Masters of the Game: Global Real Estate Leaders Discuss International Market Forces and the Future
November 05, 2018
“Think globally, act locally,” that ever-popular business mantra, doesn’t fully capture the complexities of international real estate investment and development. According to the luminaries who participated in a “Masters of the Game” panel during the Global Leaders in Real Estate Summit, the factors underlying success in the sector are far more nuanced.
The masters in question gathered to discuss “Navigating Global Geopolitical Concerns and the Outlook for 2019,” topics that drew a large audience at the summit, which was co-sponsored by iGlobal Forum in partnership with EisnerAmper and held at the Sofitel New York in October.
Jay Neveloff, partner at Kramer Levin Naftalis & Frankel LLP, moderated the lively conversation among panelists Leslie Wohlman Himmel, co-managing partner of Himmel + Meringoff Properties; Reid Liffmann, managing director of Angelo, Gordon & Co.; Justin Guichard, managing director of Oaktree Capital; Gerald Guterman, senior principal partner of Guterman Partners, LLC; and Herbert Myers, managing director, real estate investment at Investcorp.
Neveloff opened the discussion by asking about the susceptibility of the domestic real estate market to global economic conditions. Guterman quickly responded that real estate is a local business that has very little to do with the global economy per se. He continued, “What we find is if the demographics are right and the management is right, we tend to do well in the property, regardless of what the global economy is doing.”
Himmel agrees with the importance of localization, but she also pointed out that, at least in terms of the Manhattan market, the flow of international capital has decreased as a result of President Trump’s tariffs and other geopolitical considerations.
Rising interest rates are another consideration. Guichard pays close attention to them because of Oaktree’s defined investment periods. Myers is not overly concerned about any negative effects. He pointed out that the wide spread between interest rates and cap rates allows investors “to benefit from an overall return at the property level that’s attractive … that will allow them to continue investing in the United States.” He added that investors perceive certain asset classes, such as multifamily and industrial, as generators of top-line growth that offsets some of the extra interest rate expense.
Just how important is the number crunching? Himmel believes that some investors place too much emphasis on their financial models. Indeed, she’s seen deals fall through because “the brilliant 24- year olds who come out of Wharton can’t make the numbers work. We’re buying something in Manhattan for $600 a foot and I know it’s worth $800 a foot,” Himmel said. “I can’t prove to you necessarily that we’re going to get the IRR because you have to have all sorts of yields, and most people don’t understand that.”
Neveloff suggested that the right approach balances the “dirt” with the calculations. Dirt refers to the building, the demographics, who the tenants are, what the market is. Macro factors are important, too, he continued, but you can’t buy based on numbers or a thoughtfully imagined yield on sale. When you invest in real estate, you need to do more.
Local operators are critical to the dirt. These operators, said Liffmann, “know the right side of the street from the wrong side of the street. They know how to execute. They know what leasing broker they want to work with. They know the contractors.”
The other panelists concurred. And everyone agreed on another point—that the appeal of U.S. real estate to international investors persists. Notably, the demand extends to secondary and even tertiary markets. Guichard, for instance, is seeing more foreign capital in secondary markets than ever before. He attributes this to the healthier fundamentals of these markets, in contrast to New York, which is experiencing challenges in hospitality, Midtown office, and retail. Guterman, meanwhile, has done business in tertiary markets for 30 years, with no adverse impact on the bottom line.
There was also good news about real estate assets in general. They continue to gain ground as targets for fund allocations. Liffmann recently reviewed a survey of institutional rebalancing and discovered that allocations in equity markets were decreasing, while allocations in real estate were increasing. “I don’t know that there’s another asset class globally that has just effectively gone straight up since 2008,” he said.
While keeping close tabs on the evolving market and its future prospects, the panelists also are mindful of the wisdom of past experts. To Guterman, for example, the guiding rule was stated decades ago by the legendary Harry Helmsley: “You make your money on the day you buy; you collect it on the day you sell.”