown still in their studies, and expose Chicago and the historically Alfreda Delle them to commercial real estate as an LaSalle Investment Management Black colleges of Morehouse option.” and Spellman in Atlanta, where LaSalle has been trying to a webcast called The Diversity LaSalle has another office. Given diversify its ranks since 2014, when Pipeline Challenge to address the the emphasis on mentorship – it launched its Growth Through struggles of attracting minority scholars must have at least quarterly Inclusion program, which has had applicants in real estate. Jeffrey contact with their mentors – Delle more success advancing women Hayward, head of multifamily at the said proximity was a bonus for than minorities. This disparity has government-backed lender Fannie those schools, but not a necessity. been common among private real Mae, said one reason few Black The fourth school is Florida A&M, estate managers. While the share of graduates are drawn to real estate a historically Black university in women in leadership positions grew is because the sector is historically Tallahassee, Florida. modestly from 12 to 16 percent insular. “Our business is a fascinating Delle said the firm hopes to between 2017 and 2019, according and rewarding business, but most add more universities throughout to the National Association of people don’t know it,” he said. “If the country and award as much Real Estate Investment Managers, as $100,000 per year. She added the share of top executives who that LaSalle views the initiative as identify as Asian or African American a broader recruiting tool beyond remained stubbornly low, at 4 those who participate directly in percent for men and 2 percent for $500K the program, in that one student’s women. Amount LaSalle has committed to positive experience with the firm will Earlier this summer, the National Black and Latinx recruiting help to improve its reputation more Multifamily Housing Council hosted broadly. ■

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overseeing acquisition, financing High flyers The appointments and and sale transactions. promotions that mattered in private n CBRE real estate in the past month Rita Wong joined as head of valuation and advisory services and consulting businesses across Greater China. She replaces Danny BlackRock Mohr, who has been promoted into the newly-created role of head of Marcus Sperber, the former global head international valuations, Asia-Pacific. of BlackRock’s real estate business, has Wong has over 27 years of industry founded NorthCroft Capital, a London- experience. Previously, she was head based property investment and advisory of Hong Kong-Macau valuation business. NorthCroft Capital will undertake advisory services at JLL. balance sheet investing alongside partners and provide strategic business n CPP Investments management advice to real estate-related Deborah Orida has been named investment managers and property head of real assets at the Canadian companies. Before starting his new venture, pension, replacing Edwin Cass, who Sperber had spent more than 17 years at Blackrock. was promoted to chief investment Prior to being made global head of real estate, he was head of the officer. Orida joined CPP in 2009 firm’s EMEA real estate business and a portfolio manager of its UK and has held a number of senior property fund. Sperber will run the new platform with co-founder David roles since, most recently the global Bearman. Bearman is also the co-founder of London-based property head of active equities. Before that, investment firm Firefly Capital, where he leads its real estate investment she was head of private equity activities. in Asia and head of relationship investments internationally.

n Amundi Asset Management of experience in real estate and has n INREV Dominique Carrel-Billiard, the worked at Partners Group, Deutsche Iryna Pylypchuk has been appointed deputy chief executive officer of Bank, PGGM, GIC, Morgan Stanley director of research and market the French asset manager, has and Westbrook Partners. information, replacing Henri Vuong taken over the firm’s real and who is leaving after six years. alternative assets unit after the n CA Pylypchuk joins INREV from Fidelity departure of former head Pedro Jimmy Hwang and Jesse Ostrow International where she was a Antonio Arias. Carrel-Billiard was have been named executive vice- senior market analyst. Prior to this, managing director of La Financière president of investments and senior Pylypchuk spent over a decade de l’Echiquier before joining Amundi vice-president of investments, as director of EMEA and global in 2016. respectively. Joining from JLL’s research at CBRE. equity advisory team, Hwang n Bouwinvest is responsible for investment n La Française Real Estate Bert van den Hoek has been named management activities across the Managers senior portfolio manager at the medical office and life sciences Philippe Depoux has been Dutch pension investor. He will division, as well as the firm’s appointed chairman, taking over head its New York City satellite industrial and residential verticals. from Marc Bertrand. In his new role, office to strengthen the investor’s The former chief investment officer Depoux will develop and diversify presence in North America. The of medical real estate investment the group’s real estate business in pension manager plans to increase platform MedProperties Group, France and internationally. He will investments in the region by $350 Ostrow is responsible for defining oversee all real estate business million to $2 billion by the end of and implementing the firm’s line activities as well as the group’s 2022. Hoek has over three decades vertical’s investment activities and innovation platform. ■

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Hong Kong 19F On Hing Building 1 On Hing Terrace Central Hong Kong n the geopolitical front, China has remained a fixture in global news T: +852 2153 3240 headlines, with its high-profile deteriorating relations with the US and PERE its clashes with pro-democracy protestors in Hong Kong. The world’s Published 10 times a year by O PEI Media. To find out more about second-largest economy, however, is taking a markedly different tack with its real PEI Media visit thisisPEI.com estate investment activities in the West. Gone, for now, are the days when China was snapping up glitzy office towers, © PEI Media 2020 luxury hotels or vast logistics portfolios at record-shattering prices in the US and No statement in this magazine is to Europe. But that does not mean what had been one of the most significant sources be construed as a recommendation to buy or sell securities. Neither of overseas capital in US and European this publication nor any part of it real estate has gone away, as this may be reproduced or transmitted “ Chinese investors in any form or by any means, month’s cover story reveals. Chinese electronic or mechanical, including investors are now pursuing more low- are not the juggernaut photocopying, recording, or by any information storage or profile property transactions, opting for force they once were retrieval system, without the prior smaller ticket sizes and assets in non- permission of the publisher. in private real estate. Whilst every effort has been core, non-gateway markets. made to ensure its accuracy, the This under-the-radar style of publisher and contributors accept But that by no means no responsibility for the accuracy investing has a couple of major of the content in this magazine. implications for the private real estate indicates they have Readers should also be aware that external contributors may market. First, it means more Chinese been inactive ” represent firms that may have capital will be directed away from an interest in companies and/or their securities mentioned in their prominent destinations like the US, UK and France, where regulatory hurdles or contributions herein. other factors will make property investment more challenging. The beneficiaries Cancellation policy You can will instead include smaller, but more receptive, markets in Europe, such as cancel your subscription at any countries that have partnered with China on its Belt and Road Initiative. time during the first three months of subscribing and you will Second, the private real estate market can no longer expect Chinese investors receive a refund of 70 percent to continue to be trophy hunters. Indeed, sellers can no longer expect these of the total annual subscription fee. Thereafter, no refund is institutions to help drive up pricing for assets by outbidding the competition. available. Any cancellation request Chinese investors are not the juggernaut force they once were in private real needs to be sent in writing to the subscriptions departments estate. But by no means does that indicate this capital source has have been inactive (subscriptionenquiries@peimedia. in the sector – only that it is staying out of the spotlight for the time being. com) in either our London or New York offices.

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Evelyn Lee

16 PERE • October 2020 B:211 mm T:205 mm S:185 mm

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Performance Welcome to the The logistics sector continues to benefit from the shift to ‘equitization’ of private real estate e-commerce, robust demand for a range of distribution facilities, as well as the continued availability of long-duration leases backed by high-quality credit and attractive demand drivers. In addition, the residential sector benefits from the Expert analysis by Dr Paul Kennedy, managing director, relative stability of demand drivers JPMorgan Asset Management compared to offices and retail, as well as strong diversification benefits. Although leases are he covid-19 crisis has led to of market pricing and characteristics typically short, underlying cashflows speculation over temporary of the asset class. are stable. Tand permanent changes to In the office sector, an increase the underpinning factors that drive in home working may result in An adapted approach returns on real estate assets. We may occupiers reconsidering space Real estate always had the ability be seeing an evolution where more requirements and their procurement. to play multiple roles in portfolios. real estate return characteristics start While the jury is out on the impact Given its inherent diversity, the asset to resemble the return patterns of on aggregate demand, changes class will retain that optionality. equities more so than bonds. to other elements of the traditional However, a shift to shorter and Recent events highlight the leasing model are more certain. more flexible leases and rents linked importance of real estate’s ability Shorter leases and an to occupier turnover will enhance to offer ‘bond-like’ returns. increasing requirement for ‘flex’ the ability of real estate investors to Unprecedented purchases of space are evident, suggesting participate immediately in both the government and corporate bonds a greater emphasis on active upside and downside of changes to by monetary authorities have kept asset management. Further, a rental markets. This has important interest rates low and supported shift to ‘space as a service’ could implications for both pricing and pricing of assets offering long- lead to higher but more volatile asset allocation. duration, high-quality credit at rents, enhanced landlord capital There will be positives, particularly relatively high yields. expenditure and greater gross- as investors seek to offset the That is not new; monetary policy to-net rental spreads. These impact of low bond yields on overall support has bolstered real estate effects could erode the bond-like portfolio returns via exposure to pricing consistently since the global characteristics of real estate income higher-yielding versions of the asset financial crisis. It is more about the streams. class. However, the ability of parts of asset class’s ability to provide high- Trends are similar in retail, the market to offer the stable income quality income based on long leases, where the growth of e-commerce returns commonly associated with robust demand and controlled continues to disrupt the economic the higher-quality end of the asset supply. But changes to the nature model of physical retailing. This class could reduce. of these returns have implications has multiple implications; shorter Investors may have to focus on for the role real estate assets play in leases, higher yields, lower rents an increasingly narrow subset of multi-asset portfolios. and more uncertainty. And capital the office and retail sectors and rely To this end, covid-19 has been expenditure requirements have more heavily on logistics. This could associated with an extended increased. Consequently, some reinforce recent pricing trends in the shutdown of most economies, an landlords have agreed to a asset class, particularly the relative experiment with home working temporary shift to turnover-based pricing of logistics. These trends may and an acceleration of the trend leases. One consequence may be a also contribute to an erosion of the towards online retailing. Each shift toward more equity-like return historical dominance of offices and of these changes may impact characteristics. retail. Awareness of these trends will the consumption of real estate – These effects have not been help investors to identify – and profit specifically lease contracts – drivers universal, nor necessarily negative. from – mispricing. ■

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Net leases Fast becoming real relative ease with which people adjusted to working and shopping estate’s bond replacement primarily from home has only made matters worse for the property types.

Logistics focus Comment Investors seeking high quality, stable income may have to focus more on logistics. That is already playing Expert analysis by Kyle Campbell out in the net lease market, where industrial properties accounted for 48 percent of transactions last hile transaction volumes real estate to generate much-needed quarter, up from 34 percent the year have been lower during liquidity. Real estate investors, prior, according to CBRE. Wthe pandemic, net meanwhile, get something almost as A successful sale-and-leaseback lease strategies have been finding hard to come by: bond-like returns. strategy is an extension of the seller- outsized success. Last month, Apollo Real estate’s primary appeal since tenant’s creditworthiness, which can Global Management led a group of the global financial crisis has been offset broader market volatilities. In investors in acquiring a $5.5 billion as an alternative to fixed-income retail, for example, managers can portfolio of properties in Abu Dhabi instruments. With benchmark interest cherry pick successful businesses – on one such contract. Fellow private rates near zero for the foreseeable such as fast food restaurants, drug equity giant KKR is pursuing a similar future, the need for reliable yields store chains and auto repair shops – strategy in Japan. has only increased during the backed by strong parent companies. Deals like this are propping up covid-19 era. Managers have also shown a investment volumes for the private Yet, at the same time, traditionally greater willingness to invest in non- real estate sector. In the US, sale-and- structured real estate deals are traditional markets on a net-lease leaseback arrangements made up a trending more toward the cyclical basis. An example of this is Apollo record 20.2 percent of commercial fluctuation of stock markets than the in Abu Dhabi, which is more often a real estate transactions last quarter, steady income flow of bonds. This is source of investment capital than a according to a report by CBRE, most evident in the two longstanding destination. For 24 years of income nearly double the long-term average. pillars of core real estate: office and from a reliable tenant – the Abu The environment is ideal for triple- retail. The rise of flexible offices and Dhabi National Oil Company – the net lease acquisitions. Companies e-commerce has upended the long- arrangement seems well worth any languishing under the strains of the term leasing models that made these location risk. For its part, ADNOC pandemic can sell their underlying assets so attractive to investors. The gets an immediate injection of $2.7 billion to bolster it through a lull in Net leases made up a record share of commercial real estate transactions in Q2 2020 (%) petroleum demand. 25 KKR’s Japanese playbook is similar. It will source deals from railway 20 companies, manufacturers and other corporations with large, underutilized property holdings. In the US, sale- 15 and-leasebacks have played a larger role in the market since 2016, a 10 trajectory that tracks closely to the rise of industrial net leases. So long as investors remain 5 starved for steady income-producing assets and companies stay equally 0 in need of capital, look for net lease 2011 2012 2013 2014 2015 2016 2017 2018 2019 Q1 Q2 2020 2020 strategies to continue having their Source: CBRE day in the sun. ■

20 PERE • October 2020 Insight

Diversity Kalsi’s BentallGreenOak legacy bench to contend with, too many organizations are has set a hard bar on diversity in similar shape to the white, male-heavy BentallGreenOak that Kalsi has inherited. Indeed, as PERE’s interview highlights, 78 Comment percent of executives at managers covered by the Pension Real Estate Association are men; 88 percent are Expert analysis by Jonathan Brasse white. That is quite the mountain to climb. t was inevitable that once Sonny And it would be naïve to assume Kalsi’s incoming recruitment “ Conscious that racism and diversity issues will Ipolicy saw the light of day, the enthusiasm for continue to dominate headlines, and via PERE’s exclusive interview thus the public consciousness, to the with him published last month, it implementing such degree it has this summer. Certainly, would provoke debate. That was Kalsi does not think so. That is why the minimum the newly-installed trajectory-changing he wants to strike hard – and strike BentallGreenOak boss hoped for, policy might wane, now. As he admitted to PERE during after all. the interview, he considered Whether we see a subsequent he ensured he tied not sharing BentallGreenOak’s slew of copycatting is another recruitment policy before it matter. For most, the implementation the firm’s colors had taken proper shape. But, of a hard rule dictating 66.7 percent firmly to its mast ” conscious that the enthusiasm of all new recruits be minorities or for implementing such trajectory- women represents an admirable of BentallGreenOak’s 1,300-strong changing policy might wane, he effort by one of private real estate’s operation and was diversely ensured he tied the firm’s colors highest-profile individuals and designed from the start. firmly to its mast. mega-managers to fight against Harmon is a long-time ally of The specifics of the policy might systemic inequity in the western Kalsi and collaborator with him change slightly over time. But the world. on projects including the PREA target number is now out there and Corporate America was under Foundation, which partners would be problematic to remove. pressure to respond to the police with Sponsors for Educational Even if others implement hard killings of Black people this year and Opportunity on a US initiative aimed quotas far smaller than 66.7 percent, public statements of condemnation at helping Black, Hispanic and these actions would still make a and unity are no longer enough. Native American undergraduates significant difference, given most Tangible action by people who receive real estate training and firms in the industry had no such might make a difference is required full-time employment. The fact that targets before. and, in private real estate, Kalsi has she would adopt a more celebratory Private real estate has some way ensured that. tack over penalizing missed targets to go before it can meaningfully For some folks, the concurrent tells us that, even among private real contribute to the fight against implementation of self- estate’s diversity champions, there is societal inequity. And Kalsi’s imposed penalties in the event plenty of nuance. BentallGreenOak cannot hope to BentallGreenOak misses its own But while Artemis had no do more than lead by example. recruitment targets is a bridge But whether you agree with too far. Debbie Harmon’s Artemis its penalties or not, this firm is Real Estate Partners, for instance, unequivocally standing out by managed to achieve the same two- using the momentum of this thirds diverse recruiting numbers 66.7% summer’s protests against racial in 2018 and 2019 by using carrots BentallGreenOak’s minimum injustice to execute a long-needed over sticks – albeit her firm’s diverse candidate recruitment strategic shift. For that, it should be rule going forward 60-strong headcount is a fraction recognized and applauded. ■

October 2020 • PERE 21 Analysis

How much are flex office assets worth now?

The covid-19 crisis has accelerated two different shifts in how properties with a space-as-a-service component will be valued, writes Evelyn Lee

s workforces return, globally by the end of August, the re- going to be the right way to go.” flexible office space port stated. Office assets with a space-as-a-ser- is also making a The uptick in demand is expected vice component are currently valued post-lockdown recov- to continue amid the covid-19 crisis. less favorably than the traditional tro- ery. “Signing a monthly or a six-month phy office properties that are 100 per- Occupancy levels contract that fully integrates all the ser- cent leased to long-term blue-chip ten- Afor the sector stood at 41 percent in vices – that’s going to be probably even ants. Emma Swinnerton, EMEA head Europe and 40 percent globally as of more relevant going forward,” notes of flexible leasing solutions at Chica- July, according to a report from Work- Stéphane Theuriau, head of BC Part- go-based property services firm Cush- there, the flexible office business of ners Real Estate, the property arm of man & Wakefield, says: “You’re unlike- real estate advisor Savills. Meanwhile, the London-based alternative invest- ly to get the same covenant out of a flex contract occupancy – the percentage of ment firm. “Since we’re going to be in workspace operator than you would out total desks that were occupied by pay- a world of uncertainty for at least a cou- of a FTSE 100 corporate, for exam- ing members – was expected to reach ple of years, taking a flexible solution, ple, so comparatively, it’s seen as being 68 percent in Europe and 64 percent even if it’s more expensive, is probably riskier.” She explains that a co-working

22 PERE • October 2020 Analysis

Projected end of August numbers were approaching pre-pandemic levels (%)

Europe Global 0 20 40 60 80 100

Occupancy pre-covid

Occupancy as of July

Expected occupancy at end of August

Source: Workthere operator frequently sets up an individu- try to go for a more diversified cash- al special-purpose vehicle for each flex flow base – and if that comes with location it runs and consequently can shorter-term revenues, but a lot of “I think the trend walk away from the SPV without any diversification, they’re probably going definitely will go impact on the wider business. to be okay with it. I don’t think there “There’s more volatility in that in- are going to be a lot of discounts versus towards more space- come stream, and there’s more risk as- your traditional lease model.” sociated with that as well,” adds Richard Kalvoda agrees that, in the longer as-a-service” Kalvoda, head of the advisory practice term, properties without a flex compo- at commercial real estate services and nent will be valued lower. “I think the RICHARD KALVODA software company Altus Group. Simi- trend definitely will go towards more Altus Group lar to the hotel sector, “with space-as- space-as-a-service,” he says. “If that’s a-service, it could go up or down to- where the trend is going and that’s morrow; whereas the traditional office where the demand is, landlords need space [is] pretty consistent.” to future-proof their portfolio, because “Traditional valuers are going to be now there might be a premium. But at more sensitive to the classic model and some point, there could be a discount probably discount the space-as-a-ser- if you don’t incorporate some form of vice model,” says Theuriau. However, that in your building.” he anticipates the industry’s attitudes He likens space-as-a-service to toward flex assets will begin to shift. LEED or other sustainability certifi- Theuriau notes that many proper- cation programs for buildings: “It used ty firms have become more cautious to be there might be a slight premium. about owning a large building leased to Now there could be a discount because a single tenant, which puts a landlord it’s expected and demanded by the mar- at risk of having a vacant asset for an ket.” extended period. He believes that such a property will increasingly be viewed From leases to partnerships as riskier than an asset with multiple The pandemic is not only accelerating users on leases of varying maturities a shift in how flex assets are perceived and with a space-as-a-service compo- in the market, but also in the relation- nent: “That solution is going to look ship between landlords and flexible more resilient to long-term investors workspace operators. Swinnerton es- than your single-tenant, single asset, timates 60 to 80 percent of operators which was the model for your best are currently on traditional leases with deals historically. landlords. However, she expects cov- “I have a feeling the valuation indus- id will trigger a shift from leases to try and the professionals are going to management contracts, profit-sharing

October 2020 • PERE 23 Analysis

Does brand matter?

The importance of the operator’s brand on a building’s valuation is up for debate.

Swinnerton maintains that most office occupiers will not place heavy emphasis on branding. “If you’re a normal business on the street, very few people will know who the different flex workspace operators are at all,” she says. “All they’re concerned about is, ‘I need an office for this many people, it needs to be in this location and I want to pay this much money.’ Obviously each of them will have different merits, in terms of the design and the amenities that are offered and the feel of the place. But customers are not making their decision based on how the space is branded.” Kalvoda, however, believes the branding of the space-as-a-service provider will have a generally positive impact on valuation and will become more valuable as flex space becomes more popular. He notes that Altus Group itself is a flex-space occupier in some of its locations around the world: “We’d like something standard, we’d like to have a known “When you lease an experience. If we’re renting in five different cities across the world, it’s much easier to deal with one operator, knowing there’s consistency of asset to WeWork on a delivery in what the services are. That’s the consistency you see with hotels, where you generally tend to one brand, or even one hotel within a brand, 10- or 15-year lease, because you know the experience you’re going to get.” you’ve effectively lost control of your asset, partnerships or landlords delivering in- agreement, both parties are sharing house offerings. in the performance of the flex space, because you’ve lost “It’s sharing of risk with the owner, whether it be the upside or downside. fundamentally,” explains Swinnerton, “It’s a fairly new model for the office control of the final whose firm has its own white-label flex- space,” says Swinnerton. “But if you ible workspace service known as Inde- look at the hospitality industry, this is client” go. “What you see at the moment is the the model that hotels have been oper- sector is somewhat challenged and the ating on for a long period.” STEPHANE THEURIAU operators who are finding it harder are Theuriau observes that, similar to BC Partners Real Estate those actually on a fixed-lease arrange- a hotel owner, an office landlord can ment because they’ve got a fixed-cost negotiate more favorable terms with base. They’re getting asked for conces- a management contract than with a sions by their end customers in terms lease. “If you have a Four Seasons with of terminations or rent reductions or a service contract, you’re probably go- holidays. There’s only so far they can ing to be better off than if you have a go without going into the red, and then lease with Four Seasons long term,” he what happens is they are unable to pay says. “With Four Seasons having a lot rent to their landlord.” of leverage because of the quality of the Theuriau concurs: “If you think brand, the lease has been negotiated about it, when you lease an asset to more favorably to Four Seasons than a WeWork on a 10- or 15-year lease, profit-sharing service contract.” you’ve effectively lost control of your He adds that in addition to being asset, because you’ve lost control of the able to negotiate better terms, a service final client, because the final client is contract provides the office building actually going to WeWork.” owner with much more flexibility: “I By contrast, if a landlord and opera- can get rid of the operator if I’m not tor are in a profit-share or management happy with the performance, because I

24 PERE • October 2020 Analysis

think most of those companies have no your building being allocated to that, credit.” and directly to the landlord, I think you’ll see more of that become split New valuation methodologies out, because that becomes a big part of This shift away from leases towards the cashflow then,” Kalvoda says. partnership structures will necessitate What results is two separate income a different way of valuing flex assets, streams with two separate types of in- according to Swinnerton. However, vestors: a lower-risk, lower-return in- to date, “there hasn’t been a defined vestor that is seeking a stable cashflow methodology for how you value that,” from the traditionally leased compo- she says, noting that the UK’s Royal nent, and a higher-risk, higher-return Institution of Chartered Surveyors – a investor comfortable with potentially standard bearer for property valuations more volatile cashflow from the space- in Europe – has yet to provide specific as-a-service component. guidance on this topic. Theuriau does not have any hard- In response, Cushman & Wakefield and-fast rules about whether he would released in early September a white pa- value the flex component differently per outlining its own valuation meth- than the traditional office component “We definitely need a odology for flexible offices that are of a building. “It depends on who the owned and operated by the same par- operator is and the quality of offering,” clear consensus around ty or operated by a third-party being he explains. “If I feel the operator is paid a management fee. The method- weak and it’s overpriced, and it’s not methodology” ology would adopt a hybrid approach sustainable, then I’ll price it differently. that would take into account both the On the other hand, if I feel that opera- EMMA SWINNERTON trading performance of the asset as tor is bringing a competitive advantage Cushman & Wakefield well as the capitalization of two income to my asset, and it’s priced right, I may streams – the net operating income value it even more. It’s very much on a equal to the market rent if the space case-by-case basis.” was on a traditional lease; and the NOI Theuriau would adopt three dif- greater than the market rent and attrib- ferent methodologies to value an asset utable to the space-as-a-service opera- with a space-as-a-service component: a tion. comparison between a property’s cur- “We wanted to drive some mo- rent cashflows and its projected cash- mentum in this area, so that all parties flows if the flex component were to be can have some confidence about the re-leased under a standard lease; a dis- approach you take to valuing flexible counted cashflow based on the amount workspace,” Swinnerton says. of capital expenditures needed for a Kalvoda says that when the land- lease renewal; and assessment of the lord has a lease or partnership with a performance and growth potential of third-party flex space operator, and it the service component. The final val- represents less than 20 percent of the uation for the asset would be a combi- building’s cashflow, there is no major nation of all three values using the dis- difference in pricing compared with a counted cashflow approach. traditional office building. However, if “We definitely need a clear con- that percentage exceeds 20 percent, or sensus around methodology,” says if the landlord provides the space-as- Swinnerton. “That will drive further a-service directly, then the valuation confidence in this part of the business, pricing parameters may change due particularly from the investment and to the added risk or income volatili- banking communities. There will al- ty compared with a traditional office ways be certain assets that you might building. need to look at in a different way for “As space-as-a-service becomes specific reasons, but I think in general, more in demand and you see more of there should be a consensus.” ■

October 2020 • PERE 25 Cover story

26 PERE • October 2020 Cover story

EXTRA October 2020 • perenews.com Brookfield’s Kingston on big office and retail bets What does China’s conflict with the West mean for private real estate?

Cover story Has Chinese capital been beaten out of Western markets?

Strained geopolitical relations have pushed Chinese foreign direct investment in private real estate to historic lows. Yet, as Arshiya Khullar finds, not all Chinese investors are stopping their activities in the West

S President Donald finance, from technology to infrastruc- Trump was on US Air ture, to Hong Kong’s national security Force One, returning law – even the origins of the coronavi- from a rally in Florida rus pandemic. The consequences have on August 1, when he been far-reaching. Chinese investment declared war on Tik- in North America overall hit its lowest UTok. Within two weeks, he signed an point in a decade in 2019 with just $5.5 executive order banning the Chinese billion of completed deals, according viral video app. Chinese technology to analyses by law firm Baker McKen- firm Tencent, which owns the WeChat zie and research provider Rhodium messaging app, was simultaneously Group. banned from doing any US transac- Geopolitical tussles combined tions. with heightened regulatory scrutiny TikTok and Tencent are the latest of international deals involving Chi- casualties in a bitter US-China feud nese capital and Beijing’s own restric- that has raged over issues from trade to tions on outbound investment have

October 2020 • PERE 27 Cover story

Chinese direct investment in Canada and the diminished Chinese capital’s participa- US cumulatively fell 27% in 2019, reaching its lowest level in a decade ($bn) tion in global financial markets in the latter years of the last decade. But has a 10.0 death knell sounded for China’s buying in the West? 7.5 PERE asked this question of the private real estate industry, which 5.0 has closely tracked the rise and fall of Chinese investors’ high-profile trans- 2.5 actional pursuits, and the collateral damage to their credibility as a major 0.0 2018 2019 capital source. The answer, explored in this deep-dive piece, might surprise. Chinese capital inflows into real estate To be sure, the days of Chinese specifically have dropped precipitously, with H1 2020 transaction volume down 97% from investors’ trophy purchases in Man- the last five-years' H1 average ($bn) hattan and Canary Wharf are over for

3 now. State-owned enterprises are no longer the most prominent outbound investor group. But a more measured, 2 low-profile and strategic capital base from China is still investing through 1 more regulatory friendly approaches. Critically, while deal activity is down to low triple-digit million figures, it is not 0 H1 average H1 2020 at zero. If anything, fraying US-Chi- between 2015 - 2019 na relations could ultimately redirect Source: Annual survey by Baker McKenzie in Chinese capital to Western countries partnership with research provider Rhodium with friendlier ties to China than those Group, January 2020 stateside. Real estate and hospitality deals only represented a fraction of the total Chinese CFIUS and other US roadblocks foreign direct investment in North America in 2019 During the peak of Chinese merger and acquisitions activity from 2014 and in September 2019, Mirae terminated All others Consumer Product & 2016, the likes of conglomerates An- the deal in April, citing issues around 9% Services bang Group, Dalian Wanda and HNA fraudulent deeds of some of the hotels, amassed a property empire of Holly- according to a Bloomberg report. An- Health & 37% Biotech wood studios, insurance companies, bang counterclaimed the pandemic’s 10% luxury hotels and office skyscrapers. impact on the hospitality sector made Anbang, the poster child of this shop- Mirae pull the plug. Both parties sued ping spree, invested nearly $18 billion each other for breach of contract. A across a pool of assets. court verdict is expected this fall. These investors have since wound People who actively partnered with down most of their overseas portfolios. Chinese capital in the heydays of the Real Estate But the fallout of that aggressive ap- last decade admit the Anbang saga & Hospitality proach continues. In August, the Chan- prompted both the industry and US 14% cery Court of the State of Delaware regulators to reevaluate their due-dil- completed an acrimonious five-day igence approaches, especially against Basic Materials Automotive trial involving Anbang and South Ko- the backdrop of changing bilateral re- 15% 17% rean asset manager Mirae’s failed $5.8 lations. billion deal for 15 high-end US hotels. “It has been a decade in transition Source: US Inbound & Outbound Investment Trends, H1 20, CBRE (figures have been rounded) After agreeing to acquire the portfolio in US-China relations. Some of these

28 PERE • October 2020 Cover story

of the 140 Chinese covered transac- tions were in the US finance, informa- “At the peak of tion and services sector, in which real Chinese interest in estate falls. A new regulation passed in Febru- prime global real ary 2020 further expanded CFIUS’s jurisdiction to non-controlling invest- estate assets, it was ments in US real estate. Regulators are now also inquiring about non-no- almost ‘mandatory’ tified transactions, including deals that closed years ago. CFIUS’s investiga- for agents and vendors tion into ByteDance’s 2017 acquisition of what became TikTok, for example, to incentivize these was only launched in November 2019. buyers to participate Lawyers say they are aware of CFIUS actively seeking to scrutinize some pre- and bid at the top viously closed real estate deals, too. Fewer Chinese investors are trans- range of the pricing” acting in the US as a result. According to property services firm CBRE, in- bound Chinese capital in H1 2020 was PRIYARANJAN KUMAR Alvarium Investments $98.5 million, accounting for 0.8 per- cent of total foreign investment. But this is not the whole picture. What such data cannot accurately cap- ture are indirect transactions, includ- ing fund commitments and minority interests in joint venture partnerships, which are rarely publicized, as well as non-institutional deals. On the day Jay Neveloff, who chairs law firm Kramer Levin’s real estate practice, spoke to marquee real estate deals mark that between SOEs, sovereign wealth funds PERE, for example, he was working transition nicely,” says Mario Mancu- and private companies in China for the on a “mid-sized” transaction in the US so, a partner heading the international purposes of assessing a Chinese buy- involving a Chinese entrepreneur. He trade and national security practice at er’s fitness to acquire a US asset,” he says he has also advised Chinese de- law firm Kirkland & Ellis. explains. “So, the Xi change is really a velopers, that already have assets and Mancuso says while there has been sea change. And, it has had a practical capital within the US, for their condo press focus on the Trump administra- impact on how CFIUS has evaluated development projects. tion’s role in escalating tensions with various categories of Chinese buyers.” “We are seeing the sovereigns con- China, structural changes within Chi- Real estate historically was exempt- tinue investing as LPs, with no rights na are less discussed. “The Xi era has, ed from the Committee on Foreign and not doing co-investments, which in part, cracked down on certain eco- Investment in the United States. But, could potentially raise CFIUS con- nomic practices by Chinese companies in the last few years, the interagency cerns,” adds Ivan Schlager, interna- and state-owned enterprises, which federal body has widened its review tional trade and national security part- have contributed to a slowing down in of foreign deals for national security ner at Kirkland & Ellis. activity. But the Xi era has also been implications to include the sector. Si- In March, for example, a Chinese marked by a highly personalist and au- multaneously, acquisitions by Chinese sovereign wealth fund invested in a thoritarian approach. This shift in Chi- investors accounted for the largest pro- “club” joint venture partnership with na has catalyzed a CFIUS agency prac- portion of CFIUS notices filed by any another Asian sovereign fund and a tice skeptical of distinctions once held country between 2017-19. Indeed, 51 US manager. The venture acquired

October 2020 • PERE 29 Cover story

a portfolio of last-mile distribution and investment volume is significantly centers in secondary and tertiary US “The Xi change is off the high-water mark set a couple markets. PERE understands the par- of years ago. But I have seen deals get ties elected not to make a CFIUS filing really a sea change. done, albeit different styles of deals: due, in part, because none of the assets less high-profile and more private, were located within close proximity to And, it has had a club-JV types of structures in non-core any sensitive government facilities or or non-gateway markets.” urban areas. practical impact on “I think some sovereign investors Chinese deal-making 2.0 view these ‘lower-profile’ deals as a how CFIUS has This strategy aligns with Beijing’s win-win. They are still able to achieve mandate, too, given the government’s stable, core-type returns from long- evaluated various continuing clampdown on specula- term, triple net leased properties with categories of Chinese tive overseas investments through investment grade tenants, and also have foreign exchange controls since 2016. less of a CFIUS spotlight shining on buyers” Non-speculative investments, however, them because they are not buying mul- especially in sectors such as healthcare ti-billion dollar skyscrapers or hotel and senior care, are still approved. Bei- MARIO MANCUSO portfolios in downtown Manhattan or jing-based Cindat Asset Management Kirkland & Ellis other major coastal markets,” says Jack is one well-known investor in this Creedon, partner and global co-head space. As of January, the firm’s total ex- of Ropes & Gray’s real estate invest- posure to senior care assets was north ments and transactions group. of $1.5 billion in net asset value, which Average ticket sizes have also included portfolio acquisitions in the changed. The deals Creedon has UK and US. worked on recently have all been on “In terms of senior care investments, the smaller side, more in the $100 we are the largest Chinese buyer in the million-$300 million range. “I do not US,” says Greg Peng, the firm’s CEO think some of the perhaps perceived and co-founder. “These types of trans- transactional challenges involving cer- actions are not specifically ‘forbidden’. tain Chinese investors over the past In fact, some Chinese insurance com- year or so has been a total turn-off for panies were still keen to invest into our US investors wanting to do deals or deals at the beginning of this year. But JVs with sovereign wealth funds,” he the attitude changed once covid-19 says. “To be sure, overall transaction hit.”

CFIUS scrutiny: Between 2017-19, China had, by far, the most transactions reviewed by the US agency tasked with monitoring foreign transactions for national security reasons Finance, information services (real estate inc.) Total (all industries inc.) 0 30 60 90 120 150

China

Japan

Canada

Singapore

Australia

France

Source: Committee on Foreign Investment in the United States, Annual Report to Congress

30 PERE • October 2020 Cover story

While the politically charged at- mainland Chinese and Hong Kong de- Goodwin Gaw, chairman of Hong mosphere in the US is a limiting fac- velopers. A prime example is CC Land, Kong-based private equity real estate tor for cross-border deals, things are a developer in Western China, which firm, sees European deals by Chinese playing out differently in Europe. Chi- in 2017 acquired London’s ‘Cheeseg- investors ticking up as a consequence na’s souring ties with the UK over the rater’ office tower from REIT British of current US-China relations: “You’re crackdown in Hong Kong and Chinese Land and Canadian investor Oxford going to see Chinese capital in the US capital controls contributed to a 40 Properties for £1.2 billion ($1.5 billion; drop off significantly. Europe especial- percent drop in Chinese M&A invest- €1.3 billion). Today, CC Land’s UK ly, with countries that show openness ment in Europe last year, according to portfolio totals assets of roughly $5 bil- to Chinese investors, will probably Baker McKenzie’s survey. But the $13.4 lion in gross development value, which benefit.” billion investment in the continent was includes two residential developments Gaw Capital partnered with con- still twice the North American volume. and office assets in the UK. sortiums including Chinese investors “The sentiment in the US towards “One’s appetite to risk changes as a on major US and European deals in China is likely more critical than per- foreign group gets to know a territory the past decade, most prominently the haps from Europe, where it is appreci- better. When we started, we were buy- $711 million purchase of the Colum- ated that foreign investors in general, ing conservative, fully-let assets. We bia Center in Seattle in 2015 and the including the Chinese, improve the have gone up the risk curve and now Lloyds of London building in London liquidity of the market,” says Hans will also buy opportunistic develop- for $321 million two years earlier. But Vrensen, head of research and strategy ment, albeit with planning,” says Adam it will be previously less fancied parts of at investment manager AEW Europe, Goldin, head of CC Land’s UK busi- the latter region where he expects con- adding that the relevance of Chinese ness. tinued notable investment from China. capital in European property markets The firm remains acquisitive, - tar “The UK has no choice but to take has not changed in the past two years. geting high-quality, large scale prime a similar tack to the US,” says Gaw. Private capital, for one, continues assets with gross development values of “France probably also. But Germany to chase UK assets for diversification around £1.5 billion. “The overarching could take a more independent stance and wealth preservation purposes. Eric determining factor for us is whether and there are smaller countries that can Zhao, a director and Chinese capital we want to own the asset. Our driving take advantage of being friends with markets specialist at property servic- force has always been the quality, more both sides. So, now we’re seeing Chi- es firm Savills, sees the same type of than the returns it generates over a five- nese interest in other European mar- Chinese investors investing consistent year hold,” he explains. “If we do like a kets, particularly those with bilateral amounts of capital this year to last. trophy asset, like many other high net arrangements in place.” “They are transacting less openly, but worth and trophy hunter investors, we Elsewhere in the continent, positive still transacting,” he says. will find a way to buy it and to access bilateral relations due to China’s One The other active investor group are the capital.” Belt One Road policy, is drawing more Chinese capital toward places like Hun- gary, Poland, Slovakia and Italy. In Au- gust, the Chinese investment firm Fos- un acquired an office asset in Bucharest through Resolution Property, a Lon- don-based manager in which it owns a majority stake. Of such buyers, James Burke, associate director at broker Sav- ills, says: “They have the ability to do both stable, income-driven transactions as well as more opportunistic ones.”

Chinese-to-Chinese trade

Hotel del Coronado: The past few years have also seen sig- San Diego hotel’s nificant asset sales by cash-strapped sale to Anbang was scrapped after a Chinese groups, many of which are un- CFIUS review der government pressure to repatriate

October 2020 • PERE 31 Cover story

capital. Chinese investors were the big- gest sellers of US properties in 2019, offloading $20 billion more than they bought, according to Real Capital An- alytics. One active seller was Dalian Wanda, which agreed to sell its 90 per- cent stake in Chicago’s 101-story Vista Tower for $270 million, believed to be its last-remaining real estate asset in the country. Yet Chinese asset management companies like Cindat could become beneficiaries of this divestment spree. Skyscrapers: no longer the ‘trophy’ “Chinese asset management compa- targets for Chinese nies are the army of distressed solution capital providers,” says Peng. “If they buy an asset to help a Chinese owner solve a financial situation, and to repay loans ownerships. Indeed, PERE has previ- trumping price considered “top of the to Chinese banks, and later on work on ously reported on the circumventing market”, PERE was told. some restructuring to sell the asset lo- measures often used to bypass capital “Transactions such as Cheesegrater cally, it is still considered an approved controls. and Walkie-Talkie stand out because if transaction.” A Singapore-based agent PERE the ‘premium’ was not offered by the The asset management arms of spoke to completed a large Sydney buyers, the access and pole position China’s four state-owned ‘bad banks’ office acquisition this year for a Singa- granted to complete the transaction can buy these assets, often sold at a pore-based investment firm on behalf would have been missing,” says Pri- discount, on more flexible terms. For of a Chinese investor, the identity of yaranjan Kumar, managing director, instance, they can give sellers partici- which was never reported. head of Singapore at multifamily in- patory positions in the profits generat- What is evident from transaction vestment firm Alvarium Investments. ed from the asset. Or they can provide data, however, is the absence of any “That premium often was the price a loan back in China equivalent to the billion-dollar deals by Chinese inves- vendors demanded for taking on an el- purchase price, removing any foreign tors in recent years: 2017 was the last ement of execution risk with unknown currency requirements. banner year in Europe, for example, in- and first-time buyers.” “They have access to the deci- cluding CIC’s €12.2 billion purchase of What many Western sponsors and sion-makers back home, which makes the Logicor logistics property portfolio marketing agents are reluctant to pub- things a lot easier,” Peng says of the as- from Blackstone. licly acknowledge is the strategic think- set managers. “Most of the US groups If Chinese investors are no longer ing behind selecting a bidder shortlist. will be dealing with the US teams who trophy hunting, the industry will need The story of Chinese investors’ splashy don’t have decision-making powers and to readjust its perception and treatment bets is as much a story about the inner can make the market quite confused. of this pool of capital, believe marketing workings of auctions and the cross-bor- They usually also have other dealings agents. Chinese capital, especially first- der capital dependency. with those Chinese owners back in time overseas buyers, have long had the “Every seller wants that special China, therefore have more ways to reputation of being premium payers. buyer who can pull up pricing for the negotiate a deal with them on their US Sources involved in the ‘Cheesegrater’ top bidder in the market. You then get assets.” deal, for instance, say CC Land was firms to scour the planet looking for never even on the shortlist of bidders that special bidder,” says Kumar, who No more trophy hunts to buy the 46-story office tower. The brokered several cross-border deals Tracking Chinese transaction activity original plan was for British Land to during his time at broker Cushman & is tricky as many deals are completed sell its 50 percent interest while Oxford Wakefield. off-market. It is also challenging meas- Properties would retain its half share. “You don’t care where the investor uring fund-level commitments by Chi- CC Land’s unsolicited bid was for the comes from or assess early on how exe- nese investors, or detecting beneficial full 100 percent stake in the asset at a cutable they are or not, as long as they

32 PERE • October 2020 Cover story

Who's buying? Chinese sovereign wealth funds such as CIC and developers like Fosun and CC types of investors from the country will Land continue to be active overseas investors, albeit at a significantly lower scale than before likely remain active on the international

Investor Date Asset Country deals circuit. Shifting political winds, however, Fosun International Aug 20 Floreasca Park Romania will influence cross-border capital flows Jun 20 PEP Torgau Germany between China and rest of the world Jun 20 OBI Duren Germany more than ever before. The outcome Jun 20 25 Rue Garnier France of the November presidential elections China Investment Corporation Dec 19 Rue Francois Arago France in the US could be a crucial deciding factor, with some observers optimistic Oct 19 Vorstengrafdonk 39-41 Netherlands a Joe Biden victory could reset bilateral C C Land Holdings Dec 19 Whiteleys UK relationships. Kirkland & Ellis’s Man- Apr 19 85 Spring Street Australia cuso agrees while the relationship may be different at the margins under the Source: Press reports, RCA data Democratic candidate’s presidency, the US-China bilateral relationship is also structurally changing. can put a reasonably diligenced price “There have been episodes before on a piece of paper that can support the in US-China history, whether it was “The sentiment in asset selling at a valuation delivering the accidental bombing of the Chinese the US towards real GP profit.” embassy in Belgrade, the Taiwan crisis For a while, Chinese investors were of mid-90s or the downing of US air- China is likely more a prime target for that. Kumar says craft in the South China Sea,” he says. at the peak of their interest in prime “There have always been instances of critical than perhaps global real estate assets, it was “almost US-China friction. But the difference ‘mandatory’ for agents and vendors to these days is the friction is systemic, not from Europe, where incentivize these buyers to participate episodic, and that the power balance and bid at the top range of the pricing.” between China and the US is different.” it is appreciated that “It kept domestic buyers honest. This shifting power balance is also The industry had a bias to conclude why China’s – and its financial markets’ foreign investors in deals with known domestic buyers un- – place in the world is irrefutable. general, including less a foreign buyer offered a pricing “The obvious growth and increas- differential that mitigated that risk.” ing competition in the Chinese econ- the Chinese, improve In addition, Chinese firms gained omy from a service, information and market know-how. CC Land now has a technology standpoint means, at some the liquidity of the dedicated five-person team in the UK point, there needs to be a closer collab- covering investment, development, and oration between the West and China,” market” asset management operations, includ- says Justin Curlow, global head of re- ing Goldin, who joined the firm in late search and strategy at AXA IM – Real HANS VRENSEN 2017. Goldin was not there when the Assets. AEW Europe Cheesegrater deal closed, so did not “This must be more of a two-way, comment on its specifics, but agrees the similar level playing field surrounding firm evolved its approach as it gained information, trade and investment.” presence and experience in the market. Nearer term, however, the gap be- “Our aim was to become a first-class tween the two is discernably wide. custodian of real estate in the UK. We While conflicts continue to rage in oth- employed a team to execute that, and er sectors, private real estate deal vol- our profile in the UK now is higher and umes will remain unlikely to reach the better,” he says. highs of the last decade. ■ Chinese investors 2.0 may not be as trophy-oriented as before. But certain Additional reporting by Merle Crichton

October 2020 • PERE 33 Interview

34 PERE • October 2020 Interview

Brookfield’s contrarian view

Chief executive of real estate Brian Kingston tells Kyle Campbell why the $550bn manager remains t is September 1, and while many of keen on retail and New After the relative success of the mass New York City’s office workers are work-from-home experiment, many somewhere other than New York York offices despite the investors and managers are asking if a City, working somewhere other than many questions raised by permanent shift toward this new style of an office, Brian Kingston sits ina work will hurt office demand. Some also Lower Manhattan conference room. covid-19 believe the pandemic will accelerate the IOn the table in front of him, a green migration of companies and individuals checkmark says it is OK to sit there. PHOTOGRAPHY: JUSTIN SHOCKLEY away from traditional US office hubs to Red Xs by the seats next to and across lower cost metros such as Austin, Nash- from him mean they are off limits to and that’s natural,” he says. “We have a ville, Charlotte and Raleigh-Durham. promote social distancing. Occasion- unique perspective because we have of- Prashant Tewari, a partner with the ally, masked colleagues walk past his fices around the world in cities that are Townsend Group, a Cleveland-based glass enclosure. These sights, along at different places on the recovery spec- advisory and investment firm, notes that with infra-red temperature checks, dai- trum and when it turns, it does turn. In remote work does not have to be wide- ly health screenings and monthly viral China, for example, it’s as though it’s spread to have a material effect on val- tests, have become fixtures for Brook- 2019 again. People are going to restau- uations. “Some part of this work from field’s chief executive of real estate, rants, kids are back to school, workers home is here to stay and, in real estate, since the Toronto-based manager re- are back in the office. That part of the you don’t need 20, 30, 40 percent of opened its New York outpost in June. world is getting back to some sem- people to go a certain way for it to have The office is sparse this morning, blance of normalcy.” an impact,” he says. “It could be 1 or 2 Kingston tells PERE via teleconfer- As the head of Brookfield Proper- percent and, all of a sudden, you start to ence, though only slightly more than ty Partners and Brookfield Property see an impact on rent growth and, con- a typical Tuesday before Labor Day Group, both of which fall under the sequently, the value of properties.” weekend. He hopes the end of summer $550 billion Brookfield Asset Manage- Kingston is not worried about re- will bring additional colleagues back to ment umbrella, Kingston oversees the mote work or secondary cities siphon- 250 Vesey Street and spark a broader largest office portfolio in the world. ing demand from major markets. If return-to-office movement in the US. It consists of 140 million square feet anything, he wants to use Brookfield’s But he does not evangelize about it. If across 253 properties – 134 of which $15.6 billion of real estate dry powder other nations are an indication of what are core holdings on the Property Part- to add more exposure to the likes of is to come, he will not have to. ners balance sheet – plus a half dozen London, Sydney, Toronto and Los An- “If you ask the average person on more under development. geles, not only through offices, but also the street in New York when they’re It is a precarious time for office apartments, condos, hotels and other going back to the office, they’ll say owners, especially in the gateway mar- distress-driven prospects. The most they don’t want to or they’re unsure, kets where Brookfield is most active. acute opportunities, he predicts, will be

October 2020 • PERE 35 Interview

Brookfield’s top core office markets are gateway cities and energy hubs office, and that is weighing on the minds Square feet (m) of employers,” Edelstein says. “Compa- 0 1 2 3 4 5 6 7 8 9 10 11 nies making it voluntary for their staff

New York to go into the office have found that many are opting to work from home.” New York is Brookfield’s largest of- London fice market at 27 million square feet, which is 19 percent of its global office Toronto space and more than a third of its US exposure to the sector. For the core of- Houston fice holdings on Brookfield Property Partners’ balance sheet, Manhattan of- Calgary fices account for 28 percent of net op- erating income, according to a financial Los Angeles disclosure from the company. It has also spearheaded several large developments Source: Brookfield Q2 Supplement Disclosure in the city in recent years, including the $5 billion Manhattan West complex, which includes four office buildings, a in New York, a deep and historically from the investment banks too, includ- hotel, a luxury apartment high-rise and resilient market in which a lot of insti- ing Barclays, JPMorgan and Morgan 200,000 square feet of retail. The final tutional capital has lost faith. Stanley, which said in April and May piece of that project, the $2.4 billion “We have lots of dry powder and our they are considering smaller New York Two Manhattan West office tower, is clients have lots of capital they’re asking footprints. Even real estate groups that slated for completion in 2023. As of late us to put to work in intelligent ways,” had planned to be back in the office by July, just 25 percent of its 1.9 million he says. “New York is a tremendous early September have delayed returns square feet have been pre-leased. contrarian opportunity at the moment.” because of health concerns, Mark Edel- Despite New York’s status as the epi- stein, head of Morrison & Foerster’s center of the US covid-19 outbreak and Making office work real estate group, tells PERE. the concerns about its future appeal, Brookfield is not the only large land- “Many employees in cities that rely Kingston is undaunted by the prospect lord to take a lead-by-example ap- heavily on mass transit, and with high- of finding office tenants in the years proach to office re-openings. But there rise buildings requiring elevator usage ahead. He views the current environ- are not many others. A July survey of for large numbers of tenants, are nerv- ment as a temporary disruption to a roughly 500, mostly New York-based ous about health risks in getting to the long-running influx of companies into real estate professionals conducted by the law firm Morrison & Foerster, After a decade of steady growth, e-commerce spiked in the second quarter of 2020 found that just 9 percent of respond- E-commerce sales ($bn) Share of total retail activity (%) ents were regularly going into their 220 22 offices, up from 7 percent two weeks 200 20 earlier. The majority, 66 percent, did 180 18 not expect to return until 2021. Announcements from prominent 160 16 office occupiers have fueled concerns. 140 14 Last month, Bloomberg reported 120 12 Google walked away from 200,000 100 10 square feet in Dublin. In May, Twit- 80 8 ter issued a statement saying workers 60 6 would have unlimited remote priv- 40 4 ileges and the social media compa- ny Pinterest announced it would pay 20 2 0 0 $89.5 million to terminate a pre-lease Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 on a 490,000-square-foot office in San 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Francisco. Concerns are emanating Source: US Commerce Department

36 PERE • October 2020 Interview

the city, such as Amazon, which signed “There is clearly disruption happening in the a 360,000-square-foot lease at Brook- field’s Five Manhattan West property market. But, ultimately we take a long-term view in 2017. He acknowledges more work- ers will likely split time between home that high-quality real estate assets will hold their and office, but believes physical loca- value and recover when the economy recovers” tions will remain essential for attracting young talent. “The beauty of New York City is the critical mass here, the talent pool to draw from. This is where workers want to live, so if you want to attract 24- and Indeed, just as there is evidence workers to the city and turn the former 25-year-olds that are coming out of col- contradicting this assertion, there Lord & Taylor department store on lege on a fast track, you have to come is evidence supporting it too. Face- Fifth Avenue into 660,000 square feet here. Other places just don’t have the book and Amazon both renewed vows of office space. For its part, Brookfield’s infrastructure or the energy of a place to New York during the pandemic. core New York office holdings are well like New York. Over the past 20 years, Facebook finalized a long-rumored positioned for the years ahead, with things have become more and more 730,000-square-foot lease at the new- 96 percent occupancy and an average concentrated here, and I don’t see that ly-renovated Farley Building, while remaining lease duration of 10 years. getting disrupted on a long-term basis.” Amazon said it would bring 2,000 more By comparison, the firm’s overall core

October 2020 • PERE 37 Interview

office portfolio is 92 percent leased, “This is not playing outstanding rents from the covid clo- while the growth-oriented offices in its sures will go uncollected. Roughly 85 funds are just 81 percent leased. defense where we’re percent of Brookfield’s mall tenants Lenders remain confident in Brook- have now re-opened. But footfall is still field’s ability to execute in the office sec- trying to prop up only about half of what it was pre-pan- tor. In late August, the firm refinanced demic – though Kingston says that mall the construction debt on One Manhat- co-tenancy, this is visitors are now more likely to buy in- tan West – a 2.1 million-square-foot of- playing offense” stead of just browse. fice tower opened last year – with a $1.8 Kingston says the current discourse billion permanent facility underwritten around retail mirrors that of 2010, when by Deutsche Bank, Wells Fargo, Bar- it brought General Growth Partners clays, Citi and JPMorgan. The bulk of out of bankruptcy before later acquiring the financing came from a $1.5 billion the mall REIT outright eight years lat- commercial mortgage-backed securi- er. “People were saying the same things ty conduit, which Kingston says was they’re saying today: nobody’s ever go- oversubscribed: “At a time when people invest in systems and processes that ing to go to a mall again, every retailer are worried about New York office, the make us more efficient,” he says. “We is going to go bankrupt, etcetera, and debt markets are clearly there for it.” may have been closing a mall in Idaho that allowed us to make that investment At one point, as covid-19 spread for the first time, but we’re applying in a very opportunistic way at a very across the US and triggered a wave of all the learnings from what happens attractive basis,” he says. “We’re look- forced closures in March and April, all when we prepare for hurricanes to go ing at this period of time the same way. 170 of Brookfield’s malls were dark at through Florida, for example.” There is clearly disruption happening the same time. Unprecedented as it The real challenge came weeks lat- in the market. But, ultimately we take was, Kingston says the company was er, when it was time to get tenants up, a long-term view that high-quality real able to draw from one-off closures dur- running and paying rent again. Be- estate assets will hold their value and ing natural disasters across all its prop- tween forgiveness granted to smaller recover when the economy recovers.” erties as the shutdown orders rolled in. tenants and lost revenue from retailers Still, e-commerce is a far bigger “One of the benefits of having such a that have gone out of business, King- threat to traditional retail now than a large presence is that we’re able to ston anticipates roughly 20 percent of decade ago. While brick-and-mortar

38 PERE • October 2020 Interview

we’re trying to prop up co-tenancy, this is playing offense,” he says. “There are some brands that are worth saving. Take Aeropostale as an example. That was a hugely successful investment because you had a very valuable brand that had $15.6bnBrookfield’s real estate dry powder just gotten itself overextended, needed to have its capital structure reset and then get relaunched. We think there are numerous opportunities to do that.”

The way forward Closed€725m for Brookfield Europe Real Estate Partnership Like other prominent managers, in Q2 2020 Brookfield has, in a way, benefited from pandemic-imposed travel restrictions. centers were closed, online sales hit a agreements that would allow smaller, With investors eager to capitalize on record $211 billion during the second in-line tenants to dissolve their leases dislocated pricing, but unable to meet quarter, accounting for 16 percent of all if the anchor leaves. Owning an anchor with new managers, many have fo- retail activity, the US Commerce De- tenant could also allow a landlord to cused on increasing positions with ex- partment estimates. But Kingston sees make changes to a property that would isting partners. Across all its strategies, a need for both online and in-person otherwise be vetoed by an anchor. “Ul- Brookfield Asset Management raised shopping channels, even for digitally timately, controlling your real estate has $23 billion during the second quarter, native brands. In addition to providing value,” Rapkin says. “I don’t think the its best fundraising period ever. More rescue capital, a $5 billion retail revital- mall owners are looking at this as an than half of that went to Oaktree’s lat- ization program introduced by Brook- opportunity to get into the fast fashion est distressed debt fund. field Asset Management in May will business or the department store busi- Since March 15, Brookfield has also help traditionally successful brands ness. This is a real estate owner saying raised $1.8 billion across its various real that have been slow to modernize. there’s real value to us controlling our estate funds, primarily from existing Landlords purchasing their retail own real estate.” partners, including €725 million closed tenants has become evident during the However, Kingston says Brookfield’s during the second quarter for its first pandemic. Simon Property Group, retail revitalization is more opportunis- European core-plus fund, Brookfield the largest mall owner in the US, has tic. “This is not playing defense where European Real Estate Partnership. formed a joint venture with the brand Kingston says record low interest rates management company Authentic have been the driving force behind real Brands Group to buy troubled retailers The bulk of Brookfield's core office holdings estate commitments as investors look are in Manhattan like Brooks Brothers and Lucky Brands. for secure ways to replace diminished Brookfield has partnered with those Denver San Francisco yields in their fixed-income portfolios. two groups on similar acquisitions in 3% 1% And, historically speaking, Brookfield’s the past, including Aeropostale in 2016 convictions have served it and its inves- Washington, DC and Forever 21 this past February. The tors well. Its flagship opportunity fund three companies also reportedly made 16% series, Brookfield Strategic Real Estate a bid to buy the bankrupt department Partners, has delivered a gross internal store chain JC Penney, though an ac- rate of return of 18 percent across three quisition has yet to take place. vehicles, the latest of which still has There are several reasons why a roughly $4.5 billion to deploy. landlord would want to acquire a retail- “There’s a lot of capital that’s on er, Eric Rapkin, chair of the real estate New York the sidelines in cash or cash-like in- practice group at the law firm Akerman, 43% vestments that wants to get invested,” explains, especially an anchor tenant he says. “Investors are looking at the such as JC Penney. Not only would this Los Angeles Houston world and seeing a good buying op- allow them to keep the lights on and 18% 19% portunity. Prices have clearly come off continue drawing in shoppers, but it from where they were in recent years would also avoid triggering co-tenancy Source: Brookfield Q2 Supplement Disclosure and this window may not last forever.” n

October 2020 • PERE 39 Analysis

ROUNDTABLE

SPONSORS ARDIAN • EUROPA CAPITAL • GARBE • GLL

Germany stays resilient, but future worries persist

German real estate has ridden out the pandemic, so far. But managers are keeping a wary eye on the impact of economic distress still to come. Stuart Watson reports

hile other Eu- scope for an effective fiscal stimulus – six ropean real months into 2020, Germany’s response estate mar- amounted to 13.3 percent of the coun- kets have try’s GDP, compared with 8 percent in foundered in the UK and 4.4 percent in France. the wake of the But government support will not Wpandemic, covid-19 appears only to continue indefinitely, and the econom- have sharpened investor appetite for ic consequences of the pandemic, in Germany. Real Capital Analytics calcu- Germany, as elsewhere, are likely to be lates that the German market account- far-reaching. One of the most press- ed for more than a quarter of European ing questions facing the four managers dealflow in June, and the country out- participating in PERE’s 2020 Germany performed in absolute as well as relative Roundtable is how long, and to what terms. Deal volumes for both the first extent, will the hitherto relatively ro- half of 2020, at €35 billion, and the sec- bust performance of German real es- ond quarter, at €16.2 billion, exceeded tate assets be maintained? those for the same periods last year. RCA explains this as a consequence Low visibility of virus impact of three factors: the size, scale and so- “That is a difficult question to answer phistication of Germany’s domestic in- because at the moment it is a bit of a vestor base, which accounted for more black box,” muses Florian Geistmann, than half the activity in H1 2020; a head of asset management at Mu- more successful response to the pan- nich-headquartered manager GLL. demic than rival nations; and strong “Warren Buffet said it is only when public finances that have increased the the tide goes out that you see who was

40 PERE • October 2020 Analysis

Christoper Garbe

Managing partner, GARBE

Hamburg-based GARBE Group is best known as a developer, owner and operator of industrial and logistics buildings. But it also comprises property management business Fontenay, a development arm focused on constructing residential and office properties in Germany, and investment manager GARBE Institutional Capital. The group employs around 230 people, manages around €5.5 billion of real estate assets and is currently carrying out €1.5 billion of development.

Bernd Haggenmüller

Managing director, Ardian

Frankfurt-based Haggenmüller, who has more than 20 years’ experience in the real estate industry, joined Ardian in 2016. The firm is the largest European Andy Watson private equity house with total assets under Fund manager, Europa Capital management of around €100 billion. Its 30-strong Paris-based Watson is a partner at manager Europa Capital real estate division was and fund manager of its core Europa Diversified Income formed five years ago Fund. The firm, which is 75 percent owned by Japanese and manages around institutional giant Mitsubishi Estates, manages around €2 billion in core-plus €4 billion of European real estate assets. The firm employs and value-add funds. 65 staff and mainly raises capital for value-add investment strategies.

Florian Geistmann

Head of asset management and regional head DACH and the Nordics, GLL (a Macquarie Group company)

Geistmann joined Munich-headquartered manager GLL four years ago. The firm was acquired by Macquarie Infrastructure and Real Assets (MIRA) in 2018 to act as its European real estate equity platform in Europe and the Americas. GLL manages around €8 billion of assets and employs more than 150 people globally.

October 2020 • PERE 41 Analysis

swimming naked, and at the moment the government is holding the water back.” The participants’ assessments of their success in collecting rents since the onset of the virus appears to vin- dicate the government response and speak to the relative health of the Ger- man economy. Bernd Haggenmüller, managing director at private equity firm Ardian, pegs the collection rate across its office portfolio at 96 percent, with the delayed 4 percent expected to be repaid with interest. Geistmann says GLL’s figures are similar in the office segment, while 100 percent of logistics rents have been paid. Christoper Garbe, managing part- ner of GARBE Industrial Real Estate, which oversees a €3.5 billion portfolio in the segment, adds that in a survey of its tenants only 18 percent said it was possible that they might ask for a rent reduction. “About 10 percent did ask if they could reduce the rent. But only “We have had a bull half of them actually did it. So, 3-5 per- cent took the opportunity of reducing the rent under the government restric- ride in German offices tion. But most of them were SMEs and start-ups. Not one of our larger estab- lished tenants have done it,” he says. over the last 10 years. Andy Watson, fund manager at Eu- ropa Capital, has been favorably sur- prised by the resilience of the German That is coming to an market. “There were some real worries about tailspin in March that have not come to pass. The resilience of our core fund, in particular, has been pleas- end now” ing, with tenants paying over 99 per- BERND HAGGENMÜLLER cent of the rent,” he says. Ardian However, he concedes that gauging the impact of the pandemic on occupier stability over the longer run is difficult. “We have no visibility. So we adopt the common sense asset management ap- proach of talking to the tenants.” He reveals that Europa has also adopted a proptech tool designed to provide an early warning when tenants default on payments to their suppliers.

42 PERE • October 2020 Analysis

Haggenmüller says that while Ger- many’s short-time work scheme, under which the state tops up the wages of workers whose hours have been re- “At the moment, we duced, has functioned very well so far, the economic impact of the pandemic will be significant nonetheless. “We do not see it. But the will still be affected by this in all aspects of our economy, just as we were in the financial crisis. We hope this crisis will not go on too long and the impact will next 12-18 months not be too hard. But if you look at what is happening in the US, there is reason to be pessimistic.” will show what the A major economic downturn could even impact the popular logistics sec- tor, says Garbe. “At the moment, we do reality is” not see it. But the next 12-18 months will show what the reality is. Car indus- CHRISTOPER GARBE try suppliers are under scrutiny. Every- GARBE body expects manufacturing to suffer most. But, in reality, manufacturing tenants are still signing leases at the moment. There is no clear picture of what is happening. We will observe the market closely and talk to our tenants, keeping a close watch on rental collec- tion rates.” Demand for office space has already diminished, says Haggenmüller. “Take- up in the first half of 2020 was about one-third below the 2019 figure. But, if you look at the second quarter in iso- lation it was 50 percent down on 2019. We have had a bull ride in German of- fices over the last 10 years with tenants Buy sheds, or hold fire? catering for their expansion programs. That is coming to an end now. Occupi- Your last euro – would the participants ers are asking themselves twice if they invest theirs now, and if so, where? want to expand or not.”

Geistmann: City logistics. Domestic capital winning the day Garbe: Logistics development. Reflecting on continued demand for German real estate, Geistmann says: Watson: Last-mile logistics is a good 10-year bet. “With only low interest available on fixed-income, we are still seeing inves- Haggenmüller: I would wait for opportunities in tors expanding their real estate portfo- the next 12-18 months in value-add offices. lios. Return spreads have been main- tained through the crisis, and, as such,

October 2020 • PERE 43 Analysis

there is a lot of equity chasing deals, suggests Watson. “There is often a particularly on the core and core-plus need for a certain group of decision side.” makers to visit the real estate and, for He notes that demand in Germa- the moment, they cannot always do ny and France has been more resilient that. There is an obvious trend of do- than in central and eastern Europe. mestic capital winning the day at the “That is driven by markets which have moment.” lots of domestic capital being stronger through the crisis than markets that Value-add transactions falling do not have as much,” he says. “We While Germany is attractive compared currently see less international capital with other European markets, strong looking at those markets.” capital demand is not evenly replicat- Travel restrictions have played a ed across all segments and strategies. role in dampening overseas demand, The participants agree that although logistics and low-risk office invest- ments retain their popularity, retail and Germany outstripped other major European markets in H1 2020 value-add office strategies are a much Germany UK France Netherlands Sweden harder sell to investors. Monthly cumulative volume (€bn) 40 “For logistics in Germany we are inundated with money at the moment,” 35 says Garbe. “We see a real run on the asset class, with multipliers we have not 30 seen before and record pricing because logistics has been seen as a safe haven 25 among asset classes, while Germany is seen as robust, too. The rental growth 20 in logistics in the last two years has been low compared with offices, so I still be- 15 lieve there is some potential for increas- es and therefore some justification for

10 higher pricing. “We also raised a discount food re-

5 tail fund, and those assets have been very robust in the Covid crisis. Fund-

0 raising for that was a bit more diffi- Jan Feb Mar Apr May Jun cult, however, because investors were

Monthly cumulative volume by sector (€bn) 0 5 10 15 20 25 30 35

Apartment Development site H1 2019 Hotel Industrial Office Retail H1 2020 Seniors housing and care

Source for both charts: Real Capital Analytics

44 PERE • October 2020 Analysis

reluctant to back something labeled as retail.” The pandemic has created sharply contrasting demand dynamics between “Return spreads have core and value-add office investments, observes Haggenmüller: “Core offices in Germany are extremely resilient. So been maintained far, the few transactions we have seen are at similar yields to before the cri- sis, and if you have exceptionally good tenants you can even command higher through the crisis, and, prices now because everyone is looking for that kind of product. On the val- ue-add side, the impact of weaker leas- as such, there is a lot ing markets is beginning to show. That will eventually have a price impact. But sellers and buyers have not yet adjust- of equity chasing deals, ed to that new dynamic and, therefore, we see value-add transaction volumes dropping. I wouldn’t say the value-add particularly on the core market has come to a standstill. But it has slowed significantly.” and core-plus side” The office debate While the participants agree that slow- FLORIAN GEISTMANN ing economic growth means short- GLL term pain for office markets, there is less consensus over whether structural trends accelerated by the pandemic will cause permanent disruption and reduce the need for space. Geistmann notes that the tech in- dustry was driving a “voracious” hun- Pre-covid returns in Germany were highest in the office and industrial sectors, while retail returns were already falling away (%) ger for offices before the pandemic. Retail Office Industrial Residential Hotel Other But, since then, examples from the 16 US present a mixed picture, with app Pinterest paying to relinquish a lease 14 in San Francisco, while Facebook has 12 taken a huge new building near New York’s Penn Station. “More people 10 may work from home. But you could argue that, to have more flexibility, ten- 8 ants will need more space so that the need will reach a sustainable level. Af- 6 ter six months of working from home, 4 we think people are really seeking the social element that is enabled by offic- 2 es. As a result, we still believe there are strong fundamentals underpinning of- 0 fice as an investment class.” 2015 2016 2017 2018 2019 Haggenmüller also takes a bullish Source: MSCI

October 2020 • PERE 45 Analysis

The pandemic led to falling office take up in the top five German markets in Q1 and Q2 2020 (square meters) 1.0

stance on offices. “This reminds me 0.8 somehow of the situation after 9-11 when there was a big debate over whether companies would still want to 0.6 Munich locate to high rises. Humans tend to ex- Frankfurt aggerate from their current very signif- Hamburg icant and dramatic experience how the 0.4 Dusseldorf future will evolve. It is clear that office Berlin use will have to respond to new needs. But the need to bring people together 0.2 for a creative process will not go away. Whether there will be a shift in the pro- portion of flexible space and long-term 0 space that big corporations occupy I do Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 not know. But nothing will make office Source for both charts: CBRE buildings obsolete,” he argues. However, Garbe offers a dissenting perspective. “The true question is not, ‘Do we need offices or not,’ but, ‘How much office space do we need?’ We did a survey of our employees and the clear result was that they do want to come “We are in no hurry into the office two or three times a week to meet their peers. But they also want one or two days at home. In Germany, to get that dry powder that will not have as much impact as it will in cities like London where you have packed open-plan offices and long out of the door. commuting times. But it will have an impact. When economic growth re- turns, it may not have as great a posi- tive impact on office take up as it would Sticking around for have done before, so we need to think about the office in a new way.” Some analysts have suggested that another six months is increased home working will provide a boost to suburban office and residential locations. However, Watson dismiss- not going to hurt” es that as a “fashionable” idea. “Right now, and perhaps for the next year or ANDY WATSON two until we get a medical solution, the Europa Capital de-urbanization discussion will contin- ue. But the long-term trend is to con- tinue with urbanization,” he argues. “It is expensive for governments to put infrastructure out of town, and the other factor that speaks in favor of the downtown office is that there will be a

46 PERE • October 2020 Analysis

Prime yields in the German top five office locations maintained their Q1 levels in Q2, while the yield gap with bonds remains attractive

Yield (%) Prime yield office top five Yield on 10Y Bund Yield gap Capital value index office top five 6 700

5 600

4 500

3 400

2 300

1 200

0 100

-1 0 Q4 2001 Q2 2020

deeper pool of potential occupiers, and Lenders favor core offices, not just for offices, but for residential and restaurants as well.” logistics development Will economic pain create invest- ment opportunities in Germany? “Not In some segments, real estate finance remains plentiful and yet,” is the response from the panelists. the rates low. But German banks are wary of higher-risk “In the sectors we are actively target- investments, say the roundtable participants ing, beds and sheds, both for value-add and core, we see very little distress,” Geistmann: At the beginning of the lockdown, we saw the risk margin says Watson. “Europa has raised €600 on lenders’ interest rates expand. But that was just a blip and they have million of equity for our latest val- compressed again already for assets with strong income. ue-add fund. But we are in no hurry to get that dry powder out of the door. Haggenmüller: Banks are fighting for the few core transactions that you Sticking around for another six months see. But value-add is difficult to finance at the moment. We have seen is not going to hurt. There is still plen- margins increase by at least 100 basis points in Germany for the speculative ty of time on the clock.” repositioning of offices with no income, and more in other countries. “It is still early days,” agrees Hag- genmüller. “Price adjustments have not Watson: We are going to take modest leverage of 25 percent on the seed yet happened to the extent necessary portfolio for our core fund and the margins for that are probably 50 basis to make investments attractive again. points higher right now than they were six months ago. We expect that to It will be interesting to see how much compress a little, so we are in no massive hurry. On the value-add side some price adjustment has to happen before assets are unfinanceable and that is translating into a repricing of secondary we and our peers are back in the mar- deals in that space. ket, because there is a lot of liquidity.” With German real estate still at the Garbe: In the logistics market banks are quite concerned about the steep top of many investor wish lists, there are increase in capital values because 60 percent LTV at the new values would likely to be plenty of buyers waiting to have been 90 percent at the values of three years ago, so they are reluctant pounce upon any re-priced opportuni- to lever up to rates of over 50 percent LTV on market values as they stand. ties that emerge. Meanwhile, existing However, and this is a specifically German trend, for development we are owners will undoubtedly keep a sharp getting extremely aggressive offers from lenders, sometimes 80-90 percent eye on the stability of their income as a LTV, even for speculative development, at highly competitive rates. fuller picture of the economic damage wreaked by the virus begins to emerge. n

October 2020 • PERE 47 Capital watch

Uncertainty in occupier demand reduces investor appetite for offices

Expert analysis by James Jacobs, head of real estate for Lazard’s private capital advisory group

Investors are finding underwriting office demand a challenge in the current environment. But once social distancing subsides that should change

hile offices have traditional- Investor sentiment by type: the last month has office for collaborative working. Given ly been the largest sector ex- seen more investments paused the possible evolution of these require- Wposure in institutional real Business as usual ments and considerations over the next estate portfolios, many investors are re- In-process investments few years, we may also see a move to and existing relationships luctant to allocate further capital to the Investments paused shorter, more flexible leases, which is sector at present. Demand is directly % challenging for core investors needing correlated to the economy and so, giv- 100 to meet longer term liabilities. en this recession, it has fallen. Further- In terms of location, demand is

more, the potential impact of covid-19 80 likely to remain robust in the urban on office requirements, lease terms and core. Many companies are expected to location preferences are making it in- continue to cluster around suppliers, creasingly difficult for investors to un- 60 customers and clients and a central derwrite the asset class at the moment. location will also enable businesses to Corporate occupiers in many coun- attract talent from a wider catchment 40 tries have had the majority of their em- area. ployees working from home over the Notwithstanding such demand, past six months. Meanwhile, technolo- 20 public transportation concerns and gy has enabled many firms to migrate, limited lift capacity in high-rise offices often seamlessly, to the virtual office. are likely to remain issues for as long as 0 This does not, however, mean the end Jul Aug Sep social distancing persists. of the physical office as a place of work. Given the current difficulties in Many employees, including those who Source: Lazard forecasting occupational demand, in- do not have the luxury of appropriate vestors may be hesitant at present to workspaces at home, are keen to re- Lower occupancy density, necessitat- invest in offices. However, offices will turn. In addition, there are clear ben- ed by social distancing rules, is like- almost certainly remain a fundamen- efits of the office to businesses in terms ly to have a significant impact on the tal part of corporate culture, to foster of building client relationships, collab- amount of space needed, as well as on teamwork, collaboration and inno- oration and training. the design and layout of offices. Many vation. In due course there should be The demand for corporate space employees may adopt a hybrid work- greater visibility over how offices will and the way in which offices are used ing pattern, undertaking more solitary evolve, and increased investor appetite will be driven by several considerations. tasks from home and coming into the should follow. n

48 PERE • October 2020 Capital watch

Investor sentiment by type (%): endowments are proving most cautious, while wealth managers are more bullish Business as usual In-process investments and existing relationships Investments paused 0 20 40 60 80 100

Wealth manager

Asset manager

Sovereign wealth fund

Family office

Fund of fund

Consultant

Endowment/Foundation

Pension fund

Insurance company

“Our IC is increasingly “[Our] focus [is] “Our clients remain cautious about the office on managers interested in strategies sector; they feel there is which demonstrate focused on distress too much uncertainty fundraising momentum and sectors that have in the space at the as it will be important experienced some form moment” in the current market” of dislocation”

US INSTITUTION EUROPEAN PENSION FUND US CONSULTANT

Investor sentiment by strategy and sector (%): appetite for office investments stayed low while credit exposures ticked up

Credit Value-add Distressed/Opportunistic Secondaries Core/Core-plus Listed markets Other 0 20 40 60 80 100

Sep

Strategy Aug

Jul

Data centers Logistics Hospitality Office Residential Healthcare Life sciences Other niche 0 20 40 60 80 100

Sep

Sector Aug

Jul

Data and investor sentiment analysis in all charts sourced and compiled solely from Lazard communication with investors

October 2020 • PERE 49 Capital watch

American firms drive European fundraising pile

US mega-managers continue to prop up Europe’s opportunistic private real estate coffers. But the region’s wider bench remains distinctly European

Blackstone’s sixth European opportunity fund, flanked by $1bn-plus Strategy preferences have polarized, with opportunistic strategies raises by Angelo Gordon and BlackRock, pushed up closed-end garnering increasingly more capital while core and debt funds attracted fundraising in Europe over the last two years ($bn) less (%)

40 100

35

80 30 Debt 25 60 Opportunistic

20 H2 Value-add H1 Core-plus 15 40 Core 10 20 5

0 0 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 H1 2020

While US mega-managers raised the lion’s share of the capital for Europe in the first half of 2020, they accounted for just three of the top 10 fundraises in the period

Fund name Manager Strategy Target ($bn) Current size ($bn)

Blackstone Real Estate Partners Europe VI Blackstone Opportunistic 10.29 11.03

AG Europe Realty Fund III Angelo Gordon Value-add 1.20 1.50

Blackrock Europe Property Fund V BlackRock Real Estate Value-add 1.25 1.29

PATRIZIA TransEuropean VII Patrizia Value-add 0.56 0.84

RoundShield Fund IV RoundShield Partners Opportunistic 0.37 0.84

Elevation I Pictet Alternative Advisors SA Value-add 0.45 0.79

AREIM Fund IV Andersson Real Estate Investment Value-add 0.56 0.60 Management

TSC Eurocare Real Estate Fund Threestones Capital Core 0.34 0.51

British Strategic Investment Fund Gresham House Core 0.37 0.37

RLI Logistics Fund – Germany II RLI Investors Core-plus 0.45 0.28

Source for all data: PERE

50 PERE • October 2020 Capital watch

Current opportunistic fundraising efforts lag those for value-add, debt, core and core-plus strategies

+46% Other Opportunistic 61% 1% 13% More capital raised in Amount of H1 capital H1 2020 than the same raised for opportunity period last year funds

Value-add Core-plus 1 29% 14% 13%

Stepstone Real Estate Partners IV Europe is the Amount of capital only opportunistic fund in currently sought for the region’s top 10 funds opportunity funds in market Debt Core 23% 20% $11bn $1.69bn Amount raised for the region’s biggest-ever fundraising, Amount sought for the region’s biggest fund currently in Blackstone Real Estate Partners Europe VI market, Generali Real Estate Debt Investment Fund

Current trends could reverse if Europe’s largest private real estate funds now in market reach final closings, with notably fewer US-sponsored funds and more debt and core vehicles seeking investor support

Core Core-plus Debt Opportunistic Value-add $1.41bn $1.41bn $1.25bn $1.25bn Ardian Real Estate NREP Nordic $1.69bn $1.69bn Secure Income Prologis UK European Fund II Strategies Fund IV Aberdeen German Generali Real Estate Debt Property Unit Logistics Venture Urbanisation Property Fund Investment Fund Trust - SIPUT

$1.46bn Mapletree Europe Income $1.25bn Private Trust ICG-Longbow Senior Debt $1.41bn Programme Vintage IV $1.2bn Hines European Value Fund 2 StepStone Real Estate Partners IV Europe

October 2020 • PERE 51 Last word

of the systems she put in place. The irony was it was my job to do the same for her, give her criticism. I struggled all the time to do it. I’d sit down in that same meeting in Starbucks and say, “I don’t feel I’m your equal. I’m not comfortable giving you criticism.” I remember something my father used to say: don’t criticize unless you can do better. I couldn’t do better than Trish. And so, it always felt uncomfortable for me to tell her anything critical. She’d have to pull it out of me.

How did Benson Elliot regroup after her passing? In memoriam ‘Trish Barrigan was all Mogull: Three became two the day Trish got her diagnosis. I probably about empowering people’ took it hardest. I refused from the beginning to acknowledge that this potentially could be a death t has been just weeks since Trish And it made her better at managing sentence. But, in a typical Trish way, Barrigan, one of the founders of deals. She had the ability to build in the first months, when I would ILondon-based private equity real phenomenal relationships and still cry, she comforted me. That’s estate firm Benson Elliot, succumbed be tough. Trish was no pushover. not supposed to be the way this to a year-long fight with cancer. She works. My relationship with her was 47. Co-founder Marc Mogull Did that apply to being able to was as much of a big brother-little lost one of his best friends. He tells criticize you? sister thing as anything else. I was Jonathan Brasse how Benson Elliot Mogull: I’m a better professional and incredibly proud of her and I was has also lost a managing partner person because she was my partner. not going to acknowledge the able to wear both senior investment I’m generally too thin-skinned. I possibility I was going to lose her. and COO hats, complete more jobs never wanted to go through the But at the same time, Trish was in a day then either he or fellow performance appraisal system, a realist and a pragmatist, and senior partner Joseph De Leo so what we used to do was run again she spent the next year or could ever manage, and the one the whole process with everyone so reconstructing the organization, person able to deliver the sort of feeding their appraisals of me into taking all of her responsibilities and constructive criticism he knew he Trish. We’d go to our local Starbucks handing them off. She brought in and his colleagues needed. on a weekend and she would distill new people. In particular, she made the critical comments down to the sure she had someone to cover the Tell us something important to three things I’d have to change. COO-type stuff. By the time she left know about Trish Barrigan. Maybe because I’d grown up taking us she had made herself functionally Mogull: She was very commercial. orders from strong women like my redundant, though she could never But she was also a people-person wife, mother and sister, I knew what be replaced. and great at managing people. It’s she was telling me always was for my Even before her diagnosis, tough to deliver criticism, especially own good and for the good of the she was all about elevating and to someone you work with. But organization. empowering people. She trained Trish had an ability to tell people One of the things that has them and created an environment what they didn’t want to hear in a distinguished Benson Elliot is the that enabled them to realize their completely sincere, constructive and training and education people get potential. So while it was a personal not personal manner. That made is unrivaled. People constantly want tragedy, Trish made sure the her better at managing people. to poach our people. That’s because organization will be fine. n

52 PERE • October 2020 America Virtual Experience 2020

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