Jeff Jacobson

Jeff Jacobson, Global CEO, LaSalle Investment Management, has seen several cycles come and go. There is, he says, increased investor appetite for real estate, but not all forms of investing in the asset class are viewed equally.

Jeff Jacobson’s opening gambit is a confident statement that underlines the strength of investor sentiment: “Real estate has moved from a peripheral part of an investor’s portfolio into the mainstream. Investors are not down-weighting their allocation to real estate. In general they are either keeping allocations steady or increasing them, sometimes in a very meaningful way.”

Rationale

Classic core real estate with low leverage, steady income returns and diversification has always been attractive in a multi-asset class portfolio. In light of the continuing poor performance of other asset classes following the global financial crisis, its star appears to be in the ascendant.

“The cult of stock ownership was pierced after the second crash in a decade because volatility was so severe. Fixed income, a traditional alternative to stocks, has also lost some of its allure as interest rates fall to historic low levels. Meanwhile, high quality real estate continues to offer income yields of around 4% to 5%, which remains compelling compared to fixed income,” says Jacobson.

The question for investors was how could they best implement their real estate strategies.

Back to the Future

Fashions come and go. In the late 1980s segregated accounts and joint ventures were the thing. But they fell out of favour during the real estate crisis of the early 1990s only to be replaced by the private equity style opportunity funds and listed real estate securities.

The global financial crises saw a shift away from broad opportunity funds and higher risk real estate investing. Not surprisingly, the crisis coincided with the end of a long bull market real estate cycle which had seen strategies become increasingly risky and using increasing levels of leverage. There were also issues over governance and alignment. And fees were spiralling out of control. All of these issues came together with the downturn and subsequent very poor investment performance of many of these strategies.

To address these weaknesses, investors sought greater transparency and control. They headed “back to the future” and to their preferences of over 20 years ago for greater control via joint ventures, clubs and separate accounts.

As Jacobson says: “What people thought they were investing in became something different from pure real estate due to the complexity of the structures, leverage and risks being taken. Now we’ve seen investor preferences come around again. It is part of the natural swing of the pendulum. When things go wrong and the experience is painful, humans are biologically hard-wired to do the opposite of whatever hasn’t worked for them in the recent past.”

However, Jacobson is quick to point out that the number of investors who say they want to get into joint ventures and club deals is out of kilter with the number of those who are actually getting deals done. “JVs and club deals are complicated and need a tremendous amount of time and internal resources to implement. Very few institutions have the scale and staff resources to invest this way.”

Investors need to be able to perform sophisticated attribution analysis for real estate.

Debt

One of the key current trends is a move toward real estate debt funds. INREV’s recent Investment Intentions Survey identified that 35.1% of investors expected to increase their allocations to these investments.

“The lending market tends to be cyclical in which debt goes from being an attractive investment to one in which lenders crowd into the space and misprice risk”, says Jacobson.

“The current attractive phase of the European debt cycle is likely to have a much longer run because commercial lenders are broken.” He adds that with European banks needing to increase their capital base and reduce assets, growing regulation and the trillions of euros worth of refinancing requirement there is a real need to develop new sources of debt and preferred equity capital.

Jacobson sees debt as a definite growth area though it is not a pure real estate play as it combines elements of both fixed income returns with real estate credit risk. “We’re seeing many pension funds take capital for debt from their fixed income allocations not their property allocations.”

But Jacobson is keen to stress that whatever happens with new products and new trends, the diversified, ungeared real estate portfolio has delivered for investors over time and will continue to do so.

This premise underpins his view that the case for real estate as a mature and reliable asset class has now been made.

The INREV Effect

He is less convinced, however, when it comes to the narrower field of non-listed real estate funds. “INREV has done a great job over the past 10 years, but now we need to really promote the non-listed story. It is compelling, but it is less well known,” he says.

Where Jacobson believes INREV has made significant inroads is in the development of professional standards and best practice, vastly improving transparency and governance.

Initiatives such as the INREV Guidelines have helped investors to gain a better view of how non-listed real estate funds operate. And the work on styles classification has been useful in helping investors to understand the relative risk and return of these investments.

He also cites INREV’s invaluable contribution to the development of robust measurement criteria and benchmarks. “INREV’s Standard Data Delivery Sheet and Due Diligence Questionnaire is very good, but everyone needs to buy-in. Getting this right is key to the future of the non-listed real estate funds industry,” he says.

“The more data we have the better. But at the moment the measurements are still relatively crude indices at an aggregated level. They need to become more granular. Investors need to be able to perform sophisticated attribution analysis for real estate just as they can for equities and fixed income.”

His final observation fixes on the requirement for INREV to broaden its remit: “To date, INREV has focused on investing in indirect vehicles. But as the market matures, we need to integrate JVs, club deals, separate accounts and debt funds. The agenda is being shaped by investor preferences and INREV can’t afford to be left behind.”