US investors lead push into Europe's distress

A substantial amount of capital is targeting European distressed real estate, with US private equity firms at the forefront of investment activity.

In a way, the comment by Blackstone’s Stephen Schwarzman back in March that a lot of the action in the distressed space was going to be in Europe [and no longer in the US] set the scene for the months ahead.

'Everybody listened to that comment,' said Jos Short, founder and executive chairman of Internos Global Investors, speaking at the PropertyEU Distressed Investment Briefing hosted in London earlier this month. 'There is now a ton of money chasing distressed loan opportunities in the UK and continental Europe.'

While in the US the economy has largely recovered and liquidity is back in the system, fuelled by the return of the Commercial Mortgage Backed Security (CMBS) market and a more diversified financing sector, on the other side of the Atlantic a large chunk of the problem assets have yet to be restructured.

As such, a new wave of investors are piling up to exploit Europe’s mounting distress. ‘We are seeing a gravitation from the big buys of the likes of Lone Star, Fortress and Kennedy Wilson to new entrants like Pimco and Marathon, and others out of the US whose names we’ve never heard of,’ added Short. ‘Now even the banks are looking for distressed situations in Europe, with JP Morgan and Citi Bank reportedly being shortlisted for Deutsche Postbank’s UK performing loan book.’

Europe’s distressed game is mostly being led by opportunistic American investors, who are willing to entertain taking the risk associated with a 15% return. Local players are also active, mostly picking up smaller ticket transactions in their home market.

Asian capital, to the contrary, is so far showing little interest in higher-risk investments and remains focused on safe core acquisitions in capital cities. ‘We see many sovereign wealth funds looking to enter Europe but most hardly scratch the surface. They want to get started investing on the continent, but they are not quite sure how to go about it,’ commented panellist Mark Batten, a partner at PricewaterhouseCoopers (PwC).