Europe is still magic for investors in real estate, Ric Lewis, CEO of Tristan Capital Partners, told a Real Estate Private Equity event organised by PropertyEU and hosted by UBS Asset Management at its London headquarters on Wednesday.
‘Europe is less fully priced than the US and Asia,’ he said. ‘For us it is the more interesting play.’ There are headwinds, such as the uncertainties surrounding Brexit and the possibility of ‘Frexit’ following the French presidential election, but they can be managed.
Despite these uncertainties, Lewis said he was optimistic on the outlook for Europe. ‘In the end people will make it work, just like a family Christmas. We need a cohesive Europe, because it is too important a market.’
Headwinds and happy endings
Even Brexit could have a happy ending, he said: ‘It feels like we are going towards a positive compromise, with the UK out of the EU but retaining many benefits. I do not see a major fracturing where people stop investing in the UK. But admittedly I did not believe Brexit was going to happen and I did not think Trump would get elected.’
In any case, difficult situations can present opportunities. ‘The headwinds in Europe are creating a two-way traffic,’ he said. ‘There are different perceptions of the risks and the marketplace. There’s a significant spread between the cost of an impaired asset and the value that a yield-hungry investor will pay for a repaired asset. So if you fix it, you get well paid for it.’
The fact is that in a zero interest rate environment most institutional investors cannot find the yield to match their objectives and commitments, he said. ‘They need more real estate exposure and they tell us this every day.’
Lewis, who described his career path as ‘refining and perfecting my own brand of magic’, said current market conditions therefore present ‘the opportunity to differentiate yourself'.
A changed market
The European real estate industry is only 20 years old but it has undergone several momentous changes, including the financial crisis when ‘the rain started and the storm came and it lasted a long time', Lewis said. ‘Institutional memory is very short. There are people who made mistakes and lost money and now they are doing it again.’
But now costs as well as barriers to entry are higher, there is more regulation and more scrutiny, more destinations for capital and more sectors that are deemed institutionally investable. It makes for a more complex but more transparent and interesting market.
‘We are now in a market where you need to take on more risk to get 15% returns,’ said Lewis. ‘It is increasingly difficult, but it is still possible.’
Betting against Armageddon
There are areas of uncertainty and potential problems ahead, from Russia to China, from interest rates to Trump, from Brexit to Frexit, but they must be evaluated and can be managed. ‘We look at anomalies of pricing and we pride ourselves in being exceptional risk managers,’ he said. ‘We want to make private equity as easy and boring as possible.’
A successful investor has little time for doomday scenarios, said Lewis: ‘Our job is to figure out what to do when the world’s not actually ending. I am betting against Armageddon.’
