We held our second roundtable webinar on 13 May 2020 to look at some of the asset classes where European investors have allocated in a world where government bond yields are approaching zero. 52 participants were once again moderated with elan by Aoifinn Devitt.
The panellists were:
Paddy Dowdall, Assistant Executive Director at Greater Manchester Pension Fund;
Richard Tomlinson, Investment Director, Local Pensions Partnership;
Andrew Brett, Principal, Real Assets Research, NEPC LLC;
Grainne Dooley, Trinity College Dublin Endowment; and
Kristin M. Staffeldt, Senior Portfolio Analyst, University of Chicago.
We started by looking at real estate. Q1 valuations have been little affected in aggregate, though affected sectors such as retail were down some 5% to 10%. One panellist commented that there was a greater effect on sites being developed than those in occupation, as social distancing made construction slower and more difficult. Aggregate income appears to be coming in at around 60-70% in the first quarter, though all panellists thought the crunch would come in the second and third quarters. In the US income is collected monthly, and April and May seem to have held up well.
There was universal agreement that tenants and landlords are locked in a ‘partnership of pain’, and except in hopeless cases there was little point in evicting tenants for non-payment. The initial flurry of rent reduction requests has died down, and most panellists were fairly sanguine about the future: investors need income and even if rental income falls, real estate will still be an attractive source of income relative to equities.
We discussed whether there would be a move away from offices and cities, and the consensus believed that, while we may all be shell-shocked today, this would reduce and we would probably go back to patterns of living similar to BC (before Covid). One panellist commented that transport would be the real challenge if COVID-19 becomes a long-term factor in our lives, and another that offices may need to be redesigned – old-fashioned lay-outs are unlikely to be popular.
COVID-19 will affect fund-raising because on-site due diligence is so important. Panellists thought that raising new funds would be difficult, and the emphasis would be towards co-investments with existing managers.
We then turned to infrastructure. The speakers said that infrastructure was less affected by COVID-19 than real estate, though similar trends were in place. Income from PFI or renewables is unaffected, and while more economy-related assets such as airports or railway lines will take a short-term hit, the panel did not expect it to be long-term.
Listed infrastructure has done better than listed real estate, and there has been little discrimination by investors between companies so far. A speaker noted that while 35% of European companies have made announcements about dividend reductions, only 3% of US ones have. Management behaviour appears to be very different. The implication is that there are good opportunities for active managers in listed companies.
We spent a few minutes on property debt. Unlike the GFC, this crisis is not centred on levered real estate, and the general view was that it offered a better risk-adjusted return than equity, though one speaker said she didn’t invest as the returns weren’t adequate. The panel was asked whether government funding might crowd out debt and make it more expensive; one response was that the government would itself likely absorb much of the new funding, and the real issue was inflation. This led to a variety of views, but most thought that any inflationary surge would not be immediate, even in the case of a V-shaped recovery.
We noted that European allocations to real assets tended to be higher than the US, where it is usually below 10%, with the vast majority of that being in real estate. None of the panel thought that COVID-19 would make much difference to their long-term allocations to real assets, though one expected to spend more time on special situations.
Our next roundtable will be on the subject of private credit, hedge funds and opportunistic strategies at 2pm on Wednesday 27th May 2020.
Feedback from past round tables:
"An excellent initiative very professionally executed." "Thank you for inviting me to such a refreshing forum – it’s frankness and directness were most welcome." "That call was terrific! Thanks so much for including me." "Very good and as you say honest comments. Thanks to the panellists." "You did a fabulous job. Very interesting. Thank you for the invitation." "Interesting call. Thank you for the invite."
“Good discussion and nice to see some familiar faces.”
“Thanks so much! great discussion and great to see you!”
“Thanks very much Aoifinn and everyone else, very informative discussion.”
“Many thanks - very interesting.”