home sweet home: real estate rebounds

Transcription

GLOBAL REAL ESTATE & infrastructure SUMMIT 2011
home sweet home:
real estate rebounds
REUTERS/Toby Melville
The global real estate to battle plunging values and distressed debt,
while infrastructure sector frets over inflation and emerging markets.
T
he global real estate market
battened down its hatches to survive
plunging capital values, distressed debt
and upset income streams during the
global financial crisis. Now, it is edging
uneasily toward recovery, but the path is
both long, studded with uncertainty, and
varies between regions.
The global infrastructure sector has
June 20-23, 2011
benefited from heightened concerns about
inflation, with risk-averse investors seeking
the safety of inflation-linked cash flows
of companies that operate assets such as
roads, schools and airports. Investors are
becoming more comfortable with having
emerging market governments as their
counterparty as their appetite for exposure
to debt-laden countries, such as those in
the euro zone’s periphery, wanes.
Speakers attending the Reuters Global
Real Estate and Infrastructure Summit in
London, Dubai, Singapore and New York
were asked how concerns over the resilience
of the global economic recovery informed
investor allocations to these two asset
classes and where opportunities and risks
in these markets lie.
global real estate & INFRASTRUCTURE summit 2011
june 20-23, 2011
China housing push
faces roadblocks
HARD LANDING: High rise commercial and residential buildings are seen in Shenzhen August 26, 2010. REUTERS/Tyrone Siu
By Langi Chiang and Don Durfee
SHENZHEN/BEIJING, June 23
T
aoyuan Village, the first affordablehousing project in the southern
boomtown of Shenzhen, should be a shining
example of Beijing’s ambitious $600 billion
plan to offer high-quality housing for the
millions of Chinese priced out by the urban
property boom.
But the residents of this new town, with its
gleaming high-rises and clean lanes, have a
different view.
“Almost all interior walls in every home
here have turned black because the
developer used bad construction materials,”
complained one woman in her 50s, as she fed
her grandchild outside the building entrance.
“No one helps us. They kicked us around
like a ball every time we asked for help,” the
woman’s neighbour added.
Both declined to give their names.
Many economists see China’s massive
investment in affordable housing as one of
the pillars supporting a collection of more
housing investment
is supporting more
than 50 industries.
than 50 industries, from steel to consumer
electronics.
The huge quantities of building materials
that must be bought and the boost to
consumer confidence that a high-quality,
low-cost property could bring will bolster the
economy, they say.
The project is running into trouble, however.
Property companies contracted to do the
building, including Vanke, complain about
thinner-than-expected profit margins and
the building programme is falling behind
schedule.
More
worrisome,
allegations
of
cronyism and shoddy construction are
2
starting to mar the project.
Beijing has said it will build 36 million
homes over the next five years, estimated to
cost over 4 trillion yuan ($619 billion), for lowand middle-income families.
This year, the plan is to start constructing
10 million units, almost double the 2010
target of 5.8 million units, at a cost of about
1.3 trillion yuan.
Any failure to hit those targets will amplify
existing worries about a hard landing in China
when U.S. growth is weakening and other big
economies are facing a fiscal deadlock.
“Should the threat of a hard landing
emerge, we would expect fiscal stimulus
to come to the rescue, instead of monetary
easing,” said Dong Tao, an economist at
Credit Suisse in Hong Kong.
“Providing funding to policy housing and
speeding up infrastructure projects would be
the easy options.”
SHORT ON FUNDS
The next quarter will help decide
whether China can really accomplish its
target.
In the first part of this year, construction
fell behind plan due to a funding shortage
and bureaucratic delays, meaning that the
builders must break ground on an average
of 1.1 million affordable homes each month
between June and November.
june 20-23, 2011
The
central
government
appears
determined to make sure funding is adequate.
The country’s top economic planner
has promised quick approvals for local
government financing vehicles to issue bonds
to fund affordable housing.
The Ministry of Finance has also announced
it would issue 50.4 billion yuan of bonds on
behalf of 11 local governments in two tranches
later this month and early next month, partly
to help finance the home scheme. Later this
year, 150 billion yuan more will come onto
the market.
“These all show the government’s
determination to solve problems once
they arise,” said Cai Suisheng, an adviser
neither willing nor able to fully commit their
part.
With the real estate market cooling
down under heavy government tightening
measures, local governments are now
suffering sharp declines in their land sale
revenues, their lifeline funding source.
In addition, more land committed for
free to build cheap housing means an even
deeper bite into their fiscal coffer.
to the housing ministry and president of
Guangdong Real Estate Association.
Not everyone is convinced.
“The extent of activity that we’ll see in
the second half of this year and next year is
still unknown,” said Stephen Green, China
economist with Standard Chartered in Hong
Kong.
“The biggest problem is still financing.”
Analysts also suspect that local
governments and builders, which are
required to fund 90 percent of the cost, are
, are finding that they are earning lower
margins than they expected, typically 6-8
percent, but close to zero in some cases.
By
contrast,
commercial
home
development often provides over 30 percent
margins.
To be sure, developers have other
incentives, including polishing their social
responsibility
credentials,
cementing
relations with government officials and
finding a stable revenue source as a buffer
against downturns.
SLIM MARGINS
The government will also need to keep
property developers interested in the project.
The biggest developers, including Vanke,
Poly Real Estate, and China Overseas Land
allegations of shoddy construction are
starting to mar the project.
FROTHING MARKET: Visitors stand in front of the model of a property development at the 5th China (Shenzhen) Real Estate Fair, in the southern Chinese city of
Shenzhen May 4, 2010. REUTERS/Bobby Yip
3
june 20-23, 2011
But will they stay?
“Ideally, these projects would bring us
several percent of profits as a normal business
does, so that we have the enthusiasm to
do it as long as needed,” said Duan Jixian,
manager of the Longhua affordable housing
project with Vanke in Shenzhen.
His company, China’s largest listed
home builder, has pledged to help build 1
million square metres of affordable housing
nationwide this year.
The 210,000 square metre public-rental
project Vanke is now constructing in the
outskirts of Shenzhen will provide almost
no profit -- or even a loss -- if prices of
construction materials such as steel and
cement continue to increase, he said.
Squeezed by its own tight deadline, Beijing
may have to take bolder steps and allow
financial innovations including real estate
investment trusts and insurance funds to
invest in affordable housing very soon, said
Meng Xiaosu, advisory chairman of China
National Real Estate Development Group,
the country’s biggest state developer.
“China will make changes when it has no
other options. And now is almost the time,”
said Meng, who helped design the country’s
housing reform in 1998 which allowed real
estate firms to build commercial homes and
sell onto the market.
CHEAP FLATS, LUXURY CARS
And then there is the problem of how
the apartments are built, distributed and
managed.
Local media in Shenzhen have reported
many stories similar to that of the Taoyuan
residents, with people complaining about
poor construction standards at some
developments and troubles ranging from
mildew to bursting pipes.
State media have also reported cases of
luxury cars parked in the developments and
wealthy families buying flats earmarked
for low-income residents. And senior local
officials have appeared on the lists of
applicants in Beijing, Wenzhou, Shenzhen
and other cities.
In Shenzhen, housing authorities said
recently that a third of the 8,148 applicants
since the end of 2009 did not meet
qualification requirements.
The city has so far punished several
hundred, naming them in public statements,
fining each 5,000 yuan and forbidding them
to apply again in the next three years.
Other cities have done less about the
problem.
BOLDER STEPS:High rise commercial and residential buildings are seen in Shenzhen August 26, 2010.
REUTERS/Tyrone Siu
“The punishment in China is too light
so everyone would like to try their luck (at
illegally acquiring a public apartment).
Why not?” said Cai from the real estate
association.
Such problems are a worry for the
government, which hopes that its affordable
housing push will help stanch unrest among
the millions of migrants who have settled in
the country’s cities.
Shenzhen plans to adopt some of the
tactics of neighbouring Hong Kong, pressing
criminal charges and large fines. The
proposal has yet to be approved by the local
people’s congress.
“We will seriously punish those cheating or
illegally using affordable housing,” city mayor
Xu Qin told a meeting earlier this month.
“We should build affordable housing
schemes to win the hearts of our people.”
(Editing by Vinu Pilakkott)
Table of contents
China.................................................... 2-6
Top Picks.................................................. 7
Manhattan........................................... 8-9
Funds................................................. 10-11
Infrastructure.....................................12-14
Pulte........................................................15
Axis..........................................................16
Moody's...................................................17
Brazil.......................................................18
4
june 20-23, 2011
BEAUTIFUL WEATHER IN THIS SKYWAY: A woman walks between buildings at Sanlitun SOHO residential and commercial complex in Beijing May 12, 2011. REUTERS/
Jason Lee
STATE DEVELOPER SEES
CHINA HOME PRICES RISING
By Langi Chiang
BEIJING, June 21
C
hina has no property bubble and
home prices will rise steadily this
year despite government efforts to curb
speculation and cool the red-hot real estate
market, said Meng Xiaosu, advisory chairman
of the country’s biggest state developer.
China must increase land supply for
commercial housing construction, alongside
its push to build more governmentsubsidised homes, said Meng, who headed
China National Real Estate Development
Group between 1992 and 2006,
The country has banned multiple home
purchases in around 30 major cities including
Beijing, Shanghai and Shenzhen, on top of a
slew of monetary and tax measures, stalling
property transactions and slowing down
price rises.
So far, Beijing has showed no signs of
relaxing these measures, leading to growing
expectations for an eventual fall in home
prices later this year.
But Meng disagrees.
“Administrative restrictions are like
“China must increase land supply for
commercial housing construction.”
5
anaesthesia. They knock down patients. And
doctors must do the real surgeries as soon
as possible,” Meng, who helped design the
nation’s housing reform, told the Reuters
Global Real Estate and Infrastructure
Summit.
“Otherwise, doctors must jab another vein
when patients recover.”
He used to be secretary to China’s then vice
premier Wan Li in the late 1980s and later
helped draft the country’s housing reform
in 1998 which allowed private developers
to build homes and sell directly to Chinese
families.
“I don’t see any trend of a downward
correction in property prices until now,” he
said.
On the contrary, strong underlying
demand, rising consumer inflation and
insufficient supply of cheap houses mean
home prices will continue to rise throughout
the year, Meng said.
China’s real deposit rate has long been in
“There is no bubble
in any corner
of the country.”
the negative territory as interest rate rises
could not keep pace with consumer inflation.
A quarterly survey by the central bank
published last week showed property
remained the top investment option for
Chinese residents, even though steady
monetary policy tightening has dimmed its
appeal slightly.
A lack of funding has forced the national
government-subsidised affordable housing
scheme to fall behind schedule.
China started building 34 million units of
government-subsidised houses in the first
five months, only a third of the full-year
target.
After a decade’s delay since the housing
reform, Beijing is finally doubling its effort
to build cheap homes for its poor, which
will help ease social tension and pull down
average property prices.
But Meng said China must also encourage
residential property construction by releasing
more land to increase supply of homes
instead of curbing demand via administrative
orders.
He said he was concerned that the
suppressed demand would eventually
lead to a property price rebound when
june 20-23, 2011
China loosens its restrictions.
However,
some
economists
and
government researchers are calling for a
widening of these administrative curbs
nationwide, as speculators are investing in
cities where policy is lax or non-existent,
pushing up local home prices.
NO BUBBLE
China’s property prices soared in the
past two years, after its previous episode was
briefly interrupted by the global financial
crisis.
Such fast rises have stirred strong debates
on whether there is a bubble in China’s real
estate market and when it will burst, which
could push the world’s second-largest
economy to a hard landing.
“There is no bubble in any corner of the
country,” Meng said, disagreeing with even
those who worry about a partial bubble in
some cities.
Talks of a property bubble have plagued
China’s real estate market for many years.
Meng said the same strong underlying
demand from urban dwellers and massive
rural population moving to cities will
continue to drive up China’s home prices for
the next 20-30 years until when the country’s
urbanisation rate hits 75 percent, from the 50
percent now.
As China is at a different stage of
development compared with the United
States and Japan, foreign experiences cannot
predict what will happen in the Middle
Kingdom, although they sometimes do affect
Chinese policymakers, Meng said.
After the U.S. subprime crisis, China slowed
its push for financial innovations, including
the launch of real estate investment trusts
and detailed rules for insurance funds to
invest in the property market.
These programmes, if allowed, will channel
trillions of capital into the real estate market
and help ease the financing shortage of
affordable housing construction, Meng said.
“But they (some officials) are worried these
will give wrong signals to the market under
the current property tightening cycle,” he
said.
WHAT BUBBLE?: A list of the latest property transitions of a residential district is displayed at a property
agent's office in Hong Kong June 10, 2011,. REUTERS/Bobby Yip
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june 20-23, 2011
U.S., Asia, Brazil among
TOP REAL ESTATE picks
By Brenda Goh
LONDON, June 23
I
nvestors hunting discount real estate
are eyeing the mature markets of the
United States and Asia, as well as emerging
Brazil, lured by the total returns on offer there
over those in crowded European markets.
“The compression of cap rates in (core
European) markets has led investors to shift
their focus to the U.S. where yields are still
quite affordable and property values, which
have recovered ... (and) represent a good
value,” Scott Latham, vice-chairman of Jones
Lang LaSalle, said.
While property values in New York and
Washington D.C. have bounced back to levels
close to their peaks, other U.S. cities have
yet to embark on a similar pace of recovery,
opening up opportunities to profit from the
imbalance.
The market values of office buildings,
shopping malls, apartment buildings and
warehouses across the United States in May
were 44.6 percent below their peak prices in
2007, the Moody’s/REAL All Property Type
Aggregate Index showed.
“You look at some of the prices of real
estate in the United States and you would like
to think there is significant gains to be made
as they come off their lows,” said Treasury
China Trust Chief Executive Richard David.
Other property experts favoured mature
Asian commercial property markets, such as
Singapore, Hong Kong and Shanghai, due
to the region’s strong economic growth and
ample liquidity.
Stiff rivalry for safer prime European
property has seen yields fall in popular core
cities, such as London and Paris, causing
investors to look towards riskier markets to
find better total returns.
Several summit attendees named Brazil,
host of the 2014 World Cup and 2016
Olympics, as their top emerging market pick,
citing its stellar economic growth and the
potential to profit from the country’s underdeveloped infrastructure system.
“Opportunistically, if I were to invest in any
“What I like as a theme are the major cities
in Asia-Pacific ... They’re growing in terms of
population, they have strong GDP growth,”
said David Schaefer, DTZ’s international
director of Investment & Asset Management.
Asian financial hubs Hong Kong and
Singapore are expected to both post gross
domestic product growth of at least five
percent this year, official data showed.
sector ... it would be Brazil retail (assets) for
an emerging market,” Grosvenor Group’s
Chief Executive Mark Preston said.
Some investors have raised concerns
over the emergence of a Brazilian property
bubble. House prices in Rio de Janeiro have
spiked 99 percent since 2008, while in Sao
Paulo prices have gained 81 percent.
The country is also among the many
resource-rich countries lacking the necessary
infrastructure to reach its resources, said
Scott Sinha, infrastructure investment group
managing director at RBC Global Asset
Management.
“It’s a tremendous opportunity for those
who are willing to stomach the risk. Brazil
comes up time and time again,” he said.
(Additional reporting by Karen Foster and
Andrew Macdonald in London, Ilaina Jonas
in New York, Kevin Lim in Singapore and Lee
Chyen Yee in Hong Kong)
“i like the major cities in asia-pacific.
they have strong gdp growth. ”
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7
june 20-23, 2011
LANDLORDS LOVE BANKS: The Goldman Sachs building is seen at 200 West Street, New York June 2, 2011. REUTERS/Shannon Stapleton
Big banks drive
Manhattan rents
By Ilaina Jonas
NEW YORK, June 20
L
arge banks are still the high-octane
fuel that drives New York’s commercial
real estate rents, property experts said on
Monday at the Reuters Global Real Estate
and Infrastructure Summit in New York.
The financial sector accounted for 25
percent of the office leasing in Manhattan over
the last 12 months as financial institutions,
which had dumped space during the credit
crisis after 2008, found themselves in need
of space for the future. That proportion is
the same as in 2007, after it slipped down
as far as 20 percent in 2009, according to
Jones Lang LaSalle statistics.
“As profitability at the institutions started
to increase, they started to pull back that
space from the marketplace, and this isn’t
peculiar to this cycle, it happens every time,”
said Scott Latham, vice chairman of Jones
Lang LaSalle’s New York Capital Markets
Group.
Institutions such as Bank of America Corp
and Nomura Holdings Inc are in the market
to rent Manhattan office space, Latham
said. UBS also is considering returning to
Manhattan, moving its investment banking
division from Stamford, Connecticut.
Financial institutions are attractive to
landlords because banks typically seek
out large blocks of space in high-quality
buildings. Their credit quality is even more
attractive to landlords because they have
been enriched by support from the U.S.
government, said Latham, one of the top
commercial real estate brokers in New York.
“At the end of the day, but for one or two
institutions that went down, the credit ended
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8
up being far superior than most other industry
categories,” Latham said. “It turned out to
be government credit. That’s not so bad. If
you think about it in those terms, landlords
continue to like the financial services sector.”
Several banks have let go of their
proprietary trading operations, or are about
to do so, shrinking their need for space.
“It’s an extremely profitable sector -- the
banks made lots and lots of money doing it,”
Latham said, referring to proprietary trading.
New U.S. regulations that compel big
banks to close down their proprietary trading
operations have “driven employees out of
that sector,” said Latham. “But we’re seeing
job creation as a result of that because
there’s a lot of start-up activity with small
companies that are starting to hire people
who had been laid off in that space.”
LESS DOWNSIDE
From a creditor’s point of view, stricter
new or coming capital requirements by U.S.
and international regulators, along with
record profits and more efficient use of labor
and technology, have softened the downside
that a financial tenant may incur, said Marc
Holliday, chief executive officer of SL Green
Realty Corp, midtown Manhattan’s largest
landlord. That reduces the risk that those
tenants may not be able to pay their rent.
“For those reasons, we look at our financial
sector-based tenants today as being in very
good shape,” Holliday said.
The banks and other financial institutions
have added about 15,000 jobs to the
Manhattan job market since the trough of
the credit crisis, Holliday said.
“That’s good but not as much as we would
have expected given the level of profits in that
sector,” Holliday said. “I think in part that’s
just due to the reservation of companies to
make big investments in people or in new
acquisitions until the regulatory landscape
clears up a bit more.”
Financial institutions, on the other hand,
are drawn to the vast pool of labor talent in
Manhattan, as in the world’s other financial
hubs including London and Hong Kong.
Goldman Sachs Group Inc and MetLife
Inc both moved their operations back to
Manhattan after deciding to move out. UBS
is considering moving back after relocating
to Connecticut.
“It’s naive to think that as a corporation you
can move to another locale, save money on
your rent and nothing else will be impacted,”
Latham said.
june 20-23, 2011
MANHATTAN LOVES MEDIA
By Ilaina Jonas
NEW YORK, June 20
M
edia companies have become
the new rising star tenants of the
Manhattan office market, the
chief executive of landlord
SL Green Realty Corp said on
Monday at the Reuters Global
Real Estate and Infrastructure
Summit.
“Media is doing extraordinarily
well on a relative basis,” Marc
Holliday, SL Green CEO, said at
the summit in New York. “There
are no businesses that are
growing that rapidly now. Media
generally is doing well relative to
financial.”
The financial industry makes up
Manhattan’s
biggest
tenant
base,
accounting for 24 percent of the leasing of
space over 10,000 square feet in the first
quarter, according to real estate services
company Jones Lang LaSalle Inc. Media,
communications and publishing accounted
for 14 percent of the new leases, according to
Jones Lang LaSalle.
SL Green is the largest owner of midtown
Manhattan office space. Its
tenants
include
traditional
media companies Viacom Inc
and Omnicom Group Inc.
“We’ve seen a lot of strength
in some of our biggest tenants,”
Holliday said. “There are other
tenants associated with those
respective businesses that seem
to be doing relatively well right
now.”
Newer technology companies
such as Google Inc have decided
to locate downtown and Conde
Nast has agreed to rent 1 million square feet
in One World Trade Center, currently under
construction.”
(Editing by Steve Orlofsky)
“At the end of the day, it’s all about the
employees that you can attract. They flee to
the cheaper locales and come back because
they can’t hold on to the talent.”
Financial companies are some of the wouldbe tenants that already have inquired about
space at 280 Park Avenue, a 1.24 million
square-foot office complex a few blocks
from Grand Central Station. SL Green and
Vornado Realty Trust recently took control of
the building through its investments in the
debt that was on the complex.
The owners are not even marketing the
600,000 square feet that will become
available after the building undergoes
extensive redevelopment that is likely to
cost more than $150 million, Holliday said.
Although the space will not likely be available
for more than a year, prospective tenants
have begun inquiring.
“I know the market response will be great,
because it’s already great,” Holliday said.
“We’re not soliciting interest at this point, but
some of the bigger users out there who are
looking for a half million square feet or up are
in the financial sector.”
(Additional reporting by Dan Wilchins;
editing by Matthew Lewis)
BACK TO MANHATTAN: The MetLife building is seen
in New York, March 8, 2010. REUTERS/Shannon
Stapleton
9
june 20-23, 2011
global-minded U.S.
real estate funds shine
SUN RISES ON SUN HUNG KAI: The 484-metre-high International Commerce Centre (C), developed by Hong Kong's largest property developer Sun Hung Kai
Properties, is seen in Hong Kong February 28, 2011. REUTERS/Tyrone Siu
By Brenda Goh
LONDON, June 23
G
lobally focused U.S. property funds
are gaining favour with yield-hungry
investors who are pouring capital into the
vehicles to profit from their exposure to the
fast-growing economies of Asia, research
showed.
These funds drew 32 percent of the
$10.1 billion of inflows into U.S. property
funds for the year to end-May, although
they hold a proportionately smaller
share of the market, a Lipper survey of
385 U.S. property funds showed.
“People have had a tendency to prefer
the global market over the last two years,”
said Tom Roseen, research services head at
Lipper, a Thomson Reuters company that
tracks mutual fund data.
Lipper splits globally focused U.S. funds
into two groups -- global funds holding at
least 25 percent of their portfolio outside the
United States, and international funds that
hold at least 75 percent of their portfolio in
overseas investments.
Collectively, these funds hold 27 percent of
the $9.6 billion managed by the entire U.S.
property funds industry.
“By being in overseas funds, in European
or Asia-focused funds, investors get a
“in European or Asia-focused funds,
investors get a double benefit.”
10
june 20-23, 2011
double benefit -- a higher yield, and also the
exchange rate benefit of being in a foreign
currency as the dollar goes down,” he said.
The U.S. dollar tumbled close to the lows
of 2008 in May, fuelled by the U.S. Federal
Reserve’s loose monetary policy and decision
to keep interest rates low. It has lost about 7
percent against the euro this year.
On June 17, the International Monetary
Fund cut its forecast for U.S. economic
growth to 2.5 percent this year, down from
its previous forecast of 2.8 percent growth.
In contrast, it expects China to grow by 9.6
percent this year.
REBOUND PERFORMANCE
The global commercial property market
is part-way through a multi-speed rebound,
led by surging rents and demand in Asia,
while the United States and Europe grapple
with a paucity of capital and depressed
property values.
Globally focused funds have performed
better than their domestically focused
counterparts, the data showed, with the
international and global funds posting oneyear returns of 31 and 26 percent, respectively,
against 24 percent for U.S. funds.
Among these funds’ top holdings were
Asia’s biggest property developer, Sun Hung
Kai Properties Ltd, U.S. mall owner Simon
Property Group and European property giant
Unibail-Rodamco.
The data also showed year-to-date
investment inflows into the 385 U.S. property
funds were up almost three-fold from the
same period in 2010, marking a shift away
from the period of capital drought during the
2007-8 financial crisis.
Yield-chasing U.S. investors were pouring
more money into real estate on the bet that
recovery in the asset class has lagged that in
other stocks, Ronseen said.
“U.S. investors have seen grand run-ups
in equities in 2009 and 2010. However, real
estate funds did not participate to the same
extent, so U.S. investors decided to take
advantage of this lagging asset class,” he
said.
“With money market funds and bond funds
paying generally lower yields, investors have
begun looking for higher yields in riskier
assets.”
(Editing by Andrew Macdonald)
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11
june 20-23, 2011
Infrastructure investors
seek volatility shelter
By Greg Roumeliotis
AMSTERDAM, June 17
T
he low volatility and protection
from inflation that infrastructure offers
as an asset class are luring investors who are
wary of the macro-economic risks that have
put the brakes on a bull equities market.
Speakers at this year’s Thomson Reuters
Global Real Estate and Infrastructure Summit
are set to offer a different perspective on the
allure of infrastructure from 2010, when
the prospect of another economic global
downturn seemed more remote.
Concerns over the outlook of stretched
and opaque financial markets in emerging
countries have exacerbated anxiety about a
U.S. economic slowdown, contagion from the
euro zone’s debt crisis and pumped-up world
inflation.
Infrastructure companies operate assets
such as roads, airports and ports, which
can enjoy natural monopolies, making their
revenues less volatile and therefore more
appealing to risk-averse investors.
Crucially, their cash flows are often
inflation-linked, either because they are
allowed by the state to index their charges or
because their income comes from the state,
which has agreed to make above-inflation
payments.
Investors look for such assets when
they seek to rebalance portfolios to take
account of risks in equity markets and when
reassessing the recent outperformance in
returns of emerging market stocks compared
with infrastructure indices.
In private equity, Asia infrastructure
markets such as China have started to open
up. Macquarie Group, the world’s largest
HANGING ON: A construction worker adjusts reinforced bars that are being used to build a flyover in Jakarta
April 29, 2011. REUTERS/Enny Nuraheni
infrastructure fund manager, announced
a Greater China infrastructure fund joint
venture on Tuesday.
“We have a maximum exposure of 10
percent to emerging markets. They tend not
to have the operating cash flow, inflation
protection or dividend we are looking for,”
Roland Hantke, a UBS infrastructure fund
manager, said this week.
In India, private equity investment in
infrastructure has grown from about $1
billion in 2006 to $4 billion in 2010, a recent
Bain & Company report found, predicting
activity could grow 25-50 percent a year over
the next three years.
The pipeline of initial public offerings in
infrastructure is also growing as owners seek
“Asia infrastructure
markets such as
China have started
to open up. ”
to cash in on investor appetite for assets that
are perceived as safe.
These range from the infrastructure unit
of Brazilian pension fund Previ and Russian
port operator Global Ports, to Italy’s Milan
airport operator SEA.
Earlier this year, Hutchison Port Holdings,
an infrastructure unit of Hutchison Whampoa,
raised $5.5 billion in its Singapore listing,
making it the largest IPO in Southeast Asia
and the biggest in Asia to date.
With budgetary constraints in developed
countries becoming tighter, infrastructure
investors also see more opportunities in
privatisations. Several emerging market
governments are also looking to raise cash
through selling state assets.
This is of major important for the debtladen countries of euro zone’s periphery,
particularly Greece, which has failed to sell a
single cent’s worth of assets since getting a
110-billion euro EU/IMF bailout last year.
(Editing by Andrew Macdonald)
12
june 20-23, 2011
Bricks & mortar may not
stop inflation cracks
By Greg Roumeliotis
LONDON, June 23
100
0
500
400
300
200
T
he level of protection property and
infrastructure assets offer against rising
global inflation could be quickly undermined
as higher interest rates and flat capital values
erode the returns of debt-laden portfolios.
Both real estate companies and
infrastructure operators promise investors a
hedge against inflation because their revenue
often stems from contracts -- either leases,
concessions or government agreements -that are indexed to inflation.
“Normally, in a country like India, we
have seen with high inflation that interest
costs and manpower costs go up,” said
Reliance Infrastructure Chief Executive Lalit
Jalan at the Reuters Global Real Estate and
Infrastructure Summit.
“But in the infrastructure business, our
tariff is linked to the wholesale price index,
so we have a natural hedge to pricing,” Jalan
said.
Yet fears of rapid monetary tightening,
particularly in fast-growing emerging market
economies such as China, where consumer
inflation in May hit a 34-month peak of 5.5
percent, make investors anxious over the
prospect of interest rate hikes.
Memories of how unsustainable debt
can lead to the downfall of over-leveraged
Infrastructure returns
Total return rebased to 100
test
MSCI Emerging market equities
S&P Global Infrastructure Index
UBS Global Infrastructure & Utilities
MSCI World developed equities
2002
2003
2004
2005
2006
Source: Thomson Reuters Datastream
warning of rising inflationary risks in the
emerging world, and such risks are also
increasing in developed economies.
“I don’t see the risk of hyperinflation, we
see moderate inflation and this is something
which could be covered by all of the countries
and should be a situation where everything
could come to a good end hopefully,” said
Henning Kloeppelt, managing director at
“I don’t see the risk of hyperinflation.
We see moderate inflation.”
companies persist, from the U.S. housing
bubble of 2007 to the demise of Australian
infrastructure investment giant Babcock &
Brown a year later.
“At what point do interest rates rise to curb
the impact of inflation,” said Mark Preston,
chief executive of global property investor
Grosvenor Group, arguing a loose monetary
policy from developed economies may be
stocking up major rate hikes that could see
property values falling “materially”.
The debate focuses on the pace of inflation
and its prospects. Central bankers are
fund manager Warburg-Henderson. Some industry executives argue the key to
inflation hedging rests in how a company’s
revenues are linked to inflation, and assessing
the extent to which they can catch up with
consumer price inflation (CPI) or retail price
inflation (RPI).
CPI, an internationally recognised measure
of inflation, includes housing costs and
mortgage interest payments, whereas RPI
does not.
“In real estate, RPI-linked leases are the
rarity rather than the norm, so most leases
2007
2008
2009
2010
Reuters graphic/Vincent
FlasseurFlasseur 24/
Reuters graphic/Vincent
would be in some way reviewed (in relation)
to the comparables in the market,” said Bill
Hughes, managing director Legal & General
Property.
“We’ve been actively looking for RPI-linked
leases because we believe it’s important
to properly match inflation, it’s important
to recognise what the inflation risk in the
economy is,” Hughes added.
Beyond the impact on company cash
flows, investors worry measures to dampen
inflation could inflict a hard landing on asset
prices, particularly in hot markets such as
China that many investors see at risk of easily
burst price bubbles.
“The central bank needs to tighten the
money supply and raise interest rates, apart
from other measures to curb asset price rises,”
Cai Suisheng, an adviser to China’s housing
ministry and president of the Guangdong
Real Estate Association, said.
(Additional reporting by Brenda Goh and
Karen Foster in London, Langi Chiang and
Koh Gui Qing in Beijing,
and Prashant Mehra in Mumbai)
13
june 20-23, 2011
India must pay more for
better services-minister
By Matthias Williams and
Lyndee Prickitt
NEW DELHI, June 20
H
undreds of millions of Indians
living in the country’s overcrowded
cities must get used to paying more for better
public services as the government pushes a
huge infrastructure privatisation programme,
the urban development minister said.
The Indian economy is one of the fastest
growing in the world, but city councils are
“Everything has happened for free in the
municipalities,” Nath said in an interview at
his office in the capital.
“This has to change, and it requires a huge
mindset change.”
The government has pushed privatisation
in the form of public-private partnerships
(PPPs) to plug huge infrastructure gaps that
put the brakes on faster economic growth.
New Delhi aims to invest $1 trillion in the
sector between 2012 and 2017, half of which
will come from private money.
foreign investors for highway projects, wants
to push such a transformation in city utilities.
“We’ve got to develop the right PPP
models,” he said. “We are now having
discussions, we are engaging with financial
institutions, on what is the right PPP model.
“I think that in our water waste disposal,
we should target at least 50 percent (of funds
from the private sector), and for this we need
to be having proper PPP models,” he added.
A push for private partnerships could open
more doors for infrastructure firms such as
GMR Infrastructure Reliance Infrastructure
Ltd and SPML Infra.
GMR operates India’s biggest airport, while
Reliance is building the Mumbai metro.
SPML runs water utilities for municipalities.
Inviting private companies will improve
services as well as the finances of municipal
corporations, opening the door for India to
deepen its municipal bond market in the
government’s next five-year economic plan,
which runs to 2017, he said.
“Our bond market is very weak, and that is
one of our challenges,” Nath said.
STAKE SALE
'EVERYTHING HAS HAPPENED FOR FREE":India's Urban Development Minister Kamal Nath reacts to a
question during an interview with Reuters in New Delhi June 17, 2011. REUTERS/Adnan Abidi
struggling to pay for the rocketing demands
for electricity, clean water and good roads in
some of the most populous cities and biggest
slums on the globe.
Instead, the Indian government must
foster the growth of domestic and foreign
companies to lift the lid on privatisation
in public utilities, passing the costs on to
consumers, Urban Development Minister
Kamal Nath said at the Reuters Global Real
Estate and Infrastructure Summit.
A drive towards such a development model
means private construction companies are,
for example, building slick roads across the
country and charging drivers toll fares.
That’s a world away from the free but
shoddy services that plagued India’s stateplanned economy before liberalisation in
1991.
Nath, a charismatic stalwart in India’s ruling
Congress party, who in his previous post as
road transport minister energetically courted
India plans to sell a 10 percent stake in
the National Buildings Construction Corp
(NBCC), the country’s largest state-run
construction company in three months, Nath
said.
An influx of poor, rural migrants has fed
a population explosion that may see 590
million people -- nearly double the population
of the United States -- live in Indian cities by
2030, an estimate by the McKinsey Global
Institute showed.
Indian drivers face an average peak
morning commute of more than one-andhalf hours to two hours, while its cities treat
only 30 percent of sewage generated and
its sewers reach less than two-thirds of the
population, the McKinsey report showed.
“The carrying capacity of our existing urban
areas is already way exceeded,” Nath said.
“Because of this, there is so much stress in
every urban infrastructure activity of ours
(Editing by Malini Menon and
Vinu Pilakkott)
14
june 20-23, 2011
Pulte goes local,
eyes margin growth
MAKING IMPROVEMENTS:
Richard Dugas, Chairman and
CEO of PulteGroup, Inc., speaks
at the Reuters Real Estate and
Infrastructure Summit in New
York June 21, 2011. REUTERS/
Brendan McDermid
by Helen Chernikoff
NEW YORK, June 21
P
ulteGroup Inc, the second-largest
U.S. homebuilder, says its margins lag
many of its peers but will improve in the
second half of the year.
The company is making improvements
based on painful lessons learned during the
downturn, Chief Executive Officer Richard
Dugas told the Reuters Global Real Estate
and Infrastructure Summit.
“Success is a terrible teacher,” Dugas said,
quoting Microsoft Corp founder Bill Gates.
To boost margins, which the company said
were 16.9 percent when it reported firstquarter earnings in late April, the company
plans to place more authority in the hands of
regional and local managers.
The move contrasts with the trend of
centralizing power and standardizing
operations which prevailed during the
Pulte will place
more authority with
regional and local
managers.
housing boom, Dugas said.
“If a local vendor for a product is more
aggressive than a national vendor, we’ll go
with the local one,” Dugas said.
Making more features of Pulte’s homes
optional instead of part of a standard plan
set at corporate headquarters will also
enhance margins, Dugas said, because when
customers actively choose an upgrade like
fancy cabinets, the company tends to make
more money.
Pulte has also learned how to put its homes
together more efficiently, from truss layouts
to climate control.
“We’re projecting margin growth,” Dugas
said. “But part of the reason is catch-up to
where we should be.”
(Editing by Matthew Lewis)
15
june 20-23, 2011
SOUTHEAST aSIA REITs
ripe for mergers:Axis
DEALS FACE HURDLES: People fish along the banks of the Chao Phraya River opposite condominiums in Bangkok August 29, 2010. REUTERS/Sukree Sukplang
By Min Hun Fong
KUALA LUMPUR, June 20
R
eal estate investment trusts (REITs) in
Southeast Asia are ripe for consolidation
with prices rising in certain property
segments, Axis REIT Chief Executive Stewart
LaBrooy said.
Although the REIT business is still in
its infancy in Southeast Asia, excluding
Singapore, there is a need to increase the size
of books to ensure greater flexibility in trading
assets, the CEO told the Reuters Global Real
Estate and Infrastructure Summit.
Consolidation in the sector is facing
regulatory hurdles in the region, he said. In
Malaysia, for example, there are no specific
guidelines for REIT M&As, and the corporate
takeover code is insufficient, LaBrooy said.
“The trust structure we have in Asia makes
M&As almost impossible - including in
Australia,” LaBrooy said.
Loose monetary policy and rising inflation
have contributed to a rise in property demand
and prices, and have made REIT acquisitions
increasingly difficult, he said.
Rising interest rates are also hurting REITs,
he said, adding that Axis was looking at
floating an Islamic bond as well as moving
some of its borrowings to a fixed-rate facility.
Units in a number of REITs in Asia are trading
at a discount to the REITs’ net asset value. While
by no means the majority, the number is high
enough to worry some investors.
Lack of an acquisition pipeline and
movement in their asset composition are
the biggest problem that REITs in the region
face, analysts say.
REITs appreciate in value when their asset
portfolios appreciate, but the revaluation
gains are only realised when the asset is
disposed.
REITs’ reluctance to sell assets means
that much of this revaluation gains remain
trapped as an unrealised gain.
“Once you reach a certain size, a REIT
should be more open to trading opportunities
and sell if a property’s value has been
maximised,” the CEO said.
16
june 20-23, 2011
No U.S. home price rise
seen until end 2012
By Helen Chernikoff
NEW YORK, June 20
E
conomist Mark Zandi says the United
States is “nowhere near” a housing
market recovery, but he can nonetheless see
a light at the end of the tunnel.
Zandi, the chief economist of Moody’s
Analytics, sees home prices rising at the
earliest at the end of 2012, when buyers
snapping up cut-rate foreclosures and short
sales will have cleared the market to the
point that the percentage of distressed sales
starts to fall.
“We’re still in the housing crash,” he said.
Presently, about a third of home sales are
of distressed property. That percentage will
increase in the near-term as the foreclosure
pipeline, temporarily slowed by flawed
processing and related lawsuits, starts to
flow again.
Additional price declines will be painful,
but necessary for the market to bottom and
finally rebound.
“I’m expecting the process to reaccelerate
as we work through the foreclosure issues,
and we work through some of these legal
actions,” he said.
Meanwhile, the housing market is already
starting to show early signs of healing and
the economy is slowly getting stronger.
In some markets, home prices are holding
firm. The percentage of homeowners who are
30 days late on their mortgages is falling,
Zandi pointed out. And the spread between
the discount on foreclosed and other
properties is narrowing.
What’s more, he sees stable, significant
job growth. The economy has created about
2 million private sector jobs since early 2010.
Businesses are strong enough to do more
and will, when they have more confidence in
the future.
The question of confidence, however,
is a sticky one, Zandi acknowledges, and
represents valid challenges to his relatively
optimistic view of the housing market over
the next few years.
“The thing that is so worrisome about
NOWHERE NEAR RECOVERY: Mark Zandi, chief economist of Moody's Analytics, speaks at the Reuters Real
Estate and Infrastructure Summit in New York June 20, 2011. REUTERS/Brendan McDermid
the current environment is the lack of
confidence,” he said. “It doesn’t take a lot to
tip people over the edge. Before, if we’d had
$4 gas and the Japanese effect we would
have felt it, but in this context, it flipped
people’s thinking about the world overnight.”
(Editing by Phil Berlowitz)
17
june 20-23, 2011
Brazil's BHG
eyes expansion
By Guillermo Parra-Bernal
and Vivian Pereira
RIO DE JANEIRO, June 22
Hotel operator Brazilian Hospitality Group
may expand operations in some Latin
American countries to gain scale and tap
rapid income growth in the region, Chief
Executive Peter van Voorst Vader said in an
interview.
While BHG, as Brazil’s third-largest hotel
operator is known, remains focused on
growing locally through a mix of takeovers
and new projects, overseas expansion could
make sense in the long run, van Voorst
said at the Reuters Global Real Estate and
Infrastructure Summit in Rio de Janeiro.
In Argentina, where business tourism is
booming as a result of strong trade ties
with Brazil, van Voorst said any investment
would have to be large to succeed. The
main challenge to BHG’s cross-border push
is adapting the company’s administrative
structure to other countries’ taxes and laws.
“The important thing is to find the right
moment to expand outside Brazil,” Dutchborn van Voorst, also a former oil and fast
food industry executive, said late on Tuesday.
He did not say whether BHG had plans to
use the Golden Tulip brand as it expands
in the region. BHG owns the rights to run
Golden Tulip franchises throughout Latin
America.
Despite expansion plans, the company’s
main goal is building market share in Brazil’s
fragmented industry, which remains small
for the size of the country and its tourism
aspirations.
“We will do more acquisitions ... with
focus on places where there will always be
business activity,” van Voorst said. “Going
abroad could make sense in the future.”
That could be a good strategy as Brazil
prepares to host the 2014 World Cup and the
2016 Olympics. Massive oil and gas, energy
and other infrastructure investments are
DOUBLING ITS SIZE: BHG CEO Peter van der Voorst Vader poses for a picture after attending an interview
for the Reuters Global Real Estate and Infrastructure Summit in Rio de Janeiro June 21, 2011. REUTERS/
Ricardo Moraes
expected to ensure demand for hotel services
in the years ahead.
For decades, investment in Brazil’s tourism
infrastructure failed to reach its potential
because of the nation’s dependence on
foreign visitors. That reliance has eased
in recent years as the domestic economy
boomed, sparking a surge in the number of
homegrown business and leisure travelers.
Things began to improve about four years
ago as the entry of deep-pocketed chains
helped increase the supply of upscale
rooms and challenge the dominance of
undercapitalized family-owned hotels.
BHG, Brazil’s only publicly listed hotel
operator, is using its access to capital
markets to buy smaller rivals in cities that are
underserved. BHG doubled its size in 2010
with a combination of acquisitions and new,
“greenfield” projects.
BHG, controlled by private equity firm GP
Investments, expects to expand another 75
percent to 13,000 rooms by 2014 from about
6,250 now.
“The important thing is to find the right
moment to expand outside Brazil”
The company has enough cash to fund its
projects without selling new stock or debt,
van Voorst said. It recently sold $52 million of
stock in a private placement.
BHG focuses more on the business
tourism segment and three- and four-star
hotels aimed at mid-sized, industrial and
commodities hubs than its larger rivals such
as Paris-based Accor and Sao Paulo-based
Atlantica.
For instance, BHG is building a 200-room
hotel in Itaguai, an industrial hub outside of
Rio that is home to a steel mill, iron ore docks
and other heavy industrial facilities expected
to add thousands of jobs in coming years.
“Currently, you only have two or three bed
and breakfasts there,” he said.
According to data by Jones Lang Lasalle,
Accor is Brazil’s biggest hotel company,
with more than 23,000 rooms either owned
or managed as of the end of last year. Local
player Atlantica followed with about 12,200
rooms.
Shares of BHG fell 0.7 percent on Tuesday.
The stock has added 45 percent in the past
12 months. (Editing by Dave Zimmerman)
18
june 20-23, 2011
summit speakers
Art Adler
Chief Executive Officer
Jones Lang LaSalle
Hotels
Richard Dugas
PulteGroup
Yojiro Koizumi
Senior Partner
CarVal Investors
Meng Xiaosu
Former Chairman
China National Real
Estate Development Co
Marc Bajer
Hadrian's Wall Capital
Baldomero
Falcones
Fomento de
Construcciones y
Contratas
Dimitris Koutras
Chairman
Aktor Concessions
Kamal Nath
Minister of Urban
Development
India
Kenneth
Campbell
TkCompany
Marc Holliday
Chief Executive
Director
SL Green Realty
Corp
Stewart LaBrooy
Axis REIT
Vikas Oberoi
Managing Director
Oberoi Realty
Andrew
Charlesworth
Director
John Laing
Infrastructure Fund
Bill Hughes
Managing Director
Legal & General
Property
Scott Latham
Vice Chairman, New
York Capital Markets
Group Investment Sales
Jones Lang LaSalle
Boe Pahari
Head of Infrastructure,
Europe
AMP Capital Investors
Pierre Cherki
Global Head of Real
Estate
RREEF
Lalit Jalan
Reliance
Infrastructure
Ziad Makhzoumi
Chief Financial Officer
Arabtec
Mark Preston
Grosvenor Group
David Creighton
Cordiant
Gerry Jennings
Principal,
Infrastructure Debt
AMP Capital
Investors
David Marshall
Director
John Laing
Infrastructure Fund
Andrew
Radkiewicz
Managing Director
Pramerica Real Estate
Richard David
Treasury China Trust
Jason Kern
Managing Director,
Head of Real Estate
Advisory, Asia Pacific
HSBC
John McCarthy
Global Head of
Infrastructure
RREEF
Francisco Reynes
Abertis
Leo de Bever
Alberta Investment
Management Corp
Henning
Kloeppelt
Warburg-Henderson
Carlos Medeiros
BRMalls - Rio de
Janeiro
Adrian Ringrose
Interserve
19
Tony Roper
Director
InfraRed Capital
Partners
june 20-23, 2011
David Roseman
Head of Infrastructure
Macquarie Capital
Gurjit Singh
Chief Operating Officer
Sorouh Real Estate
Scott Sinha
Managing Director,
Infrastructure
Investment Group
RBC Global Asset
Management
Simon Treacy
Group Chief Executive
Officer
MGPA
Peter Van Voorst
Vader
BHG - Rio de Janeiro
Laurie Voyer
Al Habtoor Leighton
Group
Wan Abdullah
Wan Ibrahim
UEM Land
Steffen Wolf
Managing Director,
Asia Pacific Real
Estate
Savills
Rollo Wright
Partner
Gravis Capital
Partners
IS THIS SEAT TAKEN?:
Chairs in Times Square wait
to be used on a cold and
windy afternoon in New
York, December 7, 2008.
REUTERS/Chip East
Mark Zandi
Chief Economist
Moody's Analytics
COVER PHOTO:The Strata tower (L) is seen amongst other residential and commercial buildings in south London April 12, 2011. REUTERS/Toby Melville
For more information contact:
Eriko Amaha
+61 2 9373 1818
eriko.amaha@thomsonreuters.com
Ilaina jonas
+1 646 223 6193
ilaina.jonas@thomsonreuters.com
© Thomson Reuters 2011. All rights reserved. 47001073 0310
Republication or redistribution of Thomson Reuters content, including by framing or similar means, is
prohibited without the prior written consent of Thomson Reuters. ‘Thomson Reuters’ and the Thomson
Reuters logo are registered trademarks and trademarks of Thomson Reuters and its affiliated companies.
andrew macdonald
+44 20 75429667
albert.yoon@thomsonreuters.com

home sweet home: real estate rebounds

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