Real Estate Investment Panorama
Perspectives from Mary Ricks, President of Kennedy Wilson
Despite many viewing the current, speculative real estate scenario as a glass half empty, Mary Ricks, President of , expressed a more optimistic and refreshing outlook.
Ricks will be a keynote speaker at the Investor’s Talk Show on the first day of the upcoming GRI Europe 2023. Sitting down with for a sneak preview, she shared her expectations for the opportunities and challenges that lie ahead in the coming months.
Of course, Ricks’ analysis also came with a dose of the cold, hard truth. Deal flow is currently lower than desired, there’s valuation uncertainty on both sides, and real estate is like a moving target. Nevertheless, with such dynamism comes opportunity. A transformation is taking place in the banking sector, giving way to opportunities in the private credit space.
With more than three decades in international real estate investment, Ricks drew on her experience leading from zero to USD 10 billion of assets, to give her insights into which asset classes to watch in the near future.
The Here, Now, and Near FutureIt’s no mystery why investment in real estate has taken a downward turn in the past year, with soaring interest rates and inflation haunting investors around the world. With valuation uncertainty and a continuing price gap, underwriting returns and pricing acquisitions are like taking a stab in the dark.
As Ricks explains, no drastic improvements should be expected just yet. At least, not until the arrival of a light at the end of the tunnel in the form of clarity on when interest rates will stabilise.
The good news - banks are playing ball. It’s in everyone’s interest that the big borrowers ride out this wave of uncertainty and get to shore safe and dry. Strong cooperation between banks and sponsors has been observed, especially those with good relationships. As long as borrowers can hold out and bear the higher interest rates a little longer, it seems banks are open to working with them.
However, an impending wave of maturing debt may see a not so happy ending, with banks cracking the whip and limited refinancing or extension options. With this in mind, in the next 12-24 months, Ricks predicts the triggering of “events”: an equity gap, forced sales, foreclosure, and thus an overall higher transaction volume.
Private Credit SpaceIt may seem all gloom and doom, but the liveliness of the market is where Ricks and recognise potential. With banking lenders restricting supply of leverage, comes exciting opportunities for alternative lenders to grow their market share, especially in the private credit space where there are interesting risk adjusted returns being seen both in the US and Europe.
have expanded their debt portfolio significantly, especially in the US, strategically positioning their private credit platform for substantial growth. Having launched the platform in 2020, they have already secured USD 7 billion in total gross commitments, including future fundings and deals under contract.
Considering the unnecessarily bloated banking sector, which consists of more than 4,000 banks, recent closures such as the Silicon Valley Bank and Signature Bank demonstrates the consolidation of the sector. Ricks believes this transition will continue to develop and lead to yet more opportunities to buy debt in the private credit space.
The Capital StackAlthough the consolidation of the banking sector is predominantly playing out in the US, high interest rates and inflation are being seen the world over. Financing costs in most global markets are several percentage points higher, and even punching above real estate yields in many cases. Therefore, finding returns from leverage is difficult right now, and prices are looking slow to catch up.
This is where sees the benefit of investing in the entire capital stack. Referring to the recapitalization of the in 2011, where KW was the catalyst and lead investor, Ricks believes their entrance into Europe is very telling in terms of where more opportunities will be seen in the near future.
Following this recapitalization, pursued and secured a real estate asset management team, swiftly putting boots on the ground in the UK and Ireland. They then proceeded to execute a USD 1.8 billion loan portfolio, bought bonds in a securitization, and brought in multiple equity holders and debt financing with very swift execution.
This successful track record of investing through cycles up and down the capital stack, and optimising returns to investors through multiple strategies is where holds an advantage as this market cycle approaches a similar stage.
Loving Logistics“We love the logistics sector” was Ricks’ first answer when asked which asset classes to bet on in the short and long term. This applies to both the UK and Europe, and more recently in the US, Ricks continues. Rental growth is relentless, outperforming despite the volatile capital markets, and there’s no letup in sight. Ricks describes underwriting single digit rental growth and seeing up to 30% growth.
Occupational fundamentals, however, hold the secrets. In logistics, it's crucial to consider the supply chain. “All sheds are not equal,” says Ricks, and last mile warehouses are those pushing the rental increases, driven by 3PL e-commerce occupiers and a new wave of just-in-time (JIT) supply chains.
In the UK, London and the Southeast have been a big focus for , as they observe a re-shoring effect, and a push to reduce transport costs, which can account for up to 55% of total logistics costs.
Office OutlookA less rosy view of the office sector is hardly surprising in recent years.. Following the cultural shift to remote working, occupancy of offices has plummeted, and pain is expected as loans come due. With limited refinancing options, keys will inevitably be handed back.
Albeit a challenging sector, Ricks’ optimism reminds us that grade-A office space remains attractive, and demand is picking up. This is especially the case for those green assets with high ESG standards.
Much office stock is far from adequate, however, leading to increased temptation to redevelop. In the UK’s Southeast, with a dense and affluent population, redeveloping can be wise. Elsewhere, it’s not so simple. Considering inflation, steep construction costs, and big CapEx spends, it can be hard to justify.
Repurposing & ResiRepurposing carries a similar dilemma. Ricks reports seeing offices being repurposed into residential senior living, health care, industrial data centres, film studios, and more. This situation remains highly speculative and all depends on location and the exact product. Only one thing is for certain: office space below grade-A is destined to struggle.
Residential has historically been a key asset class for , especially in Europe. With conviction in the multifamily market since their inception, they now boast 37,000 units under management globally. The ability to capture market rents, the unfaltering demand, and undersupply make it an attractive sector.
Ricks is eagerly awaiting opportunities, especially in the UK and Ireland, pending the softening of market liquidity and inflation easing off on construction costs. Additionally, there is an estimated GBP £16 billion of loans allocated to residential developments. As these developers go to refinance, an equity gap may appear, bringing further opportunities.
ConclusionAlthough real estate may not be the good, old, stable investment the market knows and loves, for those with creativity and experience, the opportunities are there. A love for logistics, partial to the private credit space, and with eyes on the entire capital stack, Mary Ricks will be developing on these insights during her keynote address at Europe GRI 2023.
As a Global Patron, Ricks will also be participating in the GRI Women Leading Real Estate meeting at GRI Europe 2023. Diversity of thought is essential, Ricks explains, and it is vital to continue to help senior women rise to their full potential in the real estate space.
Europe GRI 2023 will gather the leading voices and players in real estate investment, providing access to exclusive insights and discussions. Join them by registering for the event, taking place on 12-13 September at InterContinental Paris Le Grand, Paris.