Peakside Capital, the private equity-style real estate manager that was spun out of Bank of America Merrill Lynch, is currently focusing on Germany and central and eastern Europe (CEE), and is particularly interested in capitalising on distressed situations in the real estate markets there. Roger Barris, founding partner at Peakside, says the firm was positive on Germany before it became flavour of the month among the wider investment community, while Western European markets that have strongly recovered are no longer of.

“We have seen a very strong rebound, particularly in the UK and in France, particularly for prime assets,” he says. “We haven’t been looking at those markets for the past three or four months but I suspect a lot of that is cooling off. We think those markets got ahead of themselves pretty significantly.

“I think we’ve probably been ahead of the curve; we saw what happened in London, Paris, etcetera and we decided to really focus our attention on Germany and CEE, because we thought the great wave of capital hadn’t hit those markets yet. And clearly now Germany is number one on everyone’s radar screen.

“We’ve always felt that Germany was in a much better fundamental position than a lot of the Anglo-Saxon economies, because it was just not as exposed to over-leveraging of the household sector and the de-leveraging and slow economic growth this is driving. That is translating into some pretty solid performance - not extraordinary, but solid - on the German real estate side.”

Germany is seen as “slow, steady and reasonably strong”. Barris adds: “By no means is it having the type of rebound of Paris or London, but on the other hand it didn’t fall off to the same extent. It continues to plough onward on the back of some pretty strong economic performance as well, and we continue to see some pretty strong demand for assets, particularly on the retail side, and we shall be bringing some property to the market on the retail side shortly.”

Similarly, CEE markets are also recovering relatively strongly and Barris says this has been helped by the region’s economic interconnectedness with Germany. “If you take a look at economies like the Czech Republic, Poland, Hungary, Slovakia, etcetera, they have extremely tight trading links with Germany,” he says. “Over the last few years a lot of the German companies have been outsourcing to these economies and
so they tend to follow along in the wake of Germany, and that is kind of what they are doing now. Their economies are recovering nicely - not spectacularly - and likewise their real estate markets.”

Barris says he is seeing a “solid trickle” of distressed opportunities in both Germany and CEE. “Banks have now sufficiently recapitalised so they can afford to take some losses and they are trying to clean up their balance sheets,” he says. “In Europe there is a huge amount of hidden financial distress and the banks are never going to clean it up on an overnight basis, because they can’t afford to. In Ireland we have seen what happens when you try to clean it up overnight: the answer is national bankruptcy. But conversely, as they recapitalise, as they generate earnings, they are going to take those as opportunities to clean up their balance sheets.

“It’s going to be a long, drawn-out process, but it’s going on and there is enough of it happening that we are seeing interesting opportunities. There is an element of distress in almost every deal we are looking at now.”

Barris says there is often a misconception that, because the high profile distressed debt deals are not happening on a regular basis, it should be assumed that banks have yet to start cleaning up their loan books. “There is a kind of a general perception that the distress is not coming through, because you don’t see multiple billion dollar deals - you see them, but you don’t see them everyday,” he says.

Peakside Capital is witnessing a number of opportunities around the €50m size. “We are typically finding that it is a deal that is over-leveraged, or it is a deal where an investor is exiting a market, or it is a deal where a fund is coming up to a final maturity and they need to get out and maybe they’ve passed their investment period. It isn’t headline stuff, because the assets are €50-100m chunks, but that’s fine as far as we are concerned.”