UBS property arm eyes 2010 market comeback

Change in investor confidence has cut redemptions queues in several key funds

The property arm of UBS Global Asset Management is eyeing an investment market comeback in 2010 following a sea-change in investor confidence that has cut redemptions queues in several key funds.

Roberto Varandas, head of European real estate business development at the UBS unit, said that property is back in vogue with many clients who have quit plans to take back their cash, citing renewed faith in the prospects of the beleaguered asset class.

‘Some funds are attracting big cash inflows without there being a roaring bull market for real estate just yet because the differential between yields and the risk-free rate is so large,’ Mr Varandas told Reuters in an interview at the MIPIM trade fair.

‘We have seen queues for redemptions diminish by 200-300 million euros (S$382-573 million) each quarter across all our open-ended funds, starting from Q3 2009, mainly due to rescissions – and that represents a dramatic turnaround in less than a year.’

Mr Varandas added that he expected UBS’s core continental European fund, its US$7 billion US open- ended fund and some of its German open-ended funds to be among those scouting for new acquisitions in 2010.

‘It would be hard to quantify the amount of firepower we have as it’s different from region to region,’ he said.

‘If the US fund operates at a 5 per cent liquidity, that is almost US$400 million,’ he said, adding that the continental European fund would be open to strike two or three deals in the 30-50 million euros bracket.

UBS is under no illusions about the challenges that it faces to invest new capital in today’s stock- starved European real estate market, where equity is flooding back to core strategy funds, and banks – some of the biggest de factor owners of property – are seemingly under little pressure to liquidate.

‘I think it’s fair to say that it is as hard to deploy capital in core real estate today as it was at the very height of the boom,’ Mr Varandas said, warning of a return to the typical bull-market problem faced by reputable fund managers who are forced to close funds for new investment because they cannot deploy capital at the same rate as clients invest it.

‘The new problem is managing the expectations of investors who recognise real estate yields are so much more compelling than cash or bonds but who don’t understand it takes time to put their cash to work,’ he said.

While traditional markets stumble over price discovery and fickle access to debt, UBS has managed to keep its finger on the pulse of emerging property markets such as China, India and Brazil, where rapid urbanisation is creating a potentially lucrative imbalance between property demand and supply.

‘People need to consider these emerging markets as evolving into mature markets maybe two decades or even one decade out. They represent the future,’ Mr Varandas said, flagging a particular interest in Chinese residential property.

‘A slowdown in capital to those regions has delayed our projects but we are looking closely at how we can bring these back on course in 2010,’ he said.

Its low appetite for leverage during the boom times has helped UBS to withstand troubles in some weak markets that other more indebted peers have been forced to flee at punitive prices.

Mr Varandas said that UBS had no plans to reduce its exposure to real estate in the infamous PIIGS – Portugal, Italy, Ireland Greece and Spain – economies, where he expected opportunities to abound in the near future.

‘We need to be diversified. We cannot just turn off the switch and say no more Portugal, no more Spain – that’s not what investors expect us to do. And diversification means you take the good with the bad,’ he added.

Source : Business Times – 18 Mar 2010