CBRE Capital Advisors Inaugural Four Quadrants Seminar
The seminar based around the recent Four Quadrants publication featured a panel of industry experts including Aviva’s John Gellatly, Deutsche Bank’s Martin Allen and TIAA Henderson’s Christian Janssen.
The aim was to consider the “four quadrants” of private equity, public equity, private debt and public debt as ways of making investments in real estate and debate whether there are relative pricing differentials between them and how these affect investment decisions.
The debate was framed by questions such as:
- How can one play the relative value gaps between the different ways of accessing real estate risk?
- Is Europe’s largest REIT with a dividend yield of 3.5%, but at a 60% premium to NAV, or senior debt at a 3% coupon better value?
- What happens if/when interest rates rise?
- Is everything a bubble?
One could conclude that senior debt looks expensive at a nominal yield of 3.0-3.5% and that the listed sector trading at premiums of 10-60% looks expensive compared to either physical assets or the unlisted funds trading around net asset value. However, as the debate ranged back and forth the more involved the arguments became.
It was suggested that the listed sector’s premiums only really reflected where one might actually have to pay in order to actually buy real estate assets, essentially a valuation lag argument; in which case the unlisted sector look relatively inexpensive compared to both listed companies and physical assets.
It was also argued that real estate debt was not necessarily expensive if considered in the light of arguments that, even assuming reasonable rental growth, yield expansions of less than 100bp could result in physical assets and debt investments generating the same modest returns.
The key theme to emerge was that there are relative value differentials in the pricing of different ways of access real estate risk and that these can be used to enhance investment returns both in absolute and risk adjusted terms. However, decisions about the interpretation of relative value analysis and the consequent investment decisions are as much determined by one’s market view and appetite for illiquidity risk and volatility of returns as the basic numbers.
By Graham Barnes, Executive Director, Corporate Finance at CBRE