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Real Estate Investing, 2011

“Numerous studies have shown that companies that keep spending on acquisition, advertising, and R & D during recessions do significantly better than those which make big cuts.” James Surowiecki

Keep spending. It's rare advice in the realm of business and investing—especially during a recession.

James Surowiecki, who has studied recession spending, explains that most organisations shun the idea of continued investing in these circumstances. "When hard times hit," he says, "most companies...hunker down, cut spending, and wait for good times to return. They make fewer acquisitions, even though prices are cheaper."

Asking the Relevant Questions
This issue of recession investing was explored on May 20th, when United Trust co-sponsored a panel discussion on property markets. The panel's focus was private investors and UK-European real estate.

Refreshingly, the moderators of the day sidestepped the obsessive question that has dominated this recession: At what stage of recovery is the economy? The problem with this inquiry is its abstractness. Being able to gauge the market's state of health is a hypothetical—and far cry from the reality of making concrete real-estate decisions.

In contrast, the moderators' questions were decidedly pragmatic. Among the issues the panel explored: Who, exactly, is investing in bricks and mortar in 2011? What are the experts' investment strategies of choice? Are property investors tightening their belts reflexively in this recessionary landscape?

The Experts' Mindset
As important as their questions was the panellists' collective stance on property investing. There was an implicit acceptance of current market conditions. The mood was proactive, with nary a hint of "wait-and-see." The implied philosophy could be expressed this way: Real estate recoveries must be invoked rather than awaited.

Our panellists looked at four discrete sectors: the Residential, Office, and Retail property markets, as well as Hospitality real estate.

Who's Spending Now?
The short answer to who's currently investing in UK and European real estate is: individuals from around the globe—foreigners to the European market.

Panellist Camilla Dell assessed Residential property buyers in the UK market to be 60 percent "foreign." In the Retail category, Cushman & Wakefield's Clive Bull defined one district—London's West End—as a point of reference. And, during the first quarter of 2011, Mr. Bull estimated that 70 percent of transactions were made by non-UK investors.

Why Some Investors are Spending
Domestic and foreign investors are responding to concrete advantages offered by the UK, London in particular. First and foremost, UK markets are secure—and security has proven to be golden during tumultuous times.

A secondary benefit is the favourable currency exchange rate. Third is liquidity—and strong demand practically ensures this liquidity. Parallel to strong demand, we're seeing a profound lack of supply (especially vis a vis prime properties), which adds stability to the investment.

The widespread use of British Common Law beyond borders translates to yet another attraction for foreign buyers. Many would-be investors are familiar with the UK's legal requirements; this makes the prospect of investment in the British market more plausible.

Real Estate:
Does it Outclass Other Assets?

The experts explored how UK and European real estate stack up against other investments in the current environment.

Knowing the composition of the panel, one could predict that real estate would be seen to outclass all other assets.

But the reasons cited for the primacy of property assets are noteworthy. Panellists were enthusiastic about the potentially wide margin for capital appreciation that property investment represents. They praised real estate as an opportunity to diversify portfolios. And they referenced yields of 4 ½ to 5 percent (in Residential) as high enough to trump the UK's low interest rates.

The Experts' Strategies
Again and again, in sector after sector, the concept of investing in "non-core" and geographically "fringe" properties emerged as a key approach. This recommendation was pragmatic, as usual: Why compete with the world's wealthiest investors for the choicest real estate when ingenious deals can be found in less-obvious locales?

The long-term hold—giving the asset ample time to appreciate—was another strategy invoked. In fact, Ms. Dell defined long-term capital appreciation as "the main reason to buy" residential property. This strategy has long been a staple of property investing.

It became clear, though, that the long-term hold does not necessarily entail waiting passively for a property to accumulate equity. Edouard Fernandez stated the case for adding value to properties by participating as "full, hands-on real estate developers, working with the tenants, working on the redevelopment of the building." He referenced returns closer to the high teens as the possible reward for such proactive investing.

Who's Cutting Back?
There was, of course, no debate on this subject: in this economy, it is the banks that are tightening their belts. The representative panellist on this subject, Deutsche Bank's John Matthews, identified the shortage of equity for transactions. He spoke candidly of banks being compelled to shrink balance sheets. The continued caution on lending was fully acknowledged, as were the forthcoming years of refinancing transactions.

Restricted lending is clearly a huge investing hurdle, literally and psychologically. It was interesting to observe the audience react with only fleeting pleasure to Mr. Matthews' announcement of a £190 million loan made to an Asian investor just one day earlier.

Limited lending plus increased regulation equals tough barriers for would-be property investors. In a sense, banks and regulators are reaching over and tightening investors' belts—whether they like it or not.

United Trust's Position
During the Structured Lending discussion, Alex Smotlak expressed an undernarrated truth of real estate—and indeed all—investing: it is wise to heed one's own comfort level. Communicating that comfort level to one's Trust advisor can result in the feeling of ease throughout the life cycle of the investment.

We can summarise our thoughts on the complex subject of real estate in a simple phrase: informed investing. That means being apprised of the fiscal consequences of the investment. Knowing the relevant regulations. Understanding the projected risks and returns.

All of these are responsibilities shared with a Trust advisor who knows real estate; knows onshore and offshore options, and knows markets, both bull and bear.