Secondaries becoming “accepted tool” in RE

A PERE Global Investor Forum panel featuring Robert Dombi of Landmark Partners discussed the growth in the real estate secondaries market and how more investors are using it to manage their portfolios.

According to panelists at the PERE Global Investor Forum yesterday, the real estate secondaries market is on the rise. Indeed, Landmark Partners revealed in January that the sector had experienced $3.7 billion in activity last year, up from $2.6 billion the previous year – and the increase is likely to continue.

“There are still only a couple of dedicated buyers in the space but it's starting to follow the trends established on the private equity side of the business, which is a much more mature market,” said Robert Dombi, partner at Landmark.

Dombi noted that, in comparison, the private equity secondaries market is about $25 billion in size with more than 40 competitors. “The real estate secondary transaction as a method for portfolio management is becoming more accepted and more out in the open, as people are becoming more educated and aware of it.”

Dombi’s fellow panelists agreed, including Tim Walsh, current president and chief operating officer at Gaw Capital Partners USA. As former chief investment officer leading the New Jersey Division of Investment when the pension made its big secondaries deal with NorthStar Realty Finance last year, Walsh was very aware of being one of the few players. “I still don’t understand today why more public funds and institutions are afraid to do it,” he commented.

However, more investors are beginning to take a proactive view of the secondaries market, according to Ken Wisdom, managing director and head of real estate at Portfolio Advisors. Especially with investments from 2005 to 2007 on their books, investors are seeing that it might be more prudent to sell in order to create liquidity and redeploy that capital in higher returning investments.

Additionally, financial services firms are looking to secondaries in a reactive way, due to impending regulations. “With the Volcker rule, there’s a lot of pressure to manage risk, and US and European institutions are feeling the pressure to sell,” added Wisdom.

Dombi noted that changes in CIOs or consultants at institutions are also signals of possible secondaries activity. The new people often want to modify the strategy of the plan and are not tied to the decisions of their predecessors, especially as they do not necessarily feel the same stigma when selling an investment authorized by someone else. “As the market matures, the stigma attached to selling real estate secondaries assets is fading away and it’s becoming a more accepted tool,” he said.

Mark Canavan, senior portfolio manager of real assets at the New Mexico Educational Retirement Board, provided an LP’s point of view on the panel. He added that public pension plans might be more cautious about selling because they want to hold out for the possibility of a positive shift in the market by the time the fund is realized. “I think one reason why more people don’t do it is because, if I’m holding that dog, psychologically it’s not a loss until I realize it,” he said.