Real Estate Forum - New forum

welcome2nyc:

REBanker,

from your profile picture I assume you are in london. I was curious to know what European business schools or programs place well into the real estate development field?? Any particular programs are known for producing big real estate professionals.

I am in London. I'm not sure what programs place well into development, but the programs that place well into Real Estate finance are LSE Real Estate Economics and Finance, Cambridge Real Estate Finance and to a lesser extent the Cass real estate program. A lot of these students are also looking to go into development as well. I'm not sure about European schools. To be honest, a lot of guys that I meet in the real estate have general business backgrounds.

RE_Banker:

LeatherPantz makes good points, I was more speaking to strategy of different real estate investors, but understainding their funding sources is very important to understanding the strategy. You can't really describe the whole sector in a single post.

You are correct to say that REPE is involved in development, but only from a funding perspective. Most REPE funds partner with local operators (read: developers) in order to carry out a strategy. So if you want to be a pure developer REPE is not the way to go.

I'm correct, yes but more to the point, your post was not. The nature of funding is the primary distinction between a RE focused private equity fund and other real estate investors and strategy follows funding (i.e., bc REPE have term locked equity and debt financing, therefore have few MTM constrains, they can make aggressive investments into the most illiquid assets that other investors can't do bc they're constrained by asset-liability mismatch issues).

Further, not all REPE funds are focused on opportunistic strategies. Some buy core assets and target lower returns and some are in the middle, buying core assets in non-core markets or turn-around plays of core assets/core markets. The headline grabbers tend to make opportunistic investments but in Europe over the 2005-2007 that really meant buying the crappiest portfolios in Germany. Now, almost everyone in that space is debt-focused.

LeatherPantz1:

Again, I think you're confusing different concepts or at least confusing the audience. Investment Strategy and Fund Structure (open ended, closed ended--pe, whatever a hedge fund is...) are different concepts. Any Fund Structure could theoretically pursue any investment strategy its managers liked. The point I made earlier is that the further from super core an asset gets, the less liquidity and the greater the risk asset-liability mismatch risk. Since PE funds have long lock ups, they can pursue higher return strategies with greater uncertainty and lower liquidity because there is greater visibility around when capital needs to be returned and less risk that the fund will have to sell assets when it doesn't want to. Of course, in reality, due to massive leverage PE funds use, Sponsors have had much less control than they anticipated and in lots of cases (e.g. MSREF) are turning assets over to lenders or losing free cash flow to banks.

RE_Banker...how much of your life is spent considering/modelling accounting concepts? My view is that in RE (esp. in Europe) you make relatively few accounting adjustments in models compared to other industry groups. Can you please expand on this?

Thanks.

I think we are on the same page. Opportunitistic closed ended funds can pursue those "hairy" strategies because of the locked up capital. And yes, at the moment they all see value in investing through the debt and working through it by trying to force a situation where they take control (which can get ugly) .

As for modelling adjestments for accounting concepts you need to be a bit more specific, but I'll take a stab anyway. It really depends on what you are modelling. In terms of valuing an RE asset or portfolio, you are using NOI and not FCF, so you aren't really making adjustments as NOI is fairly straightforward (its calculated before interest, property revaluation, taxes, D&A etc). In the event that you are buying a REIT you really have to pay closer attention accounting adjustments. In doing the DCF valuation, you are using FCF so adjustments matter. Of course, there are other valuation methods for REITs (i.e. looking at the NAV and comparing it to the stock price). On the whole though, I don't have to think through the accounting that often.

bankerchic:

Why exactly are more opportunistic investments less liquid?

Take a development for example. Developments are opportunistic and are less liquid because you can't sell a semi completed development (well you can, but it will be at a loss) so you have to hold it the length of the project. So your investment will be around 4+ years if you are going to stabilise the asset (generally opp funds will take on developments with minimal pre-lets so stabilisation takes a year or more post completion).

Another example would be investing through the debt. If you are buying a portfolio of non-performing loans at a massive discount to par with the idea of taking control of the assets and selling them, then the process can be long and drawn out and require an army of loan servicers.

In both scenarios you need to know that your financial backing will not be pulled. However, attached with that is the fact that you have to deliver a premium to your investors, which is why opp funds need to target 20%+ IRRs.

bankerchic:

LeatherPantz, can you expand on the following comment a bit more: "The point I made earlier is that the further from super core an asset gets, the less liquidity and the greater the risk asset-liability mismatch risk."

Why exactly are more opportunistic investments less liquid?

And to ibddreamer, to answer your question about what banks have good groups... Morgan Stanley and Goldman have traditionally had the best RE IBD groups. Morgan's PE model has really taken the heat from the market downturn (I suppose this can be said about most funds). Do a search to find a post that discussed their current status in a bit more detail

Like other asset classes, liquidity in real estate investment markets varies over time and is somehow a function of the market's perceived risk. In shitty markets, capital flees riskier investments for safe havens, like gov't bonds. In RE the same is true to a relative degree, when things are bad, investor interest in riskier assets (assets with shorter lease terms, higher vacancy or cap ex requirements, hotels, etc...) wanes the most (usually) so a seller would go to the market and have time selling an asset at a desired price. As a result, the bid-ask spread on riskier properties blows out and transactions just don't get done unless sellers accept prices below expectations. This tends to be more or less exagerated depending on the risk level--as the market got really bad, yields on all property blew out but the more core the asset (generally) the smaller the movement. This is all a function of (or for that matter defines) liquidity. For a fund who's equity can be withdrawn with little notice, you can't own assets that will be impossible to sell if/when the market turns because you'll be forced to firesale. PE's lockup mitigates this and allows PE funds to invest in assets where liquidity is likely, hence valuations are likely to be volatile over the life of the investment and as long as debt LTV covenants aren't too tight, the investment can survive a MTM valuation problem if fundamental value is OK and by the exit the price recovers.

porter9900:

cap rate is not any kind of return. it is simply the NOI/Price. therefore the higher the cap rate the lower the price of the asset. ie if the hotel has an NOI of $100,000 and a price of 1MM, the cap rate would be 10%

This is true, however it is also true with all other real estate assets. I guess another way to say my question is what incentive does hotels offer over traditional forms of real estate, to compensate for the additional operational efforts and additional risk?? Shouldn't cap rates and NOI be tied to risk and how complex operation/maintenance of the property is?

PapaJohns:

RE Banker,

I was wondering if you could possibly describe the career progression/promotion schedule for REPE, (my understanding is that MBA is not a BIG deal in REPE, primarily because real estate valuation is very different that traditional valuation methods that are taught in most b-schools.) ...Can you describe the career track, how many years its takes at each level, and finally how your responsibilities change over the years. And if you know compensation, i'm sure everyone would be curious to know about that as well. and Maybe even give your insight into the lifestyle as far as hours& travel& culture at each level. .... I feel like all this information is something many people are really interested in understanding, and it seems as though you have the most insight/experience regarding it. thanks.

Career progression is not as defined as the traditional 2 years IB -> PE. Certainly that is one way to go and is the route I'm taking, but the following are other ways I've seen people end up in REPE (keep in mind that I work in Europe):

1. Directly to REPE from undergrad/MS RE starting as an analyst - usually you have to be at a good school and have a decent understanding of real estate. A few REPE shops that hire students are Colony Capital, Blackstone RE and Tishman Speyer.

2. Chartered Surveyor for a few years -> REPE Analyst - I think this is more relevat in Europe. People who work at CBRE and JLL definitely know how to value real estate and understand market fundamentals, what they usually lack is investment acumen (i.e. picking investments that are good).

3. Real Estate Tax specialists from one of the Big 4. Definitely a good skill to have in RE. Someone with 3-4 years experience will usually start as an associate.

4. RE Law specialist. Useful especially for something like a distressed CMBS/debt purchase.

5. REIB -> REIT Acquisition Analyst -> REPE Analyst/Associate. At a REIT you are essentially doing the same things as at an REPE firm.

6. Analyst at a developer -> REPE Analyst. Like a REIT analyst, you might need some RE IB or surveyor experience first.

7. RE Commercial Banking -> REPE. This is usually more relevant at senior levels. If you have strong debt sourcing relationships you will be highly valued (especially today)

One thing I should note is that larger REPE firms have acquisition teams and asset/portolio management teams. Acquisition teams originate and execute deals (either single assets, portfolios, development jont ventures, corporate acquistions, or debt deals) and Portfolio management teams run the assets and make sure they are well let, in good condition, track development progress, refinance then when necessary etc. It is a lot easier to get a job on the asset management team, but it's boring and the pay is usually less.

I wouldn't rule out an MBA entirely. I did a real estate focused masters program, but I'd still consider going somewhere like Wharton to do an MBA where Linneman is a professor. If the program has RE courses, then you can learn RE specific valuation as part of an MBA.

Years at each level - depends on how good you are and on the firm's structure.

Pay - depends on the shop. There is a huge range.

Lifestyle - 12 hour days are typical but they can be longer at the height of a transaction. Travel is definitely part of the gig because asset tours are an important step of the due diligence process. Culture really depends - a shop run by ex-bankers will be hardcore hours and IB culture. Traditional RE guys from CBRE and JLL or REITS and Developers drink heavily and like to have fun (in my opinion). They usually work less hours.

nutsaboutWS:

so large banks that have asset management divisions for real estate are not using leverage at all? JPM/GS/MS etc. I know JPM has $45 billion in their global real assets group under investment management, so they probably buy properties from 100MM-1B. I find it hard to believe they dont use debt. Even without taxes, im sure JPM gets taxed someway.

can someone please help explain this.

Yes most banks have large real estate asset management divisions, but the way they are broken down varies.

You mention that JPM has $45 bn of RE assets AuM. I know that in Europe they have a few different funds that span the whole spectrum of RE investing. In the Life UK Property Fund they buy core assets (i.e. shiny new office buildings) with limited debt searching for 5-8% returns. They also have a more opportunitic fund which looks at developments (usually with a partner) or more distressed RE situations where they can add value. The leverage used will likely be higher for these investments. They also have a real estate fund of funds (I think) where they just allocate money to REPE funds. I would say well over 50% of the AuM they have is in the core asset bucket and so the overall amount of leverage they use should be below 50%. Because they have many funds with different objectivs, I would say the JPM probaby focuses on investments in the $25m - $200m range and anything above that is out of the norm.

MS or GS also have RE units - MSREI and Whitehall. They focus much more on opportunistic real estate plays with lots of leverage, but they still do have a few income producing funds.

Smuggler:

Would love to get your opinions on how experience at a major commercial RE brokerage firm (think the GS of re brokerage) would be viewed by a RE opportunity fund or RE hedge fund.

Depends on the RE Opp fund. If they buy single assets or portfolios then you have a shot, if they are buying companies they will typically want some IB experience.

Smuggler:

Would experience at a top tier brokerage firm where one would see transactions across the capital stack (e.g. equity to mezz debt) on all product types (e.g. office to hotels) be more valuable than an acquisitions role at a core or even value add fund that only invests in the four traditional re asset types (no mezz debt, hotels, etc.)?

Again, depends on what you are looking for. If you don't want to do fully let on long leases office deals then don't go into a core fund. Also, don't let the brokerage firm trick you into thinking they do amazingly complex deals - most transactions that involve multiple slices of the capital stack involve investment banks....and the brokerage firms usually only provide a valuation opinion on the property...

Smuggler:

The trade off may be that brokerage will see more transaction types but lack the depth in understanding the transaction (from investor perspective) and acq role at non-opp fund would be limited to the vanilla transactions. Thoughts?

That's right.

ToBeOrNotToBe:

whatever happened to this thread? Any luck with a real estate forum?

I guess this is the RE forum....nothing has been dedicated to RE that I know of.