Southern European countries move at different speeds

Investor appetite for real estate loans and distressed assets in Southern Europe remains strong, but different countries are moving at different speeds, attendees at PropertyEU’s Investment Briefing on distressed investment heard on Tuesday.

‘Spain is transitioning from a big interest in value-add and opportunistic investment,’ Aldolfo Ramirez-Escudero, president of CBRE in Spain, told the briefing. ‘In the last 12 to 18 months, we’ve seen a wall of equity in the market and the subsequent transactions have generated new references. We are now starting to move into a more liquid and more mature market.’

While Spain has been in the eye of the foreign capital storm, activity is now moving elsewhere, Ramirez-Escudero said. ‘Investors are now starting to move into Italy. Portugal is a smaller market, but there are some opportunities. Stock selection is essential.’

Jos Short, executive chairman of Internos Global Investors, called Spain ‘an amazing story’. ‘I heard a colleague say, he had been waiting for five years for investor activity to start up again. One day he went for lunch, came back and discovered he’d missed it!’

In the past 18 months, US opportunistic funds have taken the lead in Spain, Short added. ‘They played Ireland very well and when the country was rerated, they then swarmed Spain.’ While the ratio of debt to GDP has come down in Spain and unemployment levels appear to have peaked, investors in Spain still have reason for concern, Short said. ‘Economically things are still not looking very bright. The wave of opportunistic investors were right in Ireland, but the question is whether they were also right in Spain. Some of them are now migrating to Italy. Portugal is also interesting and attractive but it remains a small country.’

In that sense, Northern Europe remains a safer bet overall, Short noted. ‘Even in horrendous times, companies were still able to recapitalise. In Spain, Italy and Portugal, the liquidity completely dried up. When things are really tough, there is still liquidity in northern Europe, it’s still possible to exit.’

Since the onset of the crisis, office rents in London, Paris and the big cities in Germany have undergone ‘a huge rerating’, Short added. ‘Madrid office rents are still in a trough, but the question here is: has the rerating already been factored into the yield?’

Another issue in southern Europe is that there is too much capital chasing too little product, Short noted. ‘It depends on where your capital comes from. Different investors have different return horizons. The black box IPOs and the bond funds have a lower cost of capital.’

In any case, TIAA Henderson Real Estate is not about to jump into southern Europe in a big way, noted London-based fund manager Jason Rodrigues. ‘The issue for us is that we’re an indirect investor and whether we can find attractive returns on a risk-adjusted basis. We continue to be cautious about Spain. Yes, we see the opportunity. But can we access it? When trying to generate liquidity, we have struggled in southern Europe relative to the north. You can’t get in and out quickly and if you look at the macro-economic picture, the occupiers are not there.’

The creation of new listed vehicles in Spain has created greater liquidity, but the market remains more difficult than northern Europe, Ramirez-Escudero conceded. ‘It’s still an important issue that it is not as liquid as other markets,’ he conceded.

While doubts remain about the sustainability of Spain’s economic recovery, the fact remains that the country’s listed sector has sparked back to life since the beginning of this year, Short added. ‘It’s incredible that a number of black box placings were able to raise (more than) €1.5 bn. That has led to a complete rerating.’

And although the economic fundamentals are by no means rosy, there are some signs of an upturn, Short said. ‘We’re starting to see green shoots of recovery in retail spending in both Spain and Portugal.’
Meanwhile Italy is also starting to see a rerating of risk, Ramirez-Escudero said. ‘This is coming up in most countries in southern Europe. We’re starting to see a change and investors are asking: have we missed boat. I don’t think the boat has left yet, but now that the rerating of risk has been done we have to find other reasons for an investment case.’