May 8, 2025 • 52 mins
Property markets are headed for trouble as the US economy slows and interest rates stay high, according to Hines, the global real estate investment manager.“We will probably see a bigger wave of assets in distress,” Alfonso Munk, who runs the firm’s debt business, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Tolu Alamutu in the latest Credit Edge podcast. “What I’m worried about is the operating distress if we get into economic headwinds.” Munk and Alamutu also discuss investment opportunities and risks by property type, region and country, as well as the impact of the trade war on real estate markets worldwide.
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Episode Transcript
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Speaker 1 (00:17):
Hello, and welcome to The Credit Edge, a weekly markets podcast.
My name is James Crombie. I'm a senior editor at Bloomberg.
Speaker 2 (00:23):
And I'm totally alamito of senior and list covering real
estate at Bloomberg Intelligence. This week, we are very pleased
to welcome our Fonso Monk from Heinz. Heines is a
leading real estate and investment manager with a history of
almost seventy years that owns and operates more than ninety
(00:43):
billion dollars of assets across several countries. Alfonso oversees the
debt business and is also closely involved in the day
to day operations of the firm.
Speaker 3 (00:53):
How are you, Alfonso, good, Thank you very much for
having me.
Speaker 1 (00:56):
Great to see you. And so we are here, obviously
to talk about real estate, which tumble into distress during
the pandemic as everyone worked from home and bricks and
mortar shops closed down. Only a year ago, we had
the CEO of Fortress on this show describing a one
trillion dollar opportunity in distressed real estate debt. But by
the end of twenty twenty four we were hearing more
and more about the real estate recovery. Some of the
(01:17):
guests were even saying that the opportunity to buy the
cheap debt was already over so at that time. Obviously,
at the end of last year, there were very high
hopes about a new supposedly pro business US administration, and
that sparked a huge rally of cross markets, including real estate.
But fast forward to now with markets getting hammered by
the trade war, where are we now in that cycle?
Speaker 3 (01:37):
Off on?
Speaker 1 (01:37):
So will we back down again?
Speaker 3 (01:39):
Yeah? I think real estate is a till of cycles.
As you will mention, James, there's always some news to
some event that really moves the markets around, like any
other client sector in the economy. You're writing the COVID.
It was a quick, short lived downturn because it quickly recovered,
as it did in a lot of sectors. The next
(02:00):
The next area or event to hit real estate because
it is such an intra sensitive area, was the increase
in interest rates in the middle of twenty twenty two
as a result of Federal Reserve and all the central
banks trying to fight inflation, which obviously was the central
theme at the time. In mid twenty twenty two, we
saw the researcher Old Reserve increase rates and then all
(02:21):
of a sudden, real estate got on the spotlight again
because we need debt and leverage and interest rates in
order to invest in real estate. So all of a sudden,
some of the stress and some opportunity came around between
twenty twenty two and I would say in the mid
of twenty twenty four. So for a couple of years
we started to see interesting areas if you were an investor,
(02:42):
but also those who had real estate and depending on
leverage and that we're suffering a little bit. We saw
the light on the second half of twenty twenty four,
as you mentioned, James, because we felt that with the
change in administration in the US and the pro business
cyclecality that we were seeing things will get better. As
you might know, James were saying survive until twenty five
(03:04):
in the real estate world, and people were thinking, well,
we survived in twenty five, Things will get better. Rates
will come down, which is a big thing for real state,
as I mentioned, and then all of a sudden, we'll
be back in the game the up cycle. What we're
seeing is that we didn't expect what was going to
happen in twenty five, which is I don't know if
we have to survive now twenty five or we're going
(03:24):
to survive a few more years because the uncertainty and
volatility related to some of the actions that are taking
place around the world is creating issues. Right. Rates are
no longer expected to go down because inflation is likely
to stay high. Investors and banks who were financing real
estate are now saying, well, that's the case, then maybe
(03:47):
we should start taking more drastic actions. And I think
the opportunity for the distress might come quicker than people expect,
but the recovery of the real estate market world so
take a little bit more time for two reasons. One
and dependence on leverage, and also that depends you know,
real city is very sensitive, like a lot of industries
to the economy. It's all about demand and supply, and
(04:09):
you know, the economic headwinds that we're facing as a
result of the trig terriffs and some of the actions
that we're seeing. My impact real STY, no question, will
not impact talk about it will not impact all real
city equally, but obviously it's going to impact Real STY.
Speaker 2 (04:23):
Yeah, and we're definitely going to I think talk about
the big tea in the room, which is tariffs for sure,
but before we get onto that, I mean you've already
outlined what happened over the last two to three years
in terms of performance of real estate, and that's definitely
also what we've seen on the public siders, and the
bonds did spectacularly well in twenty three, did okay in
(04:44):
twenty twenty four, so looking this year, it was already
going to be very difficult, I think, to beat those
two years of very very strong performance. So twenty twenty
five was challenging from the start. So you mentioned survive
to twenty five, we've also heard people say make it
to twenty six now, so I guess that's now the catchphrase.
(05:04):
With that in mind, what sort of returns do you
think that investors like yourself should expect to see in
real estate this year compared to last year and the
year before.
Speaker 3 (05:16):
Yeah, I think it depends on what sector in real
estate you're investing, and also what part of the capital
structure you're investing. So when I mean capital structure is
investigated on the equity side of the real state or debt,
and then obviously depending on the sector, some sectors are
going to be impacted more than others. So the return
expectations will be better for some than others. I think
(05:38):
the credit side of the equation continues to be more
attractive on relative terms, because obviously there's limited credit and
high interest rates taking place, There's a lot of refinancings,
a lot of maturity is taking place. The banks are
continued to be cautious in real state and therefore investing
in the credit side it continues to be attractive. But
(06:01):
then there's obviously parts of pure real state investing that
that are are continue to be attractive. I think we
use a term in real estate that is discounts to
replacement cost. So oftentimes you when you're evaluating an opportunity,
you look at what that acquisition if it's an existing asset,
what acquisition that the price you're paying for a real
(06:23):
estate asset compared to the price that we will cost
to rebuild it from scratch, So that's the replacement cost.
So we're in an environment right now where we're seeing
the opportunity to acquire assets at significant discounts to what
it will cause them to replace. So for that will
be if you're buying assets, you're expected returns today will
(06:44):
be interesting. I think will be on a non lever
basis somewhere between eight and twelve percent. While if you're
planning and those who are developers to develop assets, you know,
by land and develop is going to be probably harder
because the numbers don't pencil, so those returns are gonna
be much lower. It's just too expensive, you know, costs
(07:07):
are increasing, Labors hard to find, so developing an asset
is not something that works very well now if we
continue this way at some point, because we are not
developing a lot of new acids in the US and
in the globe for that matter, there'll be a shortage
of assets at some point in the future which will
present an opportunity. Is not today, but despite two three
(07:29):
years on the line.
Speaker 2 (07:30):
So I mean, you've already mentioned that the performance of
subsectors within real estate can differ quite a lot, and
we've definitely seen that here in Europe and in some markets.
Residential properties have done extraordinarily well because of what you
mentioned on the demand and supply dynamic, but offices have
done less well. How are you thinking about the subsectors
(07:52):
that in office versus rezi versus malls and logistics and
so on. At this point, where would you be putting
more money to WAPT.
Speaker 3 (08:01):
It's a great question, and you highlight something to all that.
It's also interesting, which is the differences and at support
we can talk about the differences between the market, so US,
the the globalization that we're seeing, and I know we're
going to talk about the T word is creating imbalances
between different regions. So the opportunity is not equal in
the US or the Americas versus Europe and Asia. It
(08:24):
depends now as a result of some only actually we're
seeing we might be favoring some parts, you know, some
parts of the world versus others. But in terms of
but we go first to the to the to the
sectors right now. You know, we were very keen on
industrial historically and logistics, given the supply chain and growth
(08:45):
data centers, given the artificial intelligence, and obviously the retail
was the sector that you know, shopping moss weren't doing
well in the US it's a certain extent in Europe,
but it was recovering as a result of COVID. People
were coming back to you know, shop into physical places,
not necessarily mold, but place making lifestyle oriented retail where
(09:07):
you have experiences for in velterors, entertainment, and by services.
I think the world has changed a little bit in
twenty five. So if I were to rank the sectors
that I feel are more impacted or more favored right now,
I would say the hospitality and travel sector is probably
the one that is in the worse position in our minds,
(09:27):
and that's because travel is decreasing significantly in twenty twenty
five as a result of some of the imbalances in
the world. If you look at year today, inbound travel
to the US from places like Latin America, Cana, Europe,
and Asia compared to last year is down anywhere between
ten and twenty percent, So that that impacts you know,
(09:47):
hospitality assets, hotels, entertainment because people are traveling less. So
I'm a little more concerned on that sector to start with.
The second sector that would be a little bit concerned
goes back to retail, and I think real tell the
grocery anchored, necessity based retail will continue to perform well.
But you know, discretionary spending in the US and Europe,
(10:09):
if we go into an economic downturn, is going to
likely to decrease, and if inflation continues to be high,
people spend less, So some of it that discretionary spending
in some of the retail assets is likely going to
be suffering a little bit. So it will be the
second sector that I'm concerned about. The third will be
(10:31):
potentially some industrial assets and logsics acts that are related
to trade. This is obvious given what we're seeing on
the news, but you know, if you have port located
industrial or logistics which depends on you know, import goods
coming from Asia into the US, China into the US,
(10:51):
or trade related assets, obviously they're going to suffer significant
reduction on activity as a result of terrorists. Some of
the policies that we're seeing. We haven't seen it yet
because people have been stockpiling and anticipation for the tariff increases,
but I think at some point we're going to see
reduction trade. You you probably have seen the amount of
(11:12):
vessels coming in from China into the US as increased significantly.
That's the first component. The second is they're going to
we're gonna be stockpiling less inventory through those logistics access
that they're going to suffer. The fifth sector, the four
sector that I think will be impacted, but to a
lesser extent to be honest is office. And I think
office is a sector that has been beaten down, as
(11:33):
you guys mentioned Tolian James in the past, and you know,
over the last several years for variety reasons. I feel
that the new wave is for corporates and companies to
require their employees to come back to work. That's been
gone on very strongly recently. You've seen a lot of
big companies asking and tell empties to come back to work.
If we if we go into an environment of economic headwinds,
(11:55):
I think people will probably come back to the office
as opposed to stay home. That's going to be a
wake up signal that don't want to lose their jobs.
I think people will come back. And I think you know,
there's been a very limited increase in office stock. In fact,
office stock has been being reduced in some areas like
the US, So I think the office sector, given how
BADI has suffered over the years, it's unlikely to be
(12:16):
impacted so much. People. You know, particularly domestic investments in
the US is going to generate more demand for office
and we're seeing that, you know, But what the administration
is doing. The last sector, the fifth one that I
think We're very favored and I think will not be
as impacted as anything else is what we call the
living sector. No matter what happens with trade, no matter
(12:38):
what happens with some of the issues related to geopolitical events,
people need a place to live, and the question is
either you buy it or you rent it, because people
obviously people, you know, E commerce or artificial intelligence is
not going to replace the necessity for people to live,
whether it's in an apartment, a house, or student housing.
(13:00):
There's a shortage of housing globally and very significantly in
the US in Europe, and I think the key aspect
of the living sector will be developed or own real
state in the living sector that it's affordable for people,
you know, that people can afford given the cronent economic environment.
So we're very keen on the living sector. That's probably
our top call right now.
Speaker 1 (13:21):
From what you're saying, Alfonso, it seems like your current
outlook on the economy is quite bearish, and your assumptions
around what the administration are going to is going to
do somewhat you know, continuation of what's going on right now.
Though when we look at credit markets, we look at
other markets, there seems to be this sense of you know, well,
this isn't really going to happen, or the administration will
(13:44):
change course before it gets too bad, and actually it's
going to be fine in the end. You know, if
you look at just current public market pricing of bonds
and bonds and loans, it seems that the market just
doesn't believe that all of this is going to really
end in a bad situation, that gonna get through it
and everything's gonna be fine. But all of you on
the ground is not that.
Speaker 3 (14:06):
What's interesting. I'm not an economy, so I will not
gonna predict if there's gonna be a recession or what's
gonna happen in the economy. What I do think is
you're right. I think there's there's differing views of what's
going to happen. Some people believe that this is just
a short term impact about some policies, but the economies
and the US and Europe's gonna be fined, as you know,
(14:29):
the current US administration normalizes what's going on. It could
be true, but what I would say is real state
is not. Real state is a long term game. It's
an in liquid acid. It takes a while to develop.
It takes a while to buy and sell. It's not
like stocks and bonds, so and then credible side as well.
So I think regardless of what happens in some of
(14:50):
the policies that are taking place around the world, I
think a little bit of damage has been done right,
and the damage means creating and environment of volatility. Today
could be the big t words as Tolo said, tomorrow
can be something else right and the big uncertainty. So
we are in a bit of a storm. There's obviously
(15:13):
days that are cloudier than others, but I think we're
going to continue with a certain level of uncertainty over
the coming months, potentially years. That creates investment investors potentially
take a bit of a pause. You know, things can
go well, but you're you're just waiting to see for
the rain to stop a little bit before making certain
(15:35):
level of decisions. If investors pause, which is what drives
the financial markets. In real estate, for no matter transaction
volume decreases, and the transaction volume decreases, there's going to
be less activity and potentially impact on pricing, impact on
overall demand. So regardless of where the economy goes, I
think there's a level of concern that the shoppingness of
(15:58):
the markets and the volatility is going to continue. You
and therefore investors, big institutions, you know, smaller, big, larger,
sovereign wealth funds, you know, retail investors, high now worth investors,
they're all stepping back for a second, saying, hold on
a second. Should I just take it easy and see
what happens, or should I continue to plow in mind
into the into into financial and real see assets. I
(16:20):
think that's where we are, and I think it's going
to continue no matter how if things get resolved or
not yet you'll see the stock market go up and
now by years, but some of these decisions, you know,
take a little more time.
Speaker 2 (16:29):
Right, Let's talk about the big ted then, since we've
kind of alluded to it and a lot of what
you said. So real estate is clearly not the sector
that's most directly affected by tariffs going up or down
or disappearing or reappearing. But we, for instance, had a
conference here last month where we asked about the potential
(16:53):
impact of tariff's on performance in the public markets, and
the overall view was that it could be moderately negative
for both bonds and equity primarily because of the effect
on rates, but you've also talked about the potential effect
on transaction volumes. Are there other effects that you think
investors are not as focused as they should be in
(17:18):
terms of how tariffs might affect real estate. You've mentioned,
as I said, transaction volumes, A lot of people have
talked about rates. What else do you think people are
missing in terms of the effect of tariffs well in
real estate?
Speaker 3 (17:31):
More specifically, I think you mentioned good ones of the
transaction volume. I think inflation, you know, tariffs is perceived
again not an accountant, is perceived to be in action
that is going to increase pricing because it gets passed
on to the consumers. It's basically attacks. So if pricing
continues to be high, inflation will continue be highd therefore
(17:52):
that that impacts real estates, you know, significantly in a
few ways. One, construction costs and labor costs continue to
be high, and therefore not you know, building your real state,
building new assets becomes harder. They don't necessarily pencil as
we call it, The numbers don't work right. When you
make your equation how much things cost, obviously it doesn't
work out. So I think the costs themselves. We're monitoring
(18:15):
at heins and we're very conscious about it, whether it's
imported goods, raw materials, and quite frankly, even labor costs.
So I think that's an area where we're concerned. The
interesting part about real estate is that when we talk
about inflation and some of the terriers what's creating realty,
to a certain extent, it becomes a bit of a
(18:37):
hedge to inflation because remember, real estate has a revenue
line item sometimes is adjusted by inflation or inflation brings item,
so rents, whether it's office rents or industrial and logistic rents,
or you know, or apartments. You know, when there's high inflation,
we tend to grow those revenues up. So inflation is
(18:59):
an aspect that you know, we as create a bit
of a hedge because we don't fixed revenues. So but yeah,
I think overall, the the the terrorsts are going to create.
On one hand, you know, issues also related to demand
for space, particularly the logistics. Although at some point I
think if this ends up being an exercise of reshoring,
(19:21):
some of the activity in some countries like the US
is going to benefit for the medium long term, you
know some some you know, whether it's office or industrial assets,
right because people you know, there's gonna be more internal demand.
But I think those are primarily the areas where I
see the terrors, you know, impacting impacting real estate, right. Yeah.
Speaker 2 (19:42):
I was going to sort of follow up on the
geographical positioning if if you like, so, you've already talked
about how within sectors you prefer homes to hotels, if
I can summarize it in that way, even though obviously
you went through lots of detail for US ranking the sectors.
We like that definitely, But how about US versus Europe
(20:04):
or US versus the rest of the world. We know
there's this trend towards deglobalization, and in some of the
podcasts that we've hosted, a lot of people have talked
about positioning more towards Europe rather than the US, which
is not where they were let the start.
Speaker 3 (20:16):
Of the year.
Speaker 2 (20:17):
How are you thinking about where to be geographically now
and has that changed this year as a result of
the developments in the US.
Speaker 3 (20:26):
Yeah, it has changed to the margin. It's a good question.
Told I, you know, we were like everybody else at
the end of twenty twenty four, feeling that the US
we called the Americas there was really the main economy
in the US, and the Americans of the US was
leading the pack from an overall investment appeal, growth, easiness
(20:49):
to do business, availability of opportunities to invest. Is the
largest and most liquid market in the world in the
real estate sector. So you know, when you're investing in
real estate, not only do you want to market that
is strong and growing, but also one that is very
liquid because you need to trade those assets. Remember we're
not stocks and monds. They can trade anytime. Although I
wouldn't I wouldn't say has drastically changed, we have we have.
(21:12):
You know, in real estate, we basically I would say underweight,
overweight certain regions. I wouldn't say we completely make them disappear, right,
So at some point, you know, over the last five years,
we were overweghing a little bit Asia because of the growth,
we were underweting a little bit Europe because of the stagnation,
(21:33):
and we're being neutral in the US. Then over the
last year I would say US became more attractive, more
appealing because of the growth prospects, I was doing business
and abilities, so we overweighted the US. We underweighted Europe.
We kept underweight Europe and then and then we had
Asia as as sort of a neutral because I think
(21:54):
it's been hard to accessation, to get you know, the
right opportunities as a turn of the year because of
what we've seen in the market. I think the US
has in the volatility and uncertainty that I mentioned, has
made us pause a little bit. So we are we
do invest in the US. We obviously have a lot
of projects, but we're we're more neutral at this point
(22:16):
and overwhetting a little bit more Europe because I think
Europe as a result of what has happened, has declared
and announced more stability in more intent to invest in
certain countries. You so, what's what happened in Germany, what's
happening in France, in Spain, or we stand in the
blackout of last week last week in the UK. We
(22:36):
feel that the governments are waking up to the need
to invest in their countries to become a little bit
less dependent on the global economy, particularly the US. And
therefore when we real estate investors look at that as well,
that means opportunity they're going to need to invest in
the countries and because they seem to be less volatile
(22:58):
than what the US is right now now and be
having less geopolitical tensions. We felt overwinning Europe makes more sense,
and I think in the logistics on the living side,
we feel there's gonna be a lot of investment in
these countries, and therefore we're taking a stance that we're
going to probably spend all more time in Europe that
we have being in the last couple of years.
Speaker 1 (23:20):
Okay, and you also do a lot of work with
the big LPs in Europe, like Germany's BVK. Do you
see any sign of European or Asian investors trying to
get out of the US or shift allocations out of
the US and into other regions at the moment.
Speaker 3 (23:33):
No, we haven't seen. It's a great question because we've
been talking to our investors over the last few weeks.
I wouldn't say their intent to stay get out, not
at all, But yes, we've seen a bit of more cautiousness,
so I think they've been if they had intents to
re up and invest more, some of these investors have
put things on pass. I would say until they see
(23:55):
more clarity in the environ What I mentioned earlier, so
that ultimately translates in capital potentially coming to the US
over the coming months from international sources, no question about that.
Speaker 2 (24:06):
I think one of the bits of pushback that we
get when we talk about US versus Europe is especially
in real estate, is that the market is much more
fragmented and much more location specific than that. So in
the US we've heard people say it's even sort of
street to street, building to building type investing, and what
happens on one street can differ marketly from what happens
(24:28):
on the one that's just you know, right next door.
In that context, how are you thinking about cities in
the USA, like the Sun Belt versus New York versus
the West Coast maybe and within Europe other specific countries
that you think are more interesting than some others.
Speaker 3 (24:48):
Yeah, that's that's that's where we spend a lot of
our time with our investors talking about different markets, different
cities different In the US, we don't even talk about
markets or cities, we talk about sub markets. So for instance,
if you to your question, so if we if we
look at New York, but we look at Atlanta, it's
not just Atlanta as a city. There is multiple sub
(25:09):
markets that are behaving very differently, even within the city
of Atlanta or the MSA of Atlanta. So and that's
no where. I think. The US is a lot more
transparent market with a lot more information for investors to decide.
So therefore you have to be very micro oriented and
make decisions that are very focused and detailed. What's interesting
(25:29):
about Europe is the level of information accessibility in transparency
is not as high, and therefore you find better arbit
charge opportunities in Europe because the market is not as developed.
You know, the amount of data available to investors and
liquidity and transparency is not as high. We do going
back to the US. We analyze so a research team
(25:51):
of proprietary researching together with the Massive Management team. We
look at the US in about three thousand sub markets.
We don't look at cities. We look at sub markets
and we look at their historical performance over the last
twenty to three years. We created a regression analysis using
economic data. We'll see data et cetera coring system and
(26:12):
a tiering system for the different markets. So we start
top down and look at those that we think based
on under historical performance plus some future leading indicators like
new construction, new supply, growth in employment, growth in demographics,
and we created aggression select our top sub markets, which
out other three thousand probably goes to the top one
thousand submarkets. And then once we have that the top
(26:36):
down approach, we then go to our teams. We have
ninety five offices in the US, We have over three
thousand employees, So we get our teams in our over
ninety officer to start looking and scouting each individual sub
market that we like on those one thousand and look
for opportunities. Knocking on people's doors, are you willing to
sell an asset? Looking for assets that we think we
(26:58):
can buy. We don't wait until the brokers come to
our and say this is for sale. Were trying to
manufacture some of those sales because it's a very competitive
market in the US, so you have to do something
very very strategic in order to access assets. And you know,
over the last over the last twelve months, I think
we we continue to favor major markets where we see
you know, two things, One is strong economic growth. We
(27:20):
see demographic migrations, we see corporate migrations. So the sum
belt is an overweight still because I think we see
a lot of corporate growth and demographic growth in in
places like Texas. You know, there's hostin in dallasa Houston,
the southeast of the US, which starts in the Carolinas, Georgia,
(27:40):
and then down to Florida and then and then some
pockets of the major cities. New York has a market
that has recovered significantly. We do like people are starting
to reinvest in New York. We do like Boston. Other
markets become a little software like Washington, d C. And Chicago. Uh,
you know, and if you go to the West coast, Seattle,
Portland and those markets are a little bit soft in demand,
(28:03):
so that's the growth. Then you have the good pricing
markets like San Francisco or Partners that software significantly in
New York and now standing the fact that they might
still be in a bit of a turmoil. You find
what we call in real estate good basis. You buy
real estate a very good values, very cheap. So real
estate has to do with what you expect the growth
is going to be or the single most important indicator
(28:26):
in real estate performance, the single most important indicator of
you're going to make it a good investment is common sense,
which is what price you're buying it at so basis.
Buying something at a very attractive basis is like they're
going to guarantee a significant component of your return. So
you go to places that have been suffering economically, like
San Francisco, like La, like New York. If you've got
(28:47):
a good bay, you buy a good basis, even though
the markets are not recovered economically, over time, you'll do well.
So that's why you know, we're focusing on growth and basis,
and I would say really discerned on which you're right tool,
because if you go to New York and you sit
on Madison Avenue and forty second Street, if you're on
the right side of Madison near Grand Central, you're probably
(29:09):
going to do a lot better that if you sit
on the left side of Madison and a little bit further
north a you're further away from Grand Central station. So
you really have to know every little piece of sub
market and that's why our three thousand people on the
ground do. So that's the first part of your question.
The second one is Europe. We see two types of Europe.
One the one that is growing. You know, Spain historically
have been that way, so that southern countries have seen
(29:33):
a significant world. Italy as well, we do like, and
then you have a bit of the distressing markets like Germany.
Germany has been on a bit of an economic downwind
for a few years which has impacted real estate. So
similar to the US, for US, Germany is a place
that is still very large, the most liquid, biggest market
in Europe, and therefore, to combined with the UK, we
(29:56):
can buy a good basis in Germany compared to historical standards.
In Spain, you're not buying as that of good basis.
We mentioned the eventsa portfolio being a little bit too
expensive for us, but you do have more growth. So
as a real estate investor, we went and balance both. Right,
markets that we buy really well at good pricing, markets
that we see a lot of growth, We're not focused
as much in pricing, and therefore that that's where are
(30:18):
struting in Europe focus on. I would say the top
five economy is UK, Germany, France, Italy, Spain, Spain. Now
we're including Portugal. We did our first investment in Portugal recently.
The market that is we really like obviously small and
then sometimes some peripherical markets. I would say, like you know,
Netherlands is part of it in Eastern Europe like Poland.
Speaker 2 (30:37):
That's really helpful, thank you, Alphonso. So you've mentioned quite
a few things there. One of the interesting points that
you made was about looking back twenty or thirty years,
which I guess you're being a little bit modest about,
giving that your firm has been around for seventy years,
as we said at the start, so you maybe have
a little bit more data than the twenty or thirty
(30:57):
years to draw on, I guess. But the other thing
that you mentioned was on the differences in the sort
of information that you get and in the level of
information that is disclosed by Europe versus the US. Does
this translate into very different returns in the countries that
(31:21):
you mentioned Germany, UK, et cetera, versus the Sunbelt in
the US where you're knocking on doors and so on
with the colleagues and so on.
Speaker 3 (31:32):
It does. It does your first statement of data. It's
interesting because when I join Hines, although we've been around
for almost seventy years, are databases. Because I'm very data driven,
I want to see what we've done. Really were started
in an organized fashion nineteen ninety three, so our data
from ninety three onwards. About thirty two years is very
(31:53):
strong because we start tracking every single little piece of
data in databases. You think about before the nineties and
eight these, et cetera. I think data was harder to
store and to track and to put into databases. So
we use about I would say, thirty years with the
data to make a lot of the analysis that we make.
And then yeah, I think, look what's interesting, and I
(32:17):
said earlier, is that certain markets that Europe, because there
are multiple countries, different jurisdictions, different ways of tracking some
of the information things are not as transparent and bail
will as no data. You don't need to go as
granular as we do in the US to make a
certain level of decisions. The fact that we might know something.
We have teams on the ground that know something about
(32:42):
an asset, whether we own it in the past or
we own an asset across the street. We see what's
being demanded by tenants in that particular market, We see
where the pricing is going ahead of what is published
in the public domain. Makes us make calls that have
a little more volatility in nature, meaning the outcome is
(33:03):
a little more dispersed because of the lack of data,
but ultimately return In other words, the standing deviation might
be a little bit bigger, but the returns tend to
be outsized in that matter, if you do it well.
That's what we're thinking about Europe. In the US being
such a transparent and data focused market, the results are
more down the fairway, meaning the difference between hinds buying
(33:25):
and asset or developing and another third party, the difference
in returns are not going to be huge because there's
so much data available and information is so widely transparent
that we really have to employ a different tactic, I
would say in the US, and our tactic in the US,
as opposed to using data and selecting the specific markets
(33:47):
that everybody can do or see even the specific ACIDS,
is selecting assets and investments that we can come in
as a very clear integrative firm and generate alpha. So
it's less about the market itself, it's more about the
firm generating alf a individual ass And what does that
mean by that? I mean we take assets that anybody
(34:09):
can buy and have different business plans and we try
to look at it and see how do we generate
additional alpha at the asset level. By making an improvement
in the ASCID as opposed to writing the market. Because
the market is so transparent, everybody can write it. So
what we do is, like we look at it, I
don't know a shopping center, a retail facility, and apartment
(34:30):
building that is older logistics as what can we do,
what sort of improvements can we do on the asset
to drive more revenue? Sometimes it's revenue items that we're
looking for, you know, you know, improve the asset, making
better looking and therefore we can charge more rents. And
we have our own engineering teams and conceptual construction teams
that do that. Sometimes when you look at it is
improve the costs. We can operate it more efficiently from
(34:51):
a cost perspective and generate more income and therefore that
asset is worth more. So the US is more about
what can we individually do to drive that alpha because
everybody else knows what's going on all these markets. Europe
is more about where do we see the arbit charge
because there's a lack of information, and we can buy
things by knowing these markets at pricing that we know
(35:12):
is going to change, and then we still ad alpha,
no question about that. But I think you know the
return outcome is higher, right, Just.
Speaker 2 (35:21):
To push a little bit more on the returns question,
there is a differential there, as you stated, what sorts
of differential are we talking about? I know there's the
effects to consider also, but is it two or three points?
Is it less than that in terms of percentage returns
US versus Europe? And then I have another question on
(35:43):
something that you mentioned to do with changing the use
of property and so on, which is quite interesting from
our perspective too.
Speaker 3 (35:50):
Yep, So you have to look at the things. Obviously,
the returns in real city you look at in two ways.
One is on we're on an unlevered basis and other
ones on a lever basis. Right before you use debt
in order to enhance your returns or including the capital structure,
it's just what the real estate produces. And then if
you use leverage or debt, then obviously you can. If
the cost of debt is lower than what they the
(36:12):
asset produces you is obviously a creative to your returns.
I think on an unlevered basis, returns tend to be
a little bit similar at the end in the US.
In Europe where it changes is on a leveled basis
because interest rates are lower in the Europe that they're
in the US, and therefore I think we're able to,
(36:33):
you know, add a bit of more return enhancement in
some of the investments we make in Europe. Hard to
quantify in a blank statement, it's one hundred basis points
one hundred and fifty. It depends on the type of
asset and the market. But I would say generally speaking,
you probably have you know, a few hundred basis points
at the end of the day better in Europe. But
that changes, right if Europe enters in a recession or
(36:55):
something happens with some of the economies, the US might
become more attractive or interested particularly and interest rates go
down in the US. If they go down, I think
the US becomes more and more attractive from a return perspective.
Right now, the introt you just look at the interest
are differentials between Europe and the US, and that's kind
of what gives you the difference in return that you
will get one with versus the other.
Speaker 1 (37:16):
Right on the distress side, Alfonso, last year, one year ago,
probably cre was kind of a dirty word, you know,
was scared of commercial real estate blowing up and there
were scenarios in which, you know, thousands of regional banks
in the US would disappear under the weight of all
this debt. Obviously that was exaggerated and it didn't happen.
But to what extent do you think we will see
(37:37):
more distress coming from commercial real estate or large scale
non performing loan sales by regional banks, or even failures
by the banks.
Speaker 3 (37:47):
If if I knew this, I would be I would
be doing something else. But I do think there's two
types of distress right. One is operating distress assets that
are having a tough time operating. You can't lease it,
you know you can't, you know the acid is obsolete,
you know it's not working out. And then you have
(38:08):
the pricing distress driven by the overall market. We have seen,
well you look at the US or for that matter,
the US has been more acute. We see significant value erosion,
as you said, over the last two years the moment
interest rates started going up in the summer of twenty
twenty two, up until last year the end of twenty
twenty four, we saw values go down and go down,
(38:30):
and that's really what creates the stress, right because then
you have people who can't cover their debt service who
values are the assets are below the value of the loans.
So we saw the overall US real estate stock probably
went down by twenty twenty percent on average. Some asset
(38:51):
classes like office over the last two years have seen
a much bigger erosion in value on average forty to
fifty percent, some cases seven percent. And then assets like apartments.
Good apartments probably haven't gone as much down, but you
still saw ten to twove percent going down, So that
value erotion starts the opportunity. The second one is the
(39:17):
financing and the maturities of these assets. Because when you
go to refinancing ascid because the loan is due, right,
it's a maturity, and the acid is worth a lot less.
There's a problem. Somebody has to make up for the shortfall,
whether is the owner putting more money in order to
refinance it or the bank taking it back and selling
it a loss. I think we just see in the
beginning of this trend because what happens in real set
(39:39):
I suppose to other financial asset classes. These processes take
a very long time. You see it on the news,
you see it in Bloomberg. Sometimes they say, well, this
owner gave back the asseid to the bank or the
bank took it over there fore closed and solved it right,
And you look at when that loan defaulted and it's
two years ago, so they've been working for two years
(40:02):
between the bank and the owner. They've been working or
dealing for two years with this situation. And then finally
when things that are no longer viable, they basically go
into the stress. So we haven't seen a lot of
that yet, and we're going to see a lot more.
I think these workouts, these things that are been going on,
extending and pretending banks saying I don't have the capacity
(40:23):
to take all along this real estale. Let's just give
them some extension. But that comes to a limit. It's
going to come to an end, right, whether it is
apartments that were required, you know post COVID are very
high values when prices run up, and then we've been refinenced,
whether it's industrial assets that are not leasing. You know,
industrial has been the darling, but a lot of the
vacant industrial space is not leasing in the US right now,
(40:44):
or obviously office buildings that have lost half of its value,
and the banks are saying okay enough, and then we're
going to so I mean, there's no nobody comes to
Bloomberg and says, hey, the party is on the stresses.
They're ready go buy cheap assets, you know, because always
the markets wouldn't be efficient. You really have to look
through that and work and I think what we're seeing
(41:06):
and we're going to see a lot more of that
coming that repricing those maturities and then the pricing distress.
What I'm worried about is the operating the stress. If
we get into an economic headwind, if we if we
see the economy sort of slow down, what is that
going to mean for corporate renting in you know, logistic
assets or office buildings, or people being able to you know,
(41:26):
if they lose their jobs. Employment is holding off, but
if if unemployment goes up, then that's a big indicator
for the living sector. How do people are going to
have for apartments? And that's where I'm really worried about,
you know, looking at the fundamentals, making sure they hold it,
they don't hold which sectors are going to be impacted
first and then which ones come later. That's that's the
way I think. But we'll see we're going to see
(41:48):
a good opportunity going forward to question about.
Speaker 1 (41:49):
That, but just to be clear, rate stay high in
the economy starts to slow down, we're going to see
a major distress cycle in real estate.
Speaker 3 (41:56):
You think if rates stay high and the economy is
slows down, which according to currents, I think that's tacklation
then or inflation stays up, and I think do applies
see a bigger wave of you know, assets in distress,
no question about that.
Speaker 1 (42:13):
Globally or just in the US.
Speaker 3 (42:15):
I think things to tend tend to be more global,
but I mean with the the globalization that we're seeing
as a result of countries and different sectors and administrations
in different roles, I think it's going to be more
acute in the US and then followed by certain countries
potentially in Europe. We saw in Germany for the Germany
has been on another level of distress for a few
(42:37):
years already. And then Asia probably not because Asia is
still a growing market. And when I say Asia is
ex China, I mean China is a world within its own,
So I don't know what's going to happen there.
Speaker 2 (42:49):
Right, That's fair enough. It is definitely of its own
and even within our coverage we have those that just
solely focus on the Chinese real estate because it's so
huge and has its own drivers and so on. But
just back to something that you mentioned about the interaction
(43:10):
with banks and so on. You also talked about how
you knock on doors to try and get deals given
how competitive the market can be. Can you maybe talk
about how you're working with banks, if at all, in
terms of getting as close as possible to these distressed
opportunities that you think make sense. And then when you're
(43:30):
talking about the distressed opportunities, obviously you talked about the
different types of distress and so on. Have you been
in can you talk about situations maybe where what looked
like just price distress ended up being more the operational
or economic distress over the last couple of years or
(43:51):
more that you have been looking at those sorts of opportunities.
Speaker 3 (43:55):
Yeah, I mean, first to your first question, the financial institutions,
whereas bank, insurance company and an alternative lender, they don't like
to I mean, nobody likes to say, you know, I
have a distress problem inside my book of assets, right,
so they're not going to publicize it. You're not going
to see that openly on the market. If you go
and talk to them and say, hey, you know you
(44:18):
want to talk about all your distress. How can I
help you, They're not going to help. They're gonna say, yes,
quite frankly, banks are you know, these financial positions are
well capitalized. They're having problems in some other assets. So
the approach we take is a collaborative approach. We we
go in because we have such a big infrastructure. We
go in and say, you know, how can we help? Right,
you have assets that are underperforming, you might be taking
(44:42):
some assets back, you have some loans that are potentially
on default. Could we help you with some of your issues?
Can we help you manage as opposed to say can
I buy an asset for twenty cents on the dollar?
Now that they obviously don't like that, right, So we
start by trying to help our lending counterparts because that's
(45:03):
where they probably need more help. And then, quite frankly,
we're not vultures. So the way we do do we
have a credit fund that you know, investing in high
quality office and the US and you know, we go
in and talk to financial institutions say, well, you know,
let us help you out wedge assets. You know where
can we pay you more? In fact, instead of where
can we pay you less, we'll say where can we
(45:24):
pay you more? Because that's how you help the financial institutions.
So you look at their book of assets or some
of the loans and said, but this particular is a
great asset. We could buy the loan from you. We
can partner with you and try to pay you as
much as we can. So then the market, you know,
will see that their balance sheets are in a better
position because you're paying them a higher value. We don't
(45:44):
like going and trying to take advantage and paying the
lowest amount of value those none performing cheap loans is
not where we go after. We go for high quality
where we can pay top dollar. The banks like it.
It shows that they have a good bond, and we've
been doing that. We gave with some financial institutions who
either have to sell the loans or have to come
in with additional capital. We come in and we try
(46:05):
to be as fair as possible because ultimately that's how
you on surface more or how you surface more opportunities.
So we've been inactive dialogue with a lot of these banks,
and we provide a service too. Sometimes we might not
end up investing, but we give them advice and that
advice is valuable. Is a very strong team on the ground,
So our approach is a little bit different than some
of these big financial hedge funds that all they want
(46:27):
to do is buy big porfolios have very heavily dis
kind of pricing. That's that's not the way we operate.
And then your second question was the type of the
stress and operationally, yeah, I mean that we've seen. You know,
typically office has been one that has been hit by
the double side, right, you know, they were pricing going
down and nobody wanting to lease space. So you end
(46:48):
up with an asset that has been hit both from
a lack of demand for its use and then a
significant price erosion. And I contrast that with our top call,
which is apartments, where you could have an evalue erosal
apartments because it was purchased a very high price using
very cheap financing, and therefore now they ask that value
(47:11):
or that asset has gone down in value. But apartments,
the interesting thing about apartments is that you always lease them.
An office building can be vacant for a while because
you can't find somebody to lease it. No company wants
to lease it. Apartments is not the case. Apartments in
the US are always leased. And I know these people
who might disagree with me, this always least you can
(47:31):
always get them leased because there's always demand. All you
have to do is move the pricing right, move the rents.
So if I have an apartment building and I lower
the rents, people will rent it, no matter what type
part of the economy, no matter where an intersession of
people rented. That's not the case with other assets like
industrial and obviously office buildings or even hotels. Hotels are
(47:52):
extremely sensitive to economic factors. Apartments, you know, you can
just lowder the rents and people will come and rent them,
and you keep it occupy and pay. Obviously you have
a long return. But even so I think those are
examples that you know, I think apartments we like it
because you get the pricing distressed, not the operational distress. Right.
Speaker 1 (48:11):
So it sounds like you're not just surviving, but you're
thriving through twenty five. You'll probably make it through twenty six.
But what gives you the edge, Alfonso? How do you
differentiate yourself? How do you keep ahead of the pack?
Speaker 3 (48:21):
Well, I think in difficult times, a big storm that
we can go through, or volatility and uncertainty, that's where
the best opportunities arise. That's where people who think, use data,
anticipate trends, make probably the best investments right because on
the rising tide is hard and you can get caught.
(48:42):
So I'm excited. I'm worried about the volatility. I'm worried
about some of the geopolitical events things, but those are
things typically we can control. I'm excited about surfacing great
investment opportunities and being able to access assets and investments
are well, you know, attractively priced and are going to
(49:04):
do well. I'm excited about the living sector. I'm excited
about technology. You're driven investing. You know, we're active in
data centers, and I think both in the US and Europe,
you always find opportunities. Just making sure you're disciplined, making
sure you underwrite assets and you create projections, you factor
in worse possible scenarios, don't get too aggressive, and then
(49:27):
take advantage. I mean, look, unfortunately it is not in
a bad way, but take advantage of this volatility and
need for liquidity of those that are dying to get
out because they're worried take advantage to access investments. Otherwise
we're not going to be able to access in a
discipline fashion. So for me, you know, yeah, you wake
(49:48):
up worried about what you read on the news. But
on the other hands, so how do we make this
an opportunity for our clients? And that's what we're doing
every day.
Speaker 1 (49:54):
Right Where is the best relative value right now?
Speaker 3 (49:56):
I would say, and again know what we do, but
that's ultimately what your place. The ships, I personally and
the firm invest in a lot of these things, so
you know, office credit, we do, like I'm personally invested
significantly through the firm because we feel there's an arbitruge there,
very attractive returns. I would say. Secondly, I would go
(50:18):
to living and retail assets that are being mispriced. You
can buy them at values that have been significantly decreased
and access those. Those those where I will focus most
of my attention right now and then obviously at some point,
but again it's all right at some point because there's
no development and there's a lack of supply, there's some
(50:39):
markets that are gonna be like, wait, we haven't built
an apartment building four years, so we haven't built something
in four five years. The new building is going to
generate very attractive returns, so but that's down the line,
probably two three years on the line, right.
Speaker 1 (50:51):
Great stuff, Alfonso Monk, who oversees the debt business at Heines,
It's been a pleasure having you on the Credit Edge
any thanks, thank you very much, and of course you're
very grateful to tell Almutu from Bloomberg Intelligence. Thanks for
joining us today.
Speaker 3 (51:02):
Tulu, great to be here.
Speaker 1 (51:04):
As always, for even more credit analysis, read all of
Tolu Alamutu's great work on the Bloomberg Terminal. Bloomberg Intelligence
is part of our research department, with five hundred analysts
and strategists working across all markets. Coverage includes over two
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industries and one hundred market indices, currencies and commodities. Please
(51:25):
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We're on Apple, Spotify and all other good podcast providers,
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tell your friends, or email me directly at Jcrombieight at
Bloomberg dot net. I'm James Crombie. It's been a pleasure
having you join us again next week on the Credit Edge.
Hello, and welcome to The Credit Edge, a weekly markets podcast.
My name is James Crombie. I'm a senior editor at Bloomberg.
Speaker 2 (00:23):
And I'm totally alamito of senior and list covering real
estate at Bloomberg Intelligence. This week, we are very pleased
to welcome our Fonso Monk from Heinz. Heines is a
leading real estate and investment manager with a history of
almost seventy years that owns and operates more than ninety
(00:43):
billion dollars of assets across several countries. Alfonso oversees the
debt business and is also closely involved in the day
to day operations of the firm.
Speaker 3 (00:53):
How are you, Alfonso, good, Thank you very much for
having me.
Speaker 1 (00:56):
Great to see you. And so we are here, obviously
to talk about real estate, which tumble into distress during
the pandemic as everyone worked from home and bricks and
mortar shops closed down. Only a year ago, we had
the CEO of Fortress on this show describing a one
trillion dollar opportunity in distressed real estate debt. But by
the end of twenty twenty four we were hearing more
and more about the real estate recovery. Some of the
(01:17):
guests were even saying that the opportunity to buy the
cheap debt was already over so at that time. Obviously,
at the end of last year, there were very high
hopes about a new supposedly pro business US administration, and
that sparked a huge rally of cross markets, including real estate.
But fast forward to now with markets getting hammered by
the trade war, where are we now in that cycle?
Speaker 3 (01:37):
Off on?
Speaker 1 (01:37):
So will we back down again?
Speaker 3 (01:39):
Yeah? I think real estate is a till of cycles.
As you will mention, James, there's always some news to
some event that really moves the markets around, like any
other client sector in the economy. You're writing the COVID.
It was a quick, short lived downturn because it quickly recovered,
as it did in a lot of sectors. The next
(02:00):
The next area or event to hit real estate because
it is such an intra sensitive area, was the increase
in interest rates in the middle of twenty twenty two
as a result of Federal Reserve and all the central
banks trying to fight inflation, which obviously was the central
theme at the time. In mid twenty twenty two, we
saw the researcher Old Reserve increase rates and then all
(02:21):
of a sudden, real estate got on the spotlight again
because we need debt and leverage and interest rates in
order to invest in real estate. So all of a sudden,
some of the stress and some opportunity came around between
twenty twenty two and I would say in the mid
of twenty twenty four. So for a couple of years
we started to see interesting areas if you were an investor,
(02:42):
but also those who had real estate and depending on
leverage and that we're suffering a little bit. We saw
the light on the second half of twenty twenty four,
as you mentioned, James, because we felt that with the
change in administration in the US and the pro business
cyclecality that we were seeing things will get better. As
you might know, James were saying survive until twenty five
(03:04):
in the real estate world, and people were thinking, well,
we survived in twenty five, Things will get better. Rates
will come down, which is a big thing for real state,
as I mentioned, and then all of a sudden, we'll
be back in the game the up cycle. What we're
seeing is that we didn't expect what was going to
happen in twenty five, which is I don't know if
we have to survive now twenty five or we're going
(03:24):
to survive a few more years because the uncertainty and
volatility related to some of the actions that are taking
place around the world is creating issues. Right. Rates are
no longer expected to go down because inflation is likely
to stay high. Investors and banks who were financing real
estate are now saying, well, that's the case, then maybe
(03:47):
we should start taking more drastic actions. And I think
the opportunity for the distress might come quicker than people expect,
but the recovery of the real estate market world so
take a little bit more time for two reasons. One
and dependence on leverage, and also that depends you know,
real city is very sensitive, like a lot of industries
to the economy. It's all about demand and supply, and
(04:09):
you know, the economic headwinds that we're facing as a
result of the trig terriffs and some of the actions
that we're seeing. My impact real STY, no question, will
not impact talk about it will not impact all real
city equally, but obviously it's going to impact Real STY.
Speaker 2 (04:23):
Yeah, and we're definitely going to I think talk about
the big tea in the room, which is tariffs for sure,
but before we get onto that, I mean you've already
outlined what happened over the last two to three years
in terms of performance of real estate, and that's definitely
also what we've seen on the public siders, and the
bonds did spectacularly well in twenty three, did okay in
(04:44):
twenty twenty four, so looking this year, it was already
going to be very difficult, I think, to beat those
two years of very very strong performance. So twenty twenty
five was challenging from the start. So you mentioned survive
to twenty five, we've also heard people say make it
to twenty six now, so I guess that's now the catchphrase.
(05:04):
With that in mind, what sort of returns do you
think that investors like yourself should expect to see in
real estate this year compared to last year and the
year before.
Speaker 3 (05:16):
Yeah, I think it depends on what sector in real
estate you're investing, and also what part of the capital
structure you're investing. So when I mean capital structure is
investigated on the equity side of the real state or debt,
and then obviously depending on the sector, some sectors are
going to be impacted more than others. So the return
expectations will be better for some than others. I think
(05:38):
the credit side of the equation continues to be more
attractive on relative terms, because obviously there's limited credit and
high interest rates taking place, There's a lot of refinancings,
a lot of maturity is taking place. The banks are
continued to be cautious in real state and therefore investing
in the credit side it continues to be attractive. But
(06:01):
then there's obviously parts of pure real state investing that
that are are continue to be attractive. I think we
use a term in real estate that is discounts to
replacement cost. So oftentimes you when you're evaluating an opportunity,
you look at what that acquisition if it's an existing asset,
what acquisition that the price you're paying for a real
(06:23):
estate asset compared to the price that we will cost
to rebuild it from scratch, So that's the replacement cost.
So we're in an environment right now where we're seeing
the opportunity to acquire assets at significant discounts to what
it will cause them to replace. So for that will
be if you're buying assets, you're expected returns today will
(06:44):
be interesting. I think will be on a non lever
basis somewhere between eight and twelve percent. While if you're
planning and those who are developers to develop assets, you know,
by land and develop is going to be probably harder
because the numbers don't pencil, so those returns are gonna
be much lower. It's just too expensive, you know, costs
(07:07):
are increasing, Labors hard to find, so developing an asset
is not something that works very well now if we
continue this way at some point, because we are not
developing a lot of new acids in the US and
in the globe for that matter, there'll be a shortage
of assets at some point in the future which will
present an opportunity. Is not today, but despite two three
(07:29):
years on the line.
Speaker 2 (07:30):
So I mean, you've already mentioned that the performance of
subsectors within real estate can differ quite a lot, and
we've definitely seen that here in Europe and in some markets.
Residential properties have done extraordinarily well because of what you
mentioned on the demand and supply dynamic, but offices have
done less well. How are you thinking about the subsectors
(07:52):
that in office versus rezi versus malls and logistics and
so on. At this point, where would you be putting
more money to WAPT.
Speaker 3 (08:01):
It's a great question, and you highlight something to all that.
It's also interesting, which is the differences and at support
we can talk about the differences between the market, so US,
the the globalization that we're seeing, and I know we're
going to talk about the T word is creating imbalances
between different regions. So the opportunity is not equal in
the US or the Americas versus Europe and Asia. It
(08:24):
depends now as a result of some only actually we're
seeing we might be favoring some parts, you know, some
parts of the world versus others. But in terms of
but we go first to the to the to the
sectors right now. You know, we were very keen on
industrial historically and logistics, given the supply chain and growth
(08:45):
data centers, given the artificial intelligence, and obviously the retail
was the sector that you know, shopping moss weren't doing
well in the US it's a certain extent in Europe,
but it was recovering as a result of COVID. People
were coming back to you know, shop into physical places,
not necessarily mold, but place making lifestyle oriented retail where
(09:07):
you have experiences for in velterors, entertainment, and by services.
I think the world has changed a little bit in
twenty five. So if I were to rank the sectors
that I feel are more impacted or more favored right now,
I would say the hospitality and travel sector is probably
the one that is in the worse position in our minds,
(09:27):
and that's because travel is decreasing significantly in twenty twenty
five as a result of some of the imbalances in
the world. If you look at year today, inbound travel
to the US from places like Latin America, Cana, Europe,
and Asia compared to last year is down anywhere between
ten and twenty percent, So that that impacts you know,
(09:47):
hospitality assets, hotels, entertainment because people are traveling less. So
I'm a little more concerned on that sector to start with.
The second sector that would be a little bit concerned
goes back to retail, and I think real tell the
grocery anchored, necessity based retail will continue to perform well.
But you know, discretionary spending in the US and Europe,
(10:09):
if we go into an economic downturn, is going to
likely to decrease, and if inflation continues to be high,
people spend less, So some of it that discretionary spending
in some of the retail assets is likely going to
be suffering a little bit. So it will be the
second sector that I'm concerned about. The third will be
(10:31):
potentially some industrial assets and logsics acts that are related
to trade. This is obvious given what we're seeing on
the news, but you know, if you have port located
industrial or logistics which depends on you know, import goods
coming from Asia into the US, China into the US,
(10:51):
or trade related assets, obviously they're going to suffer significant
reduction on activity as a result of terrorists. Some of
the policies that we're seeing. We haven't seen it yet
because people have been stockpiling and anticipation for the tariff increases,
but I think at some point we're going to see
reduction trade. You you probably have seen the amount of
(11:12):
vessels coming in from China into the US as increased significantly.
That's the first component. The second is they're going to
we're gonna be stockpiling less inventory through those logistics access
that they're going to suffer. The fifth sector, the four
sector that I think will be impacted, but to a
lesser extent to be honest is office. And I think
office is a sector that has been beaten down, as
(11:33):
you guys mentioned Tolian James in the past, and you know,
over the last several years for variety reasons. I feel
that the new wave is for corporates and companies to
require their employees to come back to work. That's been
gone on very strongly recently. You've seen a lot of
big companies asking and tell empties to come back to work.
If we if we go into an environment of economic headwinds,
(11:55):
I think people will probably come back to the office
as opposed to stay home. That's going to be a
wake up signal that don't want to lose their jobs.
I think people will come back. And I think you know,
there's been a very limited increase in office stock. In fact,
office stock has been being reduced in some areas like
the US, So I think the office sector, given how
BADI has suffered over the years, it's unlikely to be
(12:16):
impacted so much. People. You know, particularly domestic investments in
the US is going to generate more demand for office
and we're seeing that, you know, But what the administration
is doing. The last sector, the fifth one that I
think We're very favored and I think will not be
as impacted as anything else is what we call the
living sector. No matter what happens with trade, no matter
(12:38):
what happens with some of the issues related to geopolitical events,
people need a place to live, and the question is
either you buy it or you rent it, because people
obviously people, you know, E commerce or artificial intelligence is
not going to replace the necessity for people to live,
whether it's in an apartment, a house, or student housing.
(13:00):
There's a shortage of housing globally and very significantly in
the US in Europe, and I think the key aspect
of the living sector will be developed or own real
state in the living sector that it's affordable for people,
you know, that people can afford given the cronent economic environment.
So we're very keen on the living sector. That's probably
our top call right now.
Speaker 1 (13:21):
From what you're saying, Alfonso, it seems like your current
outlook on the economy is quite bearish, and your assumptions
around what the administration are going to is going to
do somewhat you know, continuation of what's going on right now.
Though when we look at credit markets, we look at
other markets, there seems to be this sense of you know, well,
this isn't really going to happen, or the administration will
(13:44):
change course before it gets too bad, and actually it's
going to be fine in the end. You know, if
you look at just current public market pricing of bonds
and bonds and loans, it seems that the market just
doesn't believe that all of this is going to really
end in a bad situation, that gonna get through it
and everything's gonna be fine. But all of you on
the ground is not that.
Speaker 3 (14:06):
What's interesting. I'm not an economy, so I will not
gonna predict if there's gonna be a recession or what's
gonna happen in the economy. What I do think is
you're right. I think there's there's differing views of what's
going to happen. Some people believe that this is just
a short term impact about some policies, but the economies
and the US and Europe's gonna be fined, as you know,
(14:29):
the current US administration normalizes what's going on. It could
be true, but what I would say is real state
is not. Real state is a long term game. It's
an in liquid acid. It takes a while to develop.
It takes a while to buy and sell. It's not
like stocks and bonds, so and then credible side as well.
So I think regardless of what happens in some of
(14:50):
the policies that are taking place around the world, I
think a little bit of damage has been done right,
and the damage means creating and environment of volatility. Today
could be the big t words as Tolo said, tomorrow
can be something else right and the big uncertainty. So
we are in a bit of a storm. There's obviously
(15:13):
days that are cloudier than others, but I think we're
going to continue with a certain level of uncertainty over
the coming months, potentially years. That creates investment investors potentially
take a bit of a pause. You know, things can
go well, but you're you're just waiting to see for
the rain to stop a little bit before making certain
(15:35):
level of decisions. If investors pause, which is what drives
the financial markets. In real estate, for no matter transaction
volume decreases, and the transaction volume decreases, there's going to
be less activity and potentially impact on pricing, impact on
overall demand. So regardless of where the economy goes, I
think there's a level of concern that the shoppingness of
(15:58):
the markets and the volatility is going to continue. You
and therefore investors, big institutions, you know, smaller, big, larger,
sovereign wealth funds, you know, retail investors, high now worth investors,
they're all stepping back for a second, saying, hold on
a second. Should I just take it easy and see
what happens, or should I continue to plow in mind
into the into into financial and real see assets. I
(16:20):
think that's where we are, and I think it's going
to continue no matter how if things get resolved or
not yet you'll see the stock market go up and
now by years, but some of these decisions, you know,
take a little more time.
Speaker 2 (16:29):
Right, Let's talk about the big ted then, since we've
kind of alluded to it and a lot of what
you said. So real estate is clearly not the sector
that's most directly affected by tariffs going up or down
or disappearing or reappearing. But we, for instance, had a
conference here last month where we asked about the potential
(16:53):
impact of tariff's on performance in the public markets, and
the overall view was that it could be moderately negative
for both bonds and equity primarily because of the effect
on rates, but you've also talked about the potential effect
on transaction volumes. Are there other effects that you think
investors are not as focused as they should be in
(17:18):
terms of how tariffs might affect real estate. You've mentioned,
as I said, transaction volumes, A lot of people have
talked about rates. What else do you think people are
missing in terms of the effect of tariffs well in
real estate?
Speaker 3 (17:31):
More specifically, I think you mentioned good ones of the
transaction volume. I think inflation, you know, tariffs is perceived
again not an accountant, is perceived to be in action
that is going to increase pricing because it gets passed
on to the consumers. It's basically attacks. So if pricing
continues to be high, inflation will continue be highd therefore
(17:52):
that that impacts real estates, you know, significantly in a
few ways. One, construction costs and labor costs continue to
be high, and therefore not you know, building your real state,
building new assets becomes harder. They don't necessarily pencil as
we call it, The numbers don't work right. When you
make your equation how much things cost, obviously it doesn't
work out. So I think the costs themselves. We're monitoring
(18:15):
at heins and we're very conscious about it, whether it's
imported goods, raw materials, and quite frankly, even labor costs.
So I think that's an area where we're concerned. The
interesting part about real estate is that when we talk
about inflation and some of the terriers what's creating realty,
to a certain extent, it becomes a bit of a
(18:37):
hedge to inflation because remember, real estate has a revenue
line item sometimes is adjusted by inflation or inflation brings item,
so rents, whether it's office rents or industrial and logistic rents,
or you know, or apartments. You know, when there's high inflation,
we tend to grow those revenues up. So inflation is
(18:59):
an aspect that you know, we as create a bit
of a hedge because we don't fixed revenues. So but yeah,
I think overall, the the the terrorsts are going to create.
On one hand, you know, issues also related to demand
for space, particularly the logistics. Although at some point I
think if this ends up being an exercise of reshoring,
(19:21):
some of the activity in some countries like the US
is going to benefit for the medium long term, you
know some some you know, whether it's office or industrial assets,
right because people you know, there's gonna be more internal demand.
But I think those are primarily the areas where I
see the terrors, you know, impacting impacting real estate, right. Yeah.
Speaker 2 (19:42):
I was going to sort of follow up on the
geographical positioning if if you like, so, you've already talked
about how within sectors you prefer homes to hotels, if
I can summarize it in that way, even though obviously
you went through lots of detail for US ranking the sectors.
We like that definitely, But how about US versus Europe
(20:04):
or US versus the rest of the world. We know
there's this trend towards deglobalization, and in some of the
podcasts that we've hosted, a lot of people have talked
about positioning more towards Europe rather than the US, which
is not where they were let the start.
Speaker 3 (20:16):
Of the year.
Speaker 2 (20:17):
How are you thinking about where to be geographically now
and has that changed this year as a result of
the developments in the US.
Speaker 3 (20:26):
Yeah, it has changed to the margin. It's a good question.
Told I, you know, we were like everybody else at
the end of twenty twenty four, feeling that the US
we called the Americas there was really the main economy
in the US, and the Americans of the US was
leading the pack from an overall investment appeal, growth, easiness
(20:49):
to do business, availability of opportunities to invest. Is the
largest and most liquid market in the world in the
real estate sector. So you know, when you're investing in
real estate, not only do you want to market that
is strong and growing, but also one that is very
liquid because you need to trade those assets. Remember we're
not stocks and monds. They can trade anytime. Although I
wouldn't I wouldn't say has drastically changed, we have we have.
(21:12):
You know, in real estate, we basically I would say underweight,
overweight certain regions. I wouldn't say we completely make them disappear, right,
So at some point, you know, over the last five years,
we were overweghing a little bit Asia because of the growth,
we were underweting a little bit Europe because of the stagnation,
(21:33):
and we're being neutral in the US. Then over the
last year I would say US became more attractive, more
appealing because of the growth prospects, I was doing business
and abilities, so we overweighted the US. We underweighted Europe.
We kept underweight Europe and then and then we had
Asia as as sort of a neutral because I think
(21:54):
it's been hard to accessation, to get you know, the
right opportunities as a turn of the year because of
what we've seen in the market. I think the US
has in the volatility and uncertainty that I mentioned, has
made us pause a little bit. So we are we
do invest in the US. We obviously have a lot
of projects, but we're we're more neutral at this point
(22:16):
and overwhetting a little bit more Europe because I think
Europe as a result of what has happened, has declared
and announced more stability in more intent to invest in
certain countries. You so, what's what happened in Germany, what's
happening in France, in Spain, or we stand in the
blackout of last week last week in the UK. We
(22:36):
feel that the governments are waking up to the need
to invest in their countries to become a little bit
less dependent on the global economy, particularly the US. And
therefore when we real estate investors look at that as well,
that means opportunity they're going to need to invest in
the countries and because they seem to be less volatile
(22:58):
than what the US is right now now and be
having less geopolitical tensions. We felt overwinning Europe makes more sense,
and I think in the logistics on the living side,
we feel there's gonna be a lot of investment in
these countries, and therefore we're taking a stance that we're
going to probably spend all more time in Europe that
we have being in the last couple of years.
Speaker 1 (23:20):
Okay, and you also do a lot of work with
the big LPs in Europe, like Germany's BVK. Do you
see any sign of European or Asian investors trying to
get out of the US or shift allocations out of
the US and into other regions at the moment.
Speaker 3 (23:33):
No, we haven't seen. It's a great question because we've
been talking to our investors over the last few weeks.
I wouldn't say their intent to stay get out, not
at all, But yes, we've seen a bit of more cautiousness,
so I think they've been if they had intents to
re up and invest more, some of these investors have
put things on pass. I would say until they see
(23:55):
more clarity in the environ What I mentioned earlier, so
that ultimately translates in capital potentially coming to the US
over the coming months from international sources, no question about that.
Speaker 2 (24:06):
I think one of the bits of pushback that we
get when we talk about US versus Europe is especially
in real estate, is that the market is much more
fragmented and much more location specific than that. So in
the US we've heard people say it's even sort of
street to street, building to building type investing, and what
happens on one street can differ marketly from what happens
(24:28):
on the one that's just you know, right next door.
In that context, how are you thinking about cities in
the USA, like the Sun Belt versus New York versus
the West Coast maybe and within Europe other specific countries
that you think are more interesting than some others.
Speaker 3 (24:48):
Yeah, that's that's that's where we spend a lot of
our time with our investors talking about different markets, different
cities different In the US, we don't even talk about
markets or cities, we talk about sub markets. So for instance,
if you to your question, so if we if we
look at New York, but we look at Atlanta, it's
not just Atlanta as a city. There is multiple sub
(25:09):
markets that are behaving very differently, even within the city
of Atlanta or the MSA of Atlanta. So and that's
no where. I think. The US is a lot more
transparent market with a lot more information for investors to decide.
So therefore you have to be very micro oriented and
make decisions that are very focused and detailed. What's interesting
(25:29):
about Europe is the level of information accessibility in transparency
is not as high, and therefore you find better arbit
charge opportunities in Europe because the market is not as developed.
You know, the amount of data available to investors and
liquidity and transparency is not as high. We do going
back to the US. We analyze so a research team
(25:51):
of proprietary researching together with the Massive Management team. We
look at the US in about three thousand sub markets.
We don't look at cities. We look at sub markets
and we look at their historical performance over the last
twenty to three years. We created a regression analysis using
economic data. We'll see data et cetera coring system and
(26:12):
a tiering system for the different markets. So we start
top down and look at those that we think based
on under historical performance plus some future leading indicators like
new construction, new supply, growth in employment, growth in demographics,
and we created aggression select our top sub markets, which
out other three thousand probably goes to the top one
thousand submarkets. And then once we have that the top
(26:36):
down approach, we then go to our teams. We have
ninety five offices in the US, We have over three
thousand employees, So we get our teams in our over
ninety officer to start looking and scouting each individual sub
market that we like on those one thousand and look
for opportunities. Knocking on people's doors, are you willing to
sell an asset? Looking for assets that we think we
(26:58):
can buy. We don't wait until the brokers come to
our and say this is for sale. Were trying to
manufacture some of those sales because it's a very competitive
market in the US, so you have to do something
very very strategic in order to access assets. And you know,
over the last over the last twelve months, I think
we we continue to favor major markets where we see
you know, two things, One is strong economic growth. We
(27:20):
see demographic migrations, we see corporate migrations. So the sum
belt is an overweight still because I think we see
a lot of corporate growth and demographic growth in in
places like Texas. You know, there's hostin in dallasa Houston,
the southeast of the US, which starts in the Carolinas, Georgia,
(27:40):
and then down to Florida and then and then some
pockets of the major cities. New York has a market
that has recovered significantly. We do like people are starting
to reinvest in New York. We do like Boston. Other
markets become a little software like Washington, d C. And Chicago. Uh,
you know, and if you go to the West coast, Seattle,
Portland and those markets are a little bit soft in demand,
(28:03):
so that's the growth. Then you have the good pricing
markets like San Francisco or Partners that software significantly in
New York and now standing the fact that they might
still be in a bit of a turmoil. You find
what we call in real estate good basis. You buy
real estate a very good values, very cheap. So real
estate has to do with what you expect the growth
is going to be or the single most important indicator
(28:26):
in real estate performance, the single most important indicator of
you're going to make it a good investment is common sense,
which is what price you're buying it at so basis.
Buying something at a very attractive basis is like they're
going to guarantee a significant component of your return. So
you go to places that have been suffering economically, like
San Francisco, like La, like New York. If you've got
(28:47):
a good bay, you buy a good basis, even though
the markets are not recovered economically, over time, you'll do well.
So that's why you know, we're focusing on growth and basis,
and I would say really discerned on which you're right tool,
because if you go to New York and you sit
on Madison Avenue and forty second Street, if you're on
the right side of Madison near Grand Central, you're probably
(29:09):
going to do a lot better that if you sit
on the left side of Madison and a little bit further
north a you're further away from Grand Central station. So
you really have to know every little piece of sub
market and that's why our three thousand people on the
ground do. So that's the first part of your question.
The second one is Europe. We see two types of Europe.
One the one that is growing. You know, Spain historically
have been that way, so that southern countries have seen
(29:33):
a significant world. Italy as well, we do like, and
then you have a bit of the distressing markets like Germany.
Germany has been on a bit of an economic downwind
for a few years which has impacted real estate. So
similar to the US, for US, Germany is a place
that is still very large, the most liquid, biggest market
in Europe, and therefore, to combined with the UK, we
(29:56):
can buy a good basis in Germany compared to historical standards.
In Spain, you're not buying as that of good basis.
We mentioned the eventsa portfolio being a little bit too
expensive for us, but you do have more growth. So
as a real estate investor, we went and balance both. Right,
markets that we buy really well at good pricing, markets
that we see a lot of growth, We're not focused
as much in pricing, and therefore that that's where are
(30:18):
struting in Europe focus on. I would say the top
five economy is UK, Germany, France, Italy, Spain, Spain. Now
we're including Portugal. We did our first investment in Portugal recently.
The market that is we really like obviously small and
then sometimes some peripherical markets. I would say, like you know,
Netherlands is part of it in Eastern Europe like Poland.
Speaker 2 (30:37):
That's really helpful, thank you, Alphonso. So you've mentioned quite
a few things there. One of the interesting points that
you made was about looking back twenty or thirty years,
which I guess you're being a little bit modest about,
giving that your firm has been around for seventy years,
as we said at the start, so you maybe have
a little bit more data than the twenty or thirty
(30:57):
years to draw on, I guess. But the other thing
that you mentioned was on the differences in the sort
of information that you get and in the level of
information that is disclosed by Europe versus the US. Does
this translate into very different returns in the countries that
(31:21):
you mentioned Germany, UK, et cetera, versus the Sunbelt in
the US where you're knocking on doors and so on
with the colleagues and so on.
Speaker 3 (31:32):
It does. It does your first statement of data. It's
interesting because when I join Hines, although we've been around
for almost seventy years, are databases. Because I'm very data driven,
I want to see what we've done. Really were started
in an organized fashion nineteen ninety three, so our data
from ninety three onwards. About thirty two years is very
(31:53):
strong because we start tracking every single little piece of
data in databases. You think about before the nineties and
eight these, et cetera. I think data was harder to
store and to track and to put into databases. So
we use about I would say, thirty years with the
data to make a lot of the analysis that we make.
And then yeah, I think, look what's interesting, and I
(32:17):
said earlier, is that certain markets that Europe, because there
are multiple countries, different jurisdictions, different ways of tracking some
of the information things are not as transparent and bail
will as no data. You don't need to go as
granular as we do in the US to make a
certain level of decisions. The fact that we might know something.
We have teams on the ground that know something about
(32:42):
an asset, whether we own it in the past or
we own an asset across the street. We see what's
being demanded by tenants in that particular market, We see
where the pricing is going ahead of what is published
in the public domain. Makes us make calls that have
a little more volatility in nature, meaning the outcome is
(33:03):
a little more dispersed because of the lack of data,
but ultimately return In other words, the standing deviation might
be a little bit bigger, but the returns tend to
be outsized in that matter, if you do it well.
That's what we're thinking about Europe. In the US being
such a transparent and data focused market, the results are
more down the fairway, meaning the difference between hinds buying
(33:25):
and asset or developing and another third party, the difference
in returns are not going to be huge because there's
so much data available and information is so widely transparent
that we really have to employ a different tactic, I
would say in the US, and our tactic in the US,
as opposed to using data and selecting the specific markets
(33:47):
that everybody can do or see even the specific ACIDS,
is selecting assets and investments that we can come in
as a very clear integrative firm and generate alpha. So
it's less about the market itself, it's more about the
firm generating alf a individual ass And what does that
mean by that? I mean we take assets that anybody
(34:09):
can buy and have different business plans and we try
to look at it and see how do we generate
additional alpha at the asset level. By making an improvement
in the ASCID as opposed to writing the market. Because
the market is so transparent, everybody can write it. So
what we do is, like we look at it, I
don't know a shopping center, a retail facility, and apartment
(34:30):
building that is older logistics as what can we do,
what sort of improvements can we do on the asset
to drive more revenue? Sometimes it's revenue items that we're
looking for, you know, you know, improve the asset, making
better looking and therefore we can charge more rents. And
we have our own engineering teams and conceptual construction teams
that do that. Sometimes when you look at it is
improve the costs. We can operate it more efficiently from
(34:51):
a cost perspective and generate more income and therefore that
asset is worth more. So the US is more about
what can we individually do to drive that alpha because
everybody else knows what's going on all these markets. Europe
is more about where do we see the arbit charge
because there's a lack of information, and we can buy
things by knowing these markets at pricing that we know
(35:12):
is going to change, and then we still ad alpha,
no question about that. But I think you know the
return outcome is higher, right, Just.
Speaker 2 (35:21):
To push a little bit more on the returns question,
there is a differential there, as you stated, what sorts
of differential are we talking about? I know there's the
effects to consider also, but is it two or three points?
Is it less than that in terms of percentage returns
US versus Europe? And then I have another question on
(35:43):
something that you mentioned to do with changing the use
of property and so on, which is quite interesting from
our perspective too.
Speaker 3 (35:50):
Yep, So you have to look at the things. Obviously,
the returns in real city you look at in two ways.
One is on we're on an unlevered basis and other
ones on a lever basis. Right before you use debt
in order to enhance your returns or including the capital structure,
it's just what the real estate produces. And then if
you use leverage or debt, then obviously you can. If
the cost of debt is lower than what they the
(36:12):
asset produces you is obviously a creative to your returns.
I think on an unlevered basis, returns tend to be
a little bit similar at the end in the US.
In Europe where it changes is on a leveled basis
because interest rates are lower in the Europe that they're
in the US, and therefore I think we're able to,
(36:33):
you know, add a bit of more return enhancement in
some of the investments we make in Europe. Hard to
quantify in a blank statement, it's one hundred basis points
one hundred and fifty. It depends on the type of
asset and the market. But I would say generally speaking,
you probably have you know, a few hundred basis points
at the end of the day better in Europe. But
that changes, right if Europe enters in a recession or
(36:55):
something happens with some of the economies, the US might
become more attractive or interested particularly and interest rates go
down in the US. If they go down, I think
the US becomes more and more attractive from a return perspective.
Right now, the introt you just look at the interest
are differentials between Europe and the US, and that's kind
of what gives you the difference in return that you
will get one with versus the other.
Speaker 1 (37:16):
Right on the distress side, Alfonso, last year, one year ago,
probably cre was kind of a dirty word, you know,
was scared of commercial real estate blowing up and there
were scenarios in which, you know, thousands of regional banks
in the US would disappear under the weight of all
this debt. Obviously that was exaggerated and it didn't happen.
But to what extent do you think we will see
(37:37):
more distress coming from commercial real estate or large scale
non performing loan sales by regional banks, or even failures
by the banks.
Speaker 3 (37:47):
If if I knew this, I would be I would
be doing something else. But I do think there's two
types of distress right. One is operating distress assets that
are having a tough time operating. You can't lease it,
you know you can't, you know the acid is obsolete,
you know it's not working out. And then you have
(38:08):
the pricing distress driven by the overall market. We have seen,
well you look at the US or for that matter,
the US has been more acute. We see significant value erosion,
as you said, over the last two years the moment
interest rates started going up in the summer of twenty
twenty two, up until last year the end of twenty
twenty four, we saw values go down and go down,
(38:30):
and that's really what creates the stress, right because then
you have people who can't cover their debt service who
values are the assets are below the value of the loans.
So we saw the overall US real estate stock probably
went down by twenty twenty percent on average. Some asset
(38:51):
classes like office over the last two years have seen
a much bigger erosion in value on average forty to
fifty percent, some cases seven percent. And then assets like apartments.
Good apartments probably haven't gone as much down, but you
still saw ten to twove percent going down, So that
value erotion starts the opportunity. The second one is the
(39:17):
financing and the maturities of these assets. Because when you
go to refinancing ascid because the loan is due, right,
it's a maturity, and the acid is worth a lot less.
There's a problem. Somebody has to make up for the shortfall,
whether is the owner putting more money in order to
refinance it or the bank taking it back and selling
it a loss. I think we just see in the
beginning of this trend because what happens in real set
(39:39):
I suppose to other financial asset classes. These processes take
a very long time. You see it on the news,
you see it in Bloomberg. Sometimes they say, well, this
owner gave back the asseid to the bank or the
bank took it over there fore closed and solved it right,
And you look at when that loan defaulted and it's
two years ago, so they've been working for two years
(40:02):
between the bank and the owner. They've been working or
dealing for two years with this situation. And then finally
when things that are no longer viable, they basically go
into the stress. So we haven't seen a lot of
that yet, and we're going to see a lot more.
I think these workouts, these things that are been going on,
extending and pretending banks saying I don't have the capacity
(40:23):
to take all along this real estale. Let's just give
them some extension. But that comes to a limit. It's
going to come to an end, right, whether it is
apartments that were required, you know post COVID are very
high values when prices run up, and then we've been refinenced,
whether it's industrial assets that are not leasing. You know,
industrial has been the darling, but a lot of the
vacant industrial space is not leasing in the US right now,
(40:44):
or obviously office buildings that have lost half of its value,
and the banks are saying okay enough, and then we're
going to so I mean, there's no nobody comes to
Bloomberg and says, hey, the party is on the stresses.
They're ready go buy cheap assets, you know, because always
the markets wouldn't be efficient. You really have to look
through that and work and I think what we're seeing
(41:06):
and we're going to see a lot more of that
coming that repricing those maturities and then the pricing distress.
What I'm worried about is the operating the stress. If
we get into an economic headwind, if we if we
see the economy sort of slow down, what is that
going to mean for corporate renting in you know, logistic
assets or office buildings, or people being able to you know,
(41:26):
if they lose their jobs. Employment is holding off, but
if if unemployment goes up, then that's a big indicator
for the living sector. How do people are going to
have for apartments? And that's where I'm really worried about,
you know, looking at the fundamentals, making sure they hold it,
they don't hold which sectors are going to be impacted
first and then which ones come later. That's that's the
way I think. But we'll see we're going to see
(41:48):
a good opportunity going forward to question about.
Speaker 1 (41:49):
That, but just to be clear, rate stay high in
the economy starts to slow down, we're going to see
a major distress cycle in real estate.
Speaker 3 (41:56):
You think if rates stay high and the economy is
slows down, which according to currents, I think that's tacklation
then or inflation stays up, and I think do applies
see a bigger wave of you know, assets in distress,
no question about that.
Speaker 1 (42:13):
Globally or just in the US.
Speaker 3 (42:15):
I think things to tend tend to be more global,
but I mean with the the globalization that we're seeing
as a result of countries and different sectors and administrations
in different roles, I think it's going to be more
acute in the US and then followed by certain countries
potentially in Europe. We saw in Germany for the Germany
has been on another level of distress for a few
(42:37):
years already. And then Asia probably not because Asia is
still a growing market. And when I say Asia is
ex China, I mean China is a world within its own,
So I don't know what's going to happen there.
Speaker 2 (42:49):
Right, That's fair enough. It is definitely of its own
and even within our coverage we have those that just
solely focus on the Chinese real estate because it's so
huge and has its own drivers and so on. But
just back to something that you mentioned about the interaction
(43:10):
with banks and so on. You also talked about how
you knock on doors to try and get deals given
how competitive the market can be. Can you maybe talk
about how you're working with banks, if at all, in
terms of getting as close as possible to these distressed
opportunities that you think make sense. And then when you're
(43:30):
talking about the distressed opportunities, obviously you talked about the
different types of distress and so on. Have you been
in can you talk about situations maybe where what looked
like just price distress ended up being more the operational
or economic distress over the last couple of years or
(43:51):
more that you have been looking at those sorts of opportunities.
Speaker 3 (43:55):
Yeah, I mean, first to your first question, the financial institutions,
whereas bank, insurance company and an alternative lender, they don't like
to I mean, nobody likes to say, you know, I
have a distress problem inside my book of assets, right,
so they're not going to publicize it. You're not going
to see that openly on the market. If you go
and talk to them and say, hey, you know you
(44:18):
want to talk about all your distress. How can I
help you, They're not going to help. They're gonna say, yes,
quite frankly, banks are you know, these financial positions are
well capitalized. They're having problems in some other assets. So
the approach we take is a collaborative approach. We we
go in because we have such a big infrastructure. We
go in and say, you know, how can we help? Right,
you have assets that are underperforming, you might be taking
(44:42):
some assets back, you have some loans that are potentially
on default. Could we help you with some of your issues?
Can we help you manage as opposed to say can
I buy an asset for twenty cents on the dollar?
Now that they obviously don't like that, right, So we
start by trying to help our lending counterparts because that's
(45:03):
where they probably need more help. And then, quite frankly,
we're not vultures. So the way we do do we
have a credit fund that you know, investing in high
quality office and the US and you know, we go
in and talk to financial institutions say, well, you know,
let us help you out wedge assets. You know where
can we pay you more? In fact, instead of where
can we pay you less, we'll say where can we
(45:24):
pay you more? Because that's how you help the financial institutions.
So you look at their book of assets or some
of the loans and said, but this particular is a
great asset. We could buy the loan from you. We
can partner with you and try to pay you as
much as we can. So then the market, you know,
will see that their balance sheets are in a better
position because you're paying them a higher value. We don't
(45:44):
like going and trying to take advantage and paying the
lowest amount of value those none performing cheap loans is
not where we go after. We go for high quality
where we can pay top dollar. The banks like it.
It shows that they have a good bond, and we've
been doing that. We gave with some financial institutions who
either have to sell the loans or have to come
in with additional capital. We come in and we try
(46:05):
to be as fair as possible because ultimately that's how
you on surface more or how you surface more opportunities.
So we've been inactive dialogue with a lot of these banks,
and we provide a service too. Sometimes we might not
end up investing, but we give them advice and that
advice is valuable. Is a very strong team on the ground,
So our approach is a little bit different than some
of these big financial hedge funds that all they want
(46:27):
to do is buy big porfolios have very heavily dis
kind of pricing. That's that's not the way we operate.
And then your second question was the type of the
stress and operationally, yeah, I mean that we've seen. You know,
typically office has been one that has been hit by
the double side, right, you know, they were pricing going
down and nobody wanting to lease space. So you end
(46:48):
up with an asset that has been hit both from
a lack of demand for its use and then a
significant price erosion. And I contrast that with our top call,
which is apartments, where you could have an evalue erosal
apartments because it was purchased a very high price using
very cheap financing, and therefore now they ask that value
(47:11):
or that asset has gone down in value. But apartments,
the interesting thing about apartments is that you always lease them.
An office building can be vacant for a while because
you can't find somebody to lease it. No company wants
to lease it. Apartments is not the case. Apartments in
the US are always leased. And I know these people
who might disagree with me, this always least you can
(47:31):
always get them leased because there's always demand. All you
have to do is move the pricing right, move the rents.
So if I have an apartment building and I lower
the rents, people will rent it, no matter what type
part of the economy, no matter where an intersession of
people rented. That's not the case with other assets like
industrial and obviously office buildings or even hotels. Hotels are
(47:52):
extremely sensitive to economic factors. Apartments, you know, you can
just lowder the rents and people will come and rent them,
and you keep it occupy and pay. Obviously you have
a long return. But even so I think those are
examples that you know, I think apartments we like it
because you get the pricing distressed, not the operational distress. Right.
Speaker 1 (48:11):
So it sounds like you're not just surviving, but you're
thriving through twenty five. You'll probably make it through twenty six.
But what gives you the edge, Alfonso? How do you
differentiate yourself? How do you keep ahead of the pack?
Speaker 3 (48:21):
Well, I think in difficult times, a big storm that
we can go through, or volatility and uncertainty, that's where
the best opportunities arise. That's where people who think, use data,
anticipate trends, make probably the best investments right because on
the rising tide is hard and you can get caught.
(48:42):
So I'm excited. I'm worried about the volatility. I'm worried
about some of the geopolitical events things, but those are
things typically we can control. I'm excited about surfacing great
investment opportunities and being able to access assets and investments
are well, you know, attractively priced and are going to
(49:04):
do well. I'm excited about the living sector. I'm excited
about technology. You're driven investing. You know, we're active in
data centers, and I think both in the US and Europe,
you always find opportunities. Just making sure you're disciplined, making
sure you underwrite assets and you create projections, you factor
in worse possible scenarios, don't get too aggressive, and then
(49:27):
take advantage. I mean, look, unfortunately it is not in
a bad way, but take advantage of this volatility and
need for liquidity of those that are dying to get
out because they're worried take advantage to access investments. Otherwise
we're not going to be able to access in a
discipline fashion. So for me, you know, yeah, you wake
(49:48):
up worried about what you read on the news. But
on the other hands, so how do we make this
an opportunity for our clients? And that's what we're doing
every day.
Speaker 1 (49:54):
Right Where is the best relative value right now?
Speaker 3 (49:56):
I would say, and again know what we do, but
that's ultimately what your place. The ships, I personally and
the firm invest in a lot of these things, so
you know, office credit, we do, like I'm personally invested
significantly through the firm because we feel there's an arbitruge there,
very attractive returns. I would say. Secondly, I would go
(50:18):
to living and retail assets that are being mispriced. You
can buy them at values that have been significantly decreased
and access those. Those those where I will focus most
of my attention right now and then obviously at some point,
but again it's all right at some point because there's
no development and there's a lack of supply, there's some
(50:39):
markets that are gonna be like, wait, we haven't built
an apartment building four years, so we haven't built something
in four five years. The new building is going to
generate very attractive returns, so but that's down the line,
probably two three years on the line, right.
Speaker 1 (50:51):
Great stuff, Alfonso Monk, who oversees the debt business at Heines,
It's been a pleasure having you on the Credit Edge
any thanks, thank you very much, and of course you're
very grateful to tell Almutu from Bloomberg Intelligence. Thanks for
joining us today.
Speaker 3 (51:02):
Tulu, great to be here.
Speaker 1 (51:04):
As always, for even more credit analysis, read all of
Tolu Alamutu's great work on the Bloomberg Terminal. Bloomberg Intelligence
is part of our research department, with five hundred analysts
and strategists working across all markets. Coverage includes over two
thousand equities and credits and outlooks on more than ninety
industries and one hundred market indices, currencies and commodities. Please
(51:25):
do subscribe to the Credit Edge wherever you get your podcasts.
We're on Apple, Spotify and all other good podcast providers,
including the Bloomberg Terminal at bpod Go. Give us a review,
tell your friends, or email me directly at Jcrombieight at
Bloomberg dot net. I'm James Crombie. It's been a pleasure
having you join us again next week on the Credit Edge.
Host
James Crombie
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