"Europe [is] an unfavorable place to invest in the eyes of the rest of the world, and that statement is the opportunity," because everyone is ignoring it, he says. He extols attractive discount retail real estate deals in Germany. That country has been a nation of savers after surviving its own financial calamity in 2004, and this has been a boon to nondiscretionary spending. Discount retail "is as recession proof as you can get," he says.
Wood says the key in Europe is the arbitrage between yields you can get for secondary properties and core properties. "That is now broadly speaking as wide as it has ever been. It is around 500 basis points and rising." And anything with a whiff of risk gets hugely discounted. MGPA's strategy in Europe, he says, is to "manufacture" core assets-"buy something that is imperfect, manage it, capture some of that arbitrage between the yield." That can mean buying the property cheap from a distressed seller or developing a property no one else can. It might mean raising a new building in the City of London office market where there's huge pent up demand and low vacancy, at a time when building there has otherwise stalled. Or in China, for example, he recalls his firm's efforts to coax the Chinese in one city into a new shopping center's parking garage with free Starbucks drinks.
Then there is oft-abused Japan, "the market everybody loves to hate," according to Wood. This, too, is worth a serious look, he says, in choir with Yablon.
"The market that we like, oddly enough is Tokyo," Wood says. "Japan is out of favor at the moment. You read about the fact that its population is decreasing, its economy is going nowhere etc., etc., etc. Understand that Tokyo is the largest metropolitan area in the world, about 35 million people. It is the largest office market by miles in Asia and I think the second largest to Paris in the whole of the world and the population of Tokyo is actually getting younger and the economy is growing faster than Los Angeles and most other U.S. cities. So what you're seeing in Japan is ever-increasing concentration of economic activity in the metropolitan area of Tokyo, with the result that Tokyo benefits from that and the rest of the country is doing even worse than you thought."
Here the opportunity arises because Tokyo is a relatively inefficient property market, with older buildings to buy, renovate and play around with, and that gives property buyers the chance to, again, "manufacture" core assets, the same as in Europe or China. MGPA had been out of Tokyo but recently closed on a building in the tony Ginza area, Tokyo's version of the Champs-Elysees.
Yablon's view of Tokyo is that the office market has been so bad for so long-at a vacancy rate of 9.2% because of rampant oversupply-that it just can't get much worse. Japan also offers REIT companies a shot at industrial plays, Yablon says, since 2011's vicious tsunami revealed cracks in the country's logistical infrastructure.
A Volatility Approach
Stephen Hammers, CIO of Compass EMP Funds, a Brentwood, Tenn., alternative mutual fund manager, says the volatility in the REIT markets stems from the fact that investors keep changing their minds between hope and fear. He says that in the long term, global REITs are a great place to be, but there must be a way to hedge the downside risk by dollar-cost averaging or by investing with some sort of a stop-loss involved.
Compass's funds have a specific rules-based investment strategy with its own in-house, Dow Jones-listed index that weights REITs based on their risk, (the strategy is interesting in that it doesn't have the usual panoply of familiar REIT names in it). The strategy requires the REITs to make profits for four consecutive quarters. Because of Europe's "irrational price movements" and other currency problems, Compass liquidated its international REIT exposure two years ago and is 100% long in U.S. names.
"Europe should be performing a lot worse than what it is," Hammers says. "It should not be going up. They have some major, major catastrophic crisis that there is no money that can save them. And investors are striving for good news and it's only getting worse. So we're going to wait a while. We do intend to get back in that market and when we do we're going to dollar cost average back in."