Principal’s Indraneel Karlekar on finding value amid lower property returns

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Institutional investors bracing for a period of lower real estate returns globally can still find pockets of value in Europe and the US, says Principal Real Estate Investors’ Indraneel Karlekar.

Institutional investors have reaped healthy returns from property globally over the past decade, the senior managing director of global research and strategy at Principal REI told APAC Real Estate.

However, the days of robust core property returns in the high single digits or even low double digits are largely done, at least in the short- to medium-term, due to a slowing global economy and pretty full asset pricing across most markets.

Indraneel Karlekar
Indraneel Karlekar (image: Principal Real Estate Investors)

Investors will have to get much more creative with their real estate strategies, as the executive pointed to a mix of strategies including debt and “shovel-ready” development projects.

“We think there are some really interesting opportunities in US mezzanine high-yield debt — that’s been a well picked over asset class over the past few years — but we still think you can get pretty decent returns,” Karlekar said.

“It’s very compelling when you compare it to core real estate in Europe and the US and it allows you to have the luxury of having a pretty thick equity cushion underneath that.”

Core pan-European real estate is another interesting spot for Principal REI, however that doesn’t include the UK.

“If you look across the continent, it’s a very large and liquid market. Debt capital is plentiful and very accretive – you can still borrow 50-60% at very low rates,” the senior MD said.

“From a cycle perspective, in Europe for the most part, except for some gateway markets, there is room to run in terms of rent growth and occupier demand.”

While the difference between US and Eurozone core equity is minimal, hedging costs remain more favourable for European property, giving the market an edge over the US.

The investment manager is also pursuing ground-up development in specific markets and specific property sectors.

“When you think about doing development in late cycle, people get quite worried about it, and rightfully so,” Karlekar said.

“Our view is that if we can do ‘shovel-ready’ projects, which means no entitlement risk and no zoning risk, and you can do it with a trusted partner, then you can do it for either residential or logistics.

“You can also get short-duration exposure, which limits the amount of risk you take compared to office.

“We think there is possibly a 500-plus basis point differential in returns generated between core and development in the US and in Europe.”

Principal Real Estate Investors has US$74.5bn of assets under management and is the property arm of asset manager Principal Global Investors.

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