01/07/15

Real estate: strong demand and limited supply will sustain rising prices

Law Square’s François de Montpellier sees ‘atypical’ investors as well positioned to seize opportunities.

Despite challenging economic conditions there is optimism in the real estate market, much of which comes from the availability of capital – the real estate market is awash with equity. As markets have seen liquidity rise steadily, large amounts of capital are being directed towards real estate. Concerns about prices are being offset by historically low interest rates, and the income stream from real estate means it remains attractive compared to other asset classes. In an environment marked by strong demand and limited supply of core assets, the best deals go to the investors who have clear priorities, understand the risks, have fixed investment horizons – and who are able to position themselves and move quickly.

The shortage of quality assets remains a challenge for investors, more than cost of finance or regulation,” comments François de Montpellier, Partner at Law Square. “Institutional investors went through a flight to quality, in either premium office buildings, retail and logistics locations. Now they’re under pressure to buy in large volumes, and are more willing to go into residential and conversion projects, and other atypical projects.

Big money is still a dominant force in the market, but in-depth local knowledge can be a real advantage for finding suitable locations and assets: sound investments in regional cities, buildings that are attractive for renovation, retail and office space in town, logistics assets, residential conversions – good quality spaces in selected cities. Local knowledge also helps to spot the potential of newer formats for real estate investment, such as student housing and homes for the elderly, or leisure centres.

Activity by non-real estate ‘pure players’ such as insurance companies, or construction companies becoming developers, is driving diversification away from a landscape previously dominated by real estate ‘pure players’ (domestic and international real estate funds),” explains François de Montpellier. “We also see a lot of activity from ‘atypical’ investors – high net worth individuals (HNWI) or families, acting in groups or alone, whose time horizon for investment management can span several generations, as opposed to the 3-8 years for domestic and international real estate funds. This long-term view means they have different investment criteria. For instance, they might acquire a retail centre with an acceptable but not exceptional level of profitability, if based on demographic analysis of the area they believe a RER/GEN station will be built there in 10-15 years, and the profitability of the investment can then be increased, or it can be converted into a more profitable asset.”

Whatever their profile, real estate buyers are keen on managing risk. “Investors are buying a revenue stream, so we make sure there’s nothing that might disrupt it. We make sure the ownership is clear, that all occupancy contracts and permits are in order, and examine applicable development plans,” states François de Montpellier. “We assist our clients throughout the entire negotiation process, up to signing the deal and the transfer of ownership. They want the objective advice and legal certainty that only an independent law firm with an in-depth understanding of their business can offer.

Real estate deals have become complex transactions involving multiple players: banks, financial and tax advisers, lawyers, occupants, public authorities, operators, and so on. Institutional investors are highly sophisticated, but their responsiveness is sometimes hampered by governance policies and internal decision structures. “Atypical investors need more active support to manage all the operational and technical aspects, but on the other hand they’re real competitors thanks to the speed with which they can act,” says François de Montpellier.They have a clear strategic vision, and are well positioned to seize opportunities when they appear in the market – they’re not to be underestimated.

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