European governments have mountains of assets to sell, but, in some cases, little idea of how to sell them.
Italy, said Hassium Asset Management chief executive Yogi Dewan at a conference this week, "has a mountain of assets to sell". Not only Italian, but also Spanish and Greek central and regional governments are looking to sell off public-sector buildings to shore up public finances. But is anyone buying?
A CBRE report on European public-sector asset disposals suggests they are. Sales of European public-sector real estate assets totalled €2.3bn last year, up from less than €2bn the previous year.
But a couple of trends in the appetite for these assets are worth noting. First, so far, appetite for divested assets has been largely domestic. Overseas buyers have accounted for only 15% since 2008, and 10% last year.
Second, the countries most in need of funds to plug major deficits are not the ones investors are targeting. Last year, four markets dominated public-sector disposals - and none of them were in Southern Europe. Those markets were Germany, Sweden, Russia and the UK. The Netherlands contributed a further 10%.
What this demonstrates is that investors have no interest in going out on an opportunistic limb to pick up a bargain. Regardless of who the seller might be, they want core assets in sectors they have already identified as being of interest. In Sweden, for example, most disposals were residential, including the €189m sale of a rental portfolio in Sigtuna to a domestic property company. (With the possible exception of emerging German investors with a more granular appetite for Swedish residentials, cross-border investors would be less likely to look beyond Stockholm and perhaps a few large cities.)
In short, investors are acting as selectively as they would were they buying from a private sector seller. CBRE EMEA head of research Richard Holberton pointed out that more rigorous valuations and increased transparency might clean up the offer. But they will not, in a marvel of property alchemy, turn secondary into prime.
How not to do it
Although the crisis of 2008 and its aftermath accelerated European governments' disposal programmes, many of them came into being around 2005-06. So at least some of them have had long enough to get used to the idea that, in order to sell these assets at non-distressed prices, they need to package them wisely. Yet some are only now beginning to audit their public sector portfolios properly, and anomalies remain in valuations.
In some cases, the disposal policies are themselves problematic. Although two Spanish regional public tenders are at a relatively advanced stage, investors have balked at the bundling of prime and secondary assets. "A key issue that investors encounter when they analyse public portfolios on the market is that only some of the assets and the lots are of interest to them, and this has a clear influence on the final offer price," the CBRE report says. Not only the bundling of prime and secondary locations but the inclusion of assets designated 'public use' has proved problematic for investors.
Meanwhile, in Italy, legislative wheels grind slowly. The government estimates that public sector real estate sales could reduce public debt by €25bn-30bn. Article 5 of a bill introduced by Mario Monti's new government has enabled the transfer of property from the state to local authorities, and around 15 regions are testing the new rules for development projects including prisons and theatres.
Alberto Albertazzi, general director of Henderson's Italian operations, currently sees little appetite for the Italian market outside of retail, even among domestic investors. Unsurprisingly, state disposals are of little interest, though he said he would assess them on a case-by-case basis. Although "we would not rule them out entirely", he said, "this is not the dominant route we would follow".
Otherwise, real estate investors might welcome a technocratic government more conversant with budgets than bunga-bunga parties. But Holberton points to continuing uncertainty in the Italian market. The disposal plan has not been fully worked out, although one of the options under consideration is a possible NAMA-style central fund for public assets.
The South moves to centralise
If the central fund concentrates strategy and management, it could work. Rin-Sjoerd Zilstra, a consultant on public real estate strategy at Deloitte and co-author of a recent report on public sector disposals, identified as one of the main reasons for the success of disposal strategies in the Netherlands and Germany the creation of a central real estate organisation responsible for formulating and executing the disposal strategy, and then managing the portfolio.
Such an operation requires investment in training and real estate information systems, but Zilstra said experience from dozens of projects suggests the return to municipalities will be more significant than the investment.
"A centralised real estate organisation is more powerful," he said. "It can formulate a municipality-wide portfolio strategy, as compared with the departmental strategy of parts of the municipal property."