The EG Interview: QuadReal’s Jay Kwan on riding the market cycles

A veteran of multiple cycles over more than two decades in real estate private equity, Jay Kwan knows something about navigating difficult markets. Now, the managing director for international real estate in Europe at QuadReal, a C$73.8bn (£43.4bn) Vancouver-based investor, is tasked with building out a business in the UK and elsewhere on the continent during a time unlike anything many can remember. QuadReal invests money on behalf of public and corporate pensions in British Columbia, with a global portfolio spanning residential, retail, offices, life sciences, industrial, data centres and self-storage. In the UK, the focus is on residential and logistics. Kwan joined in 2018 to open a London office, arriving from TPG Real Estate, where he had been a managing director. The company is here for the long term, Kwan says. “This wasn’t a cyclical, moment-in-time opportunity, but rather an expression of our desire to be here on a permanent basis,” he tells EG when we meet at Coppermaker Square, a 1,225-home build-to-rent scheme that QuadReal is developing in east London alongside PSP Investments and Unibail-Rodamco-Westfield, which owns the neighbouring Westfield Stratford City. Dealmakers are already in “a different environment” to that of 2018 when Kwan first started mapping out the company’s UK and Europe vision. But he is adamant that with the right partners and a patient approach to growth, there is plenty of opportunity as QuadReal beds down on this side of the pond. Blank slate QuadReal’s dedication to the residential market is clear from group-level down. Global residential head Anthony Lanni speaks of a push to create “vibrant, resilient and sustainable” schemes and echoes Kwan’s insistence on taking “a long-term view” of investments. Europe takes some tweaking. “We obviously had to adjust for the idiosyncrasies of working here,” Kwan says. “It’s not a different place, it’s many different places. That was the first thing we had to recognise, that the nuances of each market meant we would have to adjust the strategies accordingly.” London has been “more of a blank slate” than QuadReal’s home market when it comes to BTR, Kwan says. “When we first started investing here, I think I counted 30 BTR buildings in London,” he says. “That is probably three New York City blocks. There was quite a bit of unknown [in terms of] what do tenants want and more importantly, what will tenants pay for? There was a period of market discovery: as you build, what do people gravitate towards that might be different from North America?” In part to draw on local knowledge, the model has shifted from a North American approach, in which QuadReal has an integrated property management operation, to a partnership focus in the UK and Europe. Kwan and colleagues are looking for partners that have the “capability, track record and thinking, in terms of what the tenant wants”, he says. That means partners like Unibail-Rodamco-Westfield, whose Greystar-managed Coppermaker Square will be complete by the end of this year. “We’d love to do more with them,” Kwan says. “Their sites have heavy foot traffic, they have recognition, they have the infrastructure, particularly public transport. This is fertile ground for BTR.” Or partners such as Realstar, with which QuadReal has a joint venture and in which it has since taken a stake. The pair have 18 assets in the UK, comprising 6,000 homes. Staring contests Kwan sees this as an “inflection point” in QuadReal’s time in Europe due to four trends. First, a property market dislocation. “The property markets aren’t acting normally,” he says. “Widespread repricing is leading to staring contests between buyers and sellers and there’s a steep fall in volumes as a consequence.” Next is a dislocation in the capital markets, where Kwan sees “an increasing number of stalled financing processes and a disruption to the commercial mortgage-backed securities and syndication market”. Then come geopolitical challenges. “Conflicts are rising, and there is a general challenge to political norms that we’ve seen in our generation,” he says. “It plays a lot more prominently than it did in the past 10 or 20 years.” “It’s not necessarily robust to predicate your investment thesis on a precise call on what happens with interest rates. You’re going to be wrong” Jay Kwan, QuadReal On a more positive note, Kwan says, the fourth factor driving market shifts is that “the traditional usage of real estate continues to evolve”, with an “onward march of secular trends, AI, onshoring, e-commerce and so on”. Take those four factors together, the QuadReal boss says, and it becomes difficult to build convictions in particular sectors today. “This time feels different,” he says. “Real estate cycles were predicated on monetary policies, fiscal policies, asset bubbles. Life was simpler when that was how you made a call on the market. Now you throw in the rise of geopolitical tensions, and that really matters now. That makes it a bit more difficult to say, ‘I know how this cycle is going to turn out because I’ve seen this before’. Well, not many of us have seen all four of these dislocations happening simultaneously.” QuadReal has an advantage, Kwan says, given the long-term nature of its investments and “flexible capital”. “We recognise that, despite wanting to be in Europe on a permanent basis, there will be ebbs and flows in activity. Now there’s a bit of an ebb because of those dislocations,” he says. “The challenge is figuring out when do we enter a market and how, despite the dislocation. It’s a moving target at this point.” Where the organisation has “pivoted”, as Kwan puts it, is in its credit business. In North America it has an $8bn (£6.3bn) loan book and aims to build out that business in Europe. The company set up shop in the European market in late 2022 – “before all the cool kids did it” – and has bought into Precede Capital Partners. Lending began in 2023 and the venture is now on its third loan, with a total book size of £500m. “The texture of that pipeline is going to change over time,” Kwan says. “Inbound inquiries for construction financing have slowed down naturally. But the credit opportunity is going to extend beyond construction financing. There will be a pause as a market readjusts and that staring contest continues. And then as loans resolve themselves, there will be interesting opportunities in that funding gap, whether it’s refi, senior stretch, structured equity, debt with warrants. There’s a gap that needs to be filled.” Spoken like a true survivor or multiple market ups and downs. “I’ve been through three cycles if you count the dotcom bubble, then the GFC and now this recent one which we’re in the middle of,” Kwan says, adding there is “some pattern recognition” he has picked up. “In times where your partners make a lot of money or lose a lot of money, they either build character or reveal character,” he says. “It does require proactive decision making, and the courage and conviction to act. So as values fall, there’s a tendency to not capitulate and then capitulating too late can lead to you selling in the bottom of the market. Recognising the problem early, then having the fortitude to act is one of the most difficult things to do in our industry because of the implications of selling at a loss.” These are lessons Kwan is now passing on to more junior members of his team. “The interesting challenge with managing those under, say, 35 today is that this is truly the first cycle after a very prolonged period of growth,” he says. “Everything in their careers has been doing this [demonstrates an upward trajectory with his hand], whether it’s asset pricing, compensation or career development. There’s never been a period of a down cycle. Managing expectations while keeping morale up has been a learning experience for myself.” Relevant or right? Kwan knows better than to claim he can predict market moves with any great certainty. The house view of rates remaining elevated for the medium term and then to see modest cuts comes with “about 50 different caveats” around unemployment, inflation, GDP contraction or growth and geopolitical tensions. “It’s not necessarily robust to predicate your investment thesis on a precise call on what happens with interest rates,” he says. “You’re going to be wrong.” Instead, he says, dealmakers need to get to grips with a conundrum he has been tackling for 20 years now: price versus value. “Price tends to fluctuate more wildly but it’s the value you need to figure out and anchor yourself to – what is something worth long term, not what is something priced at in the short term,” he says. “It’s something that [Oaktree Capital Management’s] Howard Marks prescribes to, and I’m an avid reader of his literature. It’s difficult to figure out what the value of something is long term. It’s easier to figure out what the price is. Where your decision making becomes difficult is when your price and your value diverge at its widest point. That’s when you fight against yourself – do you want to be relevant, or do you want to be right?” As Kwan and co prepare for the final parts of their east London resi scheme to open to tenants in the coming months, they will be hoping they’ve found a way to be both. To send feedback, e-mail tim.burke@eg.co.uk or tweet @_tim_burke or @EGPropertyNews Photographs by Tom Campbell