Is now the time for a pan-European mop-up of opportunistic real estate deals? Shayla Walmsley explores.
Tristan Capital this week announced that it is to launch a €750m opportunistic fund targeting European assets in anticipation of more bad news creating more shocks to the market - and, as a result, more buying opportunities. The fund will target markets across Europe, including Central Europe, and assets in all sectors. Although Tristan believes Spain and Ireland will recover over time, it sees opportunities in the UK and Germany.
If opportunistic fund managers can persuade traditionally cautious pension funds to curb their rampant appetite for core, there are a couple of good reasons for them to do so. In a paper on the case for opportunistic investing in European real estate, a team of RREEF analysts identified four main arguments: yield spreads, the differences in short-term and long-term interest rates, returns relative to core and value-added strategies, and potential acquisitions of distressed assets at big discounts.
Nothing has happened since that would significantly weaken the case for opportunistic investing in Europe, says RREEF Europe head of research Simon Durkin. If anything, he says, an increase in economic uncertainty since November (when the report was published) could suggest greater market dislocation and, hence, greater opportunity. "I would caveat that statement heavily by saying that the corresponding risk has also increased, both in terms of capital market risk and the underlying occupier fundamentals," he says.
No-one imagines pension schemes will throw off what IVG's Thomas Beyerle describes as their "core fetish" to divert major chunks of their allocations to opportunistic funds. But there is a place for it. Of private real estate funds closed last year, 25% adopted opportunistic strategies - the second-highest percentage after debt funds. Core and core-plus funds accounted for only 13% of the total, with value-added and distressed funds clocking up 17% each. Recent data from Preqin suggest more US private-sector pension schemes favour opportunistic over core (55% compared with 53%), although value-added came out top with 63%.
According to Tristan Capital director Monica O'Neill, potential investors in its new fund include US pension schemes looking to diversify. "They've already experienced success with opportunistic strategies in the US," she says, "and if they diversify in Europe, they need to choose funds further at the risk spectrum to compensate for the currency."
Some Canadian institutions have taken the same approach. Healthcare of Ontario Pension Plan (HOOPP) real estate senior portfolio manager Lisa Lafave told the IPRE Investor Forum last month that the CAD40bn (€30.9bn) pension scheme's European strategy was "opportunistically driven" as a means of diversifying away from its domestic core focus.
Within Europe, NIAM's announcement last month that it had raised €719m from pension schemes and sovereign wealth funds for an opportunistic fund targeting the Nordics suggested significant appetite intraregional appetite. Jan Østergaard of Denmark's DKK101bn (€13.6bn) Industriens Pension, for one, has said his scheme will focus on value-added and opportunistic strategies as a means of "extracting additional returns" and avoiding reliance on interest rate increases.
But here are two caveats. First, opportunities are not necessarily opportunistic. You could question, in fact, what 'opportunistic' means beyond the INREV definition. Its contours are relatively fluid, potentially incorporating debt and distress. The four largest opportunistic funds to close last year - two from Lone Star, one each from Blackstone and Carlyle - all featured some degree of debt.
Second, opportunistic strategies are predicated on assets. As the RREEF report cautions, quantitative easing deprived some US fund managers of anticipated assets after 2008. Europe is different - both because there is no pan-European liquidity injection mechanism and because banks are under pressure from specifically European regulations, as well as Basel III. Less efficient pricing, minimal (if improving) availability of debt and the prevalence of local strategies likewise lend the market to opportunism. But timing is a question. There is no guarantee that European banks - or, for that matter, governments - will flood the market with longed-for distress sooner rather than later.
