Pimco prefers real estate lending to investing given the uncertainty about further interest rate rises and price corrections, a senior executive told the Urban Land Institute Europe conference.
“We are in a volatile situation [...] being lower in the capital structure is a good place to be this time,” said Annette Kröger, chief executive Europe at Pimco Prime Real Estate during a panel discussion at the event in Madrid. “We are more active on the debt side than on the equity side.”
Kröger declined to provide further details after the panel discussion, saying there are no targets for either strategy. At the end of last year, Pimco had invested €52.5 billion of equity globally, nearly twice as much as the €26.4 billion of debt it provided. It also had €16.3 billion in indirect investments, according to its website.
She told the audience that Pimco had anticipated a change in interest rates, but that it had not reckoned with the speed and magnitude, which has caused a situation with “a lot of moving pieces”.
The interest rate rises, of course, caused a shift in valuations, as the cost of borrowing went up. Real estate now also finds itself competing with other asset classes as investors rebalance their portfolios, she said. On the positive side, she said real estate continued to provide a hedge against inflation, with rents increasing. She also noted that development pipelines were reducing.
Earlier in the conference, Dame DeAnne Julius, a fellow at Chatham House and a founding member of the monetary policy committee of the Bank of England, said she believed interest rates would rise a bit further before peaking at 5-6%, much in line with consensus opinion. But she noted that nobody knew the neutral rate of interest, also known as r*.
Real estate, Julius said, is going through a “disruptive transition”, like the defence and energy sector and central banks caused by geopolitical (the rise of China, Russian revisionism) and technological (AI) changes.
In this volatile environment, investors are trying to find a way forward. The market stalled after the summer last year, with investment levels across Europe dropping to record lows.
Peter Ballon, global head of real estate at CPP Investments, told CoStar News on the sidelines of the conference that he currently sees most value in public markets. The investment arm of the Canada state’s pension plan has invested C$5 billion in listed property. Its stakes are mostly under 5%.
Ballon said that the public markets had repriced quicker than the private markets.
“The private markets have not entirely adjusted,” Ballon said, adding that "private office is a challenge".
The US remains CPP Investments’ focus as it has “sold off the most and is the biggest market”, he said.
Industry leaders fear that ESG will take a back seat as the sector faces so many challenges from various sides. The conference in Madrid, the first big European one since the pandemic, was a call to action to decarbonise to stop climate change. Opening the conference, ULI chief executive Lisette van Doorn warned the 800 or so delegates – a mix of investors, lenders, lawyers and advisers – that there were too many competing initiatives.
“The industry needs to unite, pick a lane and stick to it,” she said. “Uniting requires transparency. We need the courage to stand behind collective actions.”
Clemens Brenninkmeijer, head of sustainable business operations at private investor Redevco, called for “radical transparency”.
“I can’t get access to the energy data of our tenants because they don’t want to share,” he said. “This is ridiculous [...] Let’s make data open source and then we get cracking and make better decisions.”