Credit Suisse bets on European turnaround story

The European economy may still be struggling to get back to steady ground, but investors from Asia and Latin America see a turnaround story in European real estate, according to Tim Blackwell, Global Head of Real Estate Asset Management at Credit Suisse.

'We are seeing quite an inflow of capital into the European markets from institutional investors in Asia and high-net-worth private individuals in Brazil and Chile,' Blackwell told PropertyEU in an interview. 'These clients see the European markets currently at the same spot in the cycle where the US was at the beginning of the turnaround there.'

In order to meet demand, CS REAM set up the CS European Property Fund in Luxembourg with a duration of seven years and a second closing planned for end of October. The fund currently has just under €100 mln (€89 mln) under management, Blackwell said. 'With this fund we are implementing a pan-European investment strategy focusing on the recovery theme,' he added.

With €34 bn assets under management in Europe, CS REAM ranks second in PropertyEU's annual Top 100 Investors survey based on overall size. In this interview, Blackwell comments on how CS REAM is catering to the new demand form investors outside Europe.

PropertyEU: Investors from Asia may prefer quite a different strategy to European investors, let alone private investors from Latin America. How do you manage to find a common ground?

Blackwell: We have a total of 16 funds, each of which has a different strategy, and we are constantly broadening the investment horizon for our clients. For example, for Swiss pension funds and insurance companies we recently set up two new vehicles, one for investments in Swiss industrial/logistic properties, the other geared towards the German market. We also offer individual mandates for investment volumes starting at €100 mln.

PropertyEU: You are keen on the European property markets and so are your clients. However, the newest economic data is not exactly encouraging. Germany's GDP fell by 0.2% in the second quarter while the French and Swiss economies stagnated. Isn't the US more appealing given that it recorded an annualised GDP growth of 4.2% in Q2?

Blackwell: Not necessarily. The property markets in the US have outpaced the economic recovery by quite a margin. Prices for quality assets have risen so strongly, pushing yields so low that we have not focused our efforts on any investment for our international funds in the States this year. However, in Europe some markets are currently at the point in the cycle the US markets were three years ago before the beginning of the recovery.

PropertyEU: But property in Europe is not exactly cheap either. Core assets in Switzerland trade below yields of 3% and in France, Germany, and the UK well below 5%.

Blackwell: True. However, there are opportunities in turnaround markets like Ireland, the Netherlands and Spain, whose economies are beginning to get back on track. And there are also opportunities in secondary markets in Germany and the UK. While cities like London or Munich are on the expensive side, commercial property in mid-sized towns in those countries generate yields clear above the 5% mark.

PropertyEU: Isn't that because investors are staying away from those places for fear they may not be able to get out once they're in?

Blackwell: First, good objects will always find a buyer. Second, most of our funds follow a buy-and-hold strategy. So we are not under pressure to sell any given property at any specific time. And third, secondary cities can offer good value. Take a look at Wolfsburg, a city inhabited by 122,000 people in Lower Saxony. Few investors have this town on their radar even though Volkswagen is headquartered there - one of the largest car manufacturers in the world willing to sign long-term leases for office space.

PropertyEU: So you are staying clear of core properties in large cities?

Blackwell: At this point, yes. When it comes to those places we would rather scour the markets for value- add assets with some vacancy. Bought at the right point in the cycle, those properties can net considerable returns as soon as demand picks up again with an economic turnaround.

PropertyEU: Which usually goes along with rising interest rates...

Blackwell: ...which will not necessarily result in lower property values. When the economy picks up, demand for commercial real estate rises causes rents to go up which in turn leads to an increase in values. Also we expect the ECB to raise interest rates well into the recovery although we don't see a hike in 2015 due to deflationary risks in some countries.

Richard Haimann
Correspondent German-speaking countries