Pictet eyes rental housing, luxury residential and last-mile logistics property opportunities in Europe
The group has around US$4 billion of assets under management in real estate, split across investments in funds, co-investment and direct investment
[GENEVA] Direct access to end buyers can give Pictet Group’s direct real estate investment business an edge in the build-to-sell luxury residential segment, said Zsolt Kohalmi, global head of real estate and deputy CEO of Pictet Alternative Advisors.
One of his favourite cities in the luxury homes segment is Madrid. For heritage, cultural, cost and other reasons, many big Latin American families are moving to the Spanish capital, he noted.
“Madrid has a lot of demand from high net worth families, and yet almost no supply,” he said.
He pointed out that branded residence projects in Madrid can offer strong returns, citing the direct investment business’ track record of chalking up 24.1 per cent internal rate of return (IRR) in the Hermosilla 47 Mandarin Oriental project in Madrid.
A new project Kohalmi is working on is turning the recently acquired Ministry of Justice building in Madrid into a luxury housing development.
Another area of focus in direct real estate investment is completed build-to-rent residential properties in European cities such as London, Copenhagen, Stockholm and Madrid.
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In this segment, Kohalmi sees structural demand-supply mismatch in various European cities and professionally managed rental housing units enjoying an edge over rental homes owned by individuals.
He notes that deal cap rates at around 5.2 per cent or 60 per cent wider than three years ago offer good entry points.
Kohalmi argues there is strong housing demand in many European cities.
“The biggest driver of how many flats you need in Europe is what’s called single household formation,” he said. Kohalmi pointed to how over the years, the age of marriage and the divorce rate have risen dramatically.
The third area of focus for the direct real estate investment business is last-mile logistics assets in countries such as Germany, Netherlands, Denmark, Sweden, the UK and France.
Geopolitical disruptions to supply chains are helping drive demand for last-mile logistics assets as businesses shift from a just-in-time mindset to a just-in-case one, said Kohalmi.
He noted Pictet Group’s ability to access off-market acquisitions from private families is helping it in the last-mile logistics segment.
While Kohalmi agreed that artificial intelligence is making data centre needs explode, he thinks too many people are trying to build hyperscale data centres out of town. He argued that the exit will be a challenge for the large hyperscalers going forward.
A segment that he continues to be wary of is the US office rental market. While not a time bomb, he said: “We are not at the end of losses for US commercial real estate.”
In his view, it is not remote working but rather high interest rates that are really weighing on US commercial property.
He was relatively more bullish on European offices versus US’ offices as the lower vacancy rate in the former will drive relatively faster rental growth.
“When you are at low vacancy, even if the economic growth is muted, you can still get very interesting rental growth,” he said.
No direct investment in Asian real estate yet
As for getting involved in direct investment in Asian real estate, this can happen but not so soon, said Kohalmi. He argued that boots on the ground are needed to understand the nuances of individual real estate markets and properties.
“Real estate is a very local phenomenon. To be a good investor, you need to walk every building, understand the local context,” he said.
Overall, Pictet Group has around US$4 billion of assets under management (AUM) in real estate, which is split across investments in funds, co-investment and direct investment.
The AUM in real estate direct investment is about US$2 billion, with average deal size of around US$30 million.
Pictet’s real estate business is part of its alternative investments business which has around US$48 billion in AUM, led by US$27 billion in AUM in private equity and US$15 billion in AUM in hedge funds.
New campus
Pictet Group is bingeing big on real estate for its own use. The group is constructing an avant-garde building at the heart of the Praille Acacias Vernets urban development project in Geneva – the Campus Pictet de Rochemont, located next to its current headquarters.
The group will consolidate its operations at the new campus, with 55,000 square metres of officers and client areas, and its existing headquarters.
The campus, which is being built with environmental considerations at the forefront, will see staff moving in gradually from September.
Separately, on the private equity front, David Marechal, deputy head of private equity and co-head of Europe at Pictet Alternative Advisors, said that valuations of private-equity backed companies are realistic but holding periods of investments are being extended.
The effects of the latter are negative on IRR and could bring down the 18.5 per cent IRR, which has been notched by private equity investments since 1989, going forward, he said.
The bulk of the private equity investments is currently in private equity funds. Marechal said that Pictet Alternative Advisors was highly selective on which private equity funds to back and does extensive due diligence on potential funds to invest in.
The target allocation is roughly 45 per cent each to North America and Europe, with 10 per cent to Asia. The high turnover in private equity teams in Asia, can make investing in private equity funds in the continent challenging, said Marechal.
Pictet Alternative Advisors is also busy building its co-investment franchise in private equity, where it works as a co-investor alongside a general partner.
Marechal said that general partners view Pictet Alternative Advisors as a limited partner that gives the general partner access to private wealth investors without having to deal with them individually.
He added that saving on management fees compared with investing in private equity funds can provide the potential for more attractive returns from co-investment opportunities.
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