For some time US investors have considered Europe a no-go area. But, as Richard Lowe reports, there has been a ‘dramatic shift’
Worldwide House is a 170,000sqft office building in the English town of Peterborough fully let to Travelex. It changed hands in August for £16m (€18.9m). It certainly wasn’t the biggest deal of summer, but it was significant because it was evidence of what is being described as a “dramatic shift in sentiment” towards European real estate among US investors.
Karlin Real estate, a US-based family-office investor, made the acquisition, its first in Europe, having built up a diversified property portfolio in the US. It’s unlikely to be its last either; Karlin claims it has $1bn (€0.8bn) to deploy in Europe.
Matthew Schwab, co-founder and managing director at Karlin, sees similarities between the UK real estate market today – particularly in the regions like Peterborough – and the US two years ago. “There is a lack of capital from lenders to funds, to private individuals, similar to what we saw in the US – a lack of solutions for sellers,” he says.
At the other end of the spectrum is the news that Blackstone is seeking to raise money for a $5bn European real estate fund. US-based hedge fund Oaktree Capital, meanwhile, has been very busy buying assets, most notably Segro’s IQ Winnersh business park in Berkshire which it bought for £245m.
David Evans, partner at law firm Goodwin Procter, says he has been seeing growing activity among US investors looking at Europe, mainly concerning real estate debt markets.
Evans is leading Goodwin Procter’s European office in London and the company has a large presence in the US where, Evans says, it is able to “take the temperature” of US investors. He certainly expects to see more dedicated European real estate funds being launched – as opposed to 10% “sleeves” of global funds, as has been the norm so far – as well as a number of examples of US companies acquiring real estate platforms in Europe.
Keith Breslauer, managing director at Patron Capital, has a lot of experience in deploying capital in Europe on behalf of US investors and says “there has been a dramatic, dramatic shift in sentiment with respect to opportunities in Europe”.
He adds: “The simple reality is that the American opportunity, in terms of the distressed market, is over – at least that’s as perceived by a lot of aggressive investors. And therefore what they are looking to do is find opportunities [in Europe].”
Charles Weeks, European CEO of Cornerstone Real Estate Advisers, whose main client is the US-based MassMutual insurance company, agrees. “You’ve got a lot of activity that’s beginning to bubble up now amongst the opportunistic investors,” he says. “There is a view amongst some investors in the US that the bounce-back in the US has happened.”
Both Breslauer and Weeks agree the shift in focus to Europe is a combination of opportunities diminishing in the US and the macro-economic picture in Europe stabilising. The continent is no longer the no-go area it was perceived to be during the worst months of the sovereign debt crisis.
Peter Reilly, head of European real estate at JP Morgan Asset Management, says when discussing European real estate with US investors 18-24 months ago he was met with “a general lack of interest”. “They felt there were plenty of opportunities in the US as the markets there were rebounding,” he says.
“They were very nervous about the dynamics of what was going on in Europe with the sovereign debt crisis…. they felt the macro risk of Europe was too great.”
He adds: “If you fast-forward to six months ago, into March, April, I would say the sentiment had changed dramatically…. Those same investors we talked to six months ago are completely reversed in their thoughts; they are very interested in Europe.”
So, as well as the opportunity funds and hedge funds (which are invariably backed by US institutional investors), there is also a shift among what Weeks describes as the “broader investment universe in the US” – namely, the pension plans and other institutions. “We are seeing it on both the debt side as well as the equity side of the market,” he says. “We are witnessing a greater and greater level of interest from US investors, in particular, for European opportunities.”
A number of US pension plans have been allocating to European real estate strategies. San Diego City Employees’ Retirement System recently approved a $20m commitment to Europa Capital’s latest European value-add fund. New Mexico State Investment Council revealed recently that it will be targeting European real estate debt opportunities in the coming months and has allocated $35m to two debt funds managed by M&G Investments.
However, so far these sorts of commitments have remained relatively small and limited in number. Paul Vosper, COO and co-head of Morgan Stanley Alternative Investment Partners, says he is seeing a lot of interest from private wealth clients for European real estate strategies, but US institutional investors are still cautious when it comes to backing higher-return strategies outside their domestic borders.
“A number of our larger private-wealth clients are actively looking to exploit distressed opportunities,” he says. “On the institutional side, I still think the US is generally more cautious on opportunistic investing. A lot of the big funds got badly burned in the crisis and it is still a difficult argument that they have with their trustees to go into private-equity-style real estate.”
Morgan Stanley AIP has been deploying capital in the UK over the past 24 months but has so far advised its clients to hold back on the euro-zone. “The pricing right now does not look particularly attractive in the euro-zone,” says Vosper. “We think it is probably still 12-18 months away. Having said that, we are telling clients that once we see that capitulation then we could see some very attractive opportunities.”
Vosper says it is important, from a risk perspective, to have the assurance of liquidity in the markets being targeted. “Spain or Italy remain challenging,” he says. “We think there could be a value trap in those markets still. Markets like Germany, in particular, and maybe France, on a secondary basis, we think are going to start looking very attractive as we start to see the banks deal with the balance sheet issues.”