The European real estate market is increasingly focusing on transactional clearing prices and cash-on-cash yields rather than traditional book valuations, attendees at the ULI Europe Conference in Berlin heard this week.
Moderating a panel discussion, Edward Siskind, founder and CEO of Cale Street Partners, questioned whether the market was genuinely pricing assets at reality-tested clearing levels, or if investors were simply clinging to their “hoped-for prices”.
The relationship between book value and realistic market pricing remained a consistent thread throughout the session, with Aref Lahham, founding partner of Orion Capital Managers, noting that public equity markets were reflecting a clear pricing disconnect, with listed real estate companies trading at 30-40% discounts to net asset value.
“The market doesn’t believe the marks,” Lahham said. “It’s really hard to take advantage of these discounts… to take public companies private and capture that discount.”
Richard Powers, managing director of Brookfield’s real estate business, agreed, saying that established market norms regarding trading premiums “get in the way of people buying these companies at a price they’re comfortable with in this environment”.
Instead of waiting for official valuations to adjust, opportunistic managers are bypassing appraisals entirely to underwrite deals based on debt arbitrage and structural resilience.
Lahham mentioned Orion’s 50/50 joint venture with Helical at 100 New Bridge Street in the City of London as a prime example of cash-driven execution.
Taking speculative development risk on the 20,000sqm office project, Orion priced the scheme to yield an 8% yield on cost, which climbs to 10% on the back of surging prime London rents.
Yet, despite a double-digit yield being a structural “no-brainer”, institutional investment committees routinely rejected the opportunity because they had decided that “offices were bad” and they should not take the risk, Lahham said.
The difference in the velocity of repricing contrasts with the US market, where panellists agreed real estate valuations adjusted much more rapidly through swift write-downs.
Powers explained that the European lag is fundamentally structural, driven by a “heavily banked market, as opposed to [a] securitised market”. Because European banks hold real estate loans directly on their balance sheets, they have the flexibility to work alongside borrowers.
“Banks are more willing to [and] more able to – they have a balance sheet,” Powers said. “They’re more willing to work with the borrower, it’s just the process goes a little longer… but it definitely changes [the] speed of how a mark-to-market gets done.”
While this limits systemic distress, Powers acknowledged that this structural setup is precisely “why Europe is a little slower, generally speaking, to mark things than the US”.
The result is a distinct shift in what global limited partners demand from European transactions, with Uli Steinmetz, head of European transactions at DWS Real Estate, confirming that international capital has moved away from underwriting based on projected macro-driven market growth.
While in the past, international capital looked to Europe for “an IRR play”, Steinmetz explained that incoming investors were now “looking into total return, cash-on-cash-plus value creation”.
Amid a decline in availability of capital for core real estate, Lahham concluded that today presented a “fantastic time for people that have discretionary capital to be able to take advantage of the markets”.
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