Senior commercial real estate debts and select second-tier cities are likely to offer greater investment opportunities to global investors still keen to raise exposure to the US real estate market, said a senior manager of Los Angeles-based Ares Management L.P.
Booming e-commerce and demographic change will help generate long-term demand for US commercial properties, underpinned by solid US economy and steady population growth in the world’s biggest economy, Jamie Henderson, real estate debt head and partner of Ares Management, told the Korean Investors in a recent email interview.
However, some core equity and subordinated debt investors in US gateway markets may suffer from any mild pullback in the real estate market because of their high valuations, he added.
Ares Management manages $121 billion of assets as of June 2018.
The following are Q&As with Henderson in the interview conducted ahead of the ASK 2018 Real Estate & Infrastructure Summit in Seoul due on Oct. 23:
Q: Where do you see the attractive investment opportunities in terms of region, country, strategy, sector, tranche, etc.?
“We believe both the US and European real estate markets present a broad range of attractive opportunities along the debt and equity risk spectrums. The disruption from e-commerce and the interplay between demographics and housing are two phenomenon generating long-term demand tailwinds in both regions.”
“In the US, we believe that select secondary markets, which are experiencing high growth but are more affordable than the coastal gateway markets, offer a greater opportunity set. We also believe that some core equity and subordinated debt investors in the gateway markets may be overexposed even in the event of a mild pullback given how far asset values have risen during the recovery.”
Q: What do you think is going to happen to real estate investment in the coming years? What are the major risks of these asset classes?
“The US is the largest real estate market in the world, comprising one third of the global investable universe. It also has the largest economy and the highest GDP per capita of any G7 nation and its population and labor force are expected to grow at a steady rate. As a result, we believe global investor appetite for private US real estate debt and equity should remain high in coming years.”
“Historically, risks specific to the asset class include weakening demand, over-leverage, oversupply, and/or regulatory change. Supply and leverage are in balance, and therefore, we believe that the demand and regulatory environment remain favorable. … Furthermore, we believe private real estate is well positioned to outperform other asset classes, including public fixed income and public equity assets, in the event of an economic downturn.”
Q: What’s your view on global macroeconomic outlook? How do you think the US Fed’s interest rate hike will change capital flows in global financial market?
“Capital has continued to flow into the US even as the Federal Reserve has pursued interest rate normalization. Institutional investors around the world are still below their target allocations to the US commercial real estate market. We believe the US economy and financial markets are healthy enough to withstand higher interest rates, and the US should continue to attract investment capital.”
Q: Korean investors are getting more conservative when assessing investment opportunities in US real estate market because hedging cost has increased. Do you have any solution?
“We do believe that in the current environment, investors can benefit from the safety and stability provided by US commercial real estate. In particular, we believe that US first mortgage commercial real estate debt is highly accretive to investor portfolios due to its many attractive attributes that include:
• Potential for high and predictable current income
• Floating-rate structure provides potential hedge to inflation
• Yield premium to investment grade corporate debt with similar credit risk
• Hard asset backing and seniority in the capital structure
• Low correlation to public equities and only moderate correlation to fixed income
• Complement to core real estate equity and investment-grade corporate bond allocations
Q: There are concerns in the investment community over the valuation throughout all asset classes. What about real estate? Do you see any signs of bubble in the market?
“Overall, we believe commercial real estate pricing is relatively well-balanced and reflects strong fundamentals. When adjusted for inflation, real estate prices as measured by the RCA Commercial Property Price Index are only 10% above its pre-recession peak compared to real GDP which is 17% above pre-recession peak.”
“We do, however, feel that select assets in gateway cities have experienced significant price appreciation.”
By Chang Jae Yoo
<Edited by Yeonhee Kim>