Cycles are getting sharper and quicker, says Tristan’s Spry

Property cycles are getting sharper and quicker, according to Cameron Spry, head of investments at Tristan Capital Partners. Our view is that you can’t predict perfectly how the cycle will unfold and that you therefore have to be agile and able to move quickly when it does.’

Roughly 18 months ago, Spry saw a 10-year opportunity for picking up broken assets, fixing them and repositioning them as core product. ‘I now think there’s probably a seven-year opportunity. The problem is still the problem, but it’s starting to be worked through more quickly than a few years ago.’

In the past 12 to 18 months, London-based Tristan has taken advantage of the appetite for large logistics transactions and has accelerated the sales of the assets it had pieced together since the outbreak of the financial crisis, after repairing them and aggregating them into new portfolios.

‘We’re still looking at small transactions in other markets and there may well be an advantage in bringing them together. In the current cycle there is a lot of capital for larger transactions, but less for smaller ones. But although it rhymes, history never repeats itself. I wouldn’t underwrite the same thing happening again. A deal must not rely on an aggregation exit. We have to feel comfortable with it, standing on its own feet. Aggregation is really just the cream on the cake.’

The real estate business has changed ‘so much’, Spry said, since the heady days of 2005-07. ‘Those were the most steamy years of the previous period. There were lots of buyers but no natural sellers then. In contrast now, most of what we’re buying now is under-invested stock that requires capex from people who are not natural owners. That’s quite different from the last cycle when it was mostly people like us trading with each other. We’ve all learned you need not only to pay the right price for a property but you must also improve its nature or durability. All those overlevered assets with no amortization have capital structures that weren’t self-healing. We’re like a manufacturer, we buy stuff that’s broken, fix it and sell it. The market is right for that now. There are a lot of broken assets and a lot of core capital.’

ACCIDENTAL OWNERS
Another big difference between the current cycle and the boom years is that there are a lot of closed-end funds, especially in Germany that are currently in wind-down mode while ‘accidental owners’ of real estate including some of Europe’s leading banks are now accelerating their loan sales.

‘The Asset Quality Review will be another catalyst for further sales,’ Spry predicted. ‘In certain countries the banks have focussed more or less on recapitalization and deleveraging. The UK for example is quite a way through it but Germany and Italy haven’t really started. The AQR will shift the geographic focus of the delevering process.’

Spry sees more portfolios coming onto the market in the coming 12 months. ‘Some are cross-border portfolios, some focussed on just one country. That is becoming a feature of the market.’

After investing roughly 80% of its €950 mln European Property Investors Special Opportunities III (EPISO III) fund earlier this year, Tristan has commenced talks with existing investors regarding the launch of a 4th EPISO fund. Tristan’s fourth European fund will follow the same format as its third fund, targeting net returns of 15% and investing in a diversified portfolio of assets, a spokesman said. The fund is expected to start capital raising in the first half of 2015.

‘Things change,’ Spry noted, ‘but I feel pretty strongly that the market opportunity is still compelling. We don’t want to be in a market that’s interesting without capital.’

The new fund, which is likely to start capital-raising in the first half of 2015, will continue to target underinvested assets rather than particular countries or regions, Spry said. ‘We are active in the value-add opportunistic space, buying assets from people who are accidental owners, who not interested, or who don’t have the capital or the infrastructure to deal with the impairments. That is really the focus. We are not geographically focussed, we’re focussed on the vendors and the profile of the seller and the opportunity to invest into those assets.’

The market is entering a new phase, he added. ‘An uptick in pricing has closed the gap between buyers and sellers, and encouraged sellers to bring more to the market. In stage 1, owners only sold their assets if they absolutely had to. In stage 2, we saw more capital coming into the market and with the passage of time, more capex required. The vendors didn’t need to sell, but wanted to sell and that is where we are now. In stage 3, there will be more regulatory pressure on banks and more lifespan pressure on funds so we will now see the emergence of a another forced-to-sell group.’