Europa Capital is back in buy mode following a 12-month pause. But while the European fund manager sees lots of opportunities, Charles Graham and Noel Manns are coming up against just as many unrealistic sellers. They talk to Richard Lowe

The purchase of Forum Steglitz shopping centre in Berlin from Hammerson in May represented the first acquisition for Europa Capital in almost a year. The lack of transactional activity on the part of the opportunity fund manager was by no means attributable to lack of firepower: it is aiming to deploy close to €900m of committed institutional capital into European real estate markets over the next three or so years, for two funds it raised in 2008.

Forum Steglitz was the first deal for Europa Fund III, a closed-ended institutional vehicle targeting investment opportunities in European Union countries, and Norway and Switzerland. It has since been followed by the purchase of the Fremlin Walk shopping centre in the UK for £70m (€82m) from Land Securities.

"We've had an 18-month hiatus," says Charles Graham, one of the firm's co-founding principals, responsible for acquisitions in Germany and Central Europe and asset management. "We've been looking at opportunities, trying to understand where the value is."

Today, as he speaks to IPE Real Estate in Europa's London offices, just by Sloane Square, Graham sees "plenty of opportunities". Sitting next to him is fellow co-founding principal Noel Manns, who is also responsible for asset management and acquisitions in Northern Europe. The sunny conditions in West London seem to reflect the mood and atmosphere inside, which is perhaps to be expected for a boutique entrepreneurial firm that has recently raised what Manns describes as "the thick end of €900m".

Like Fremlin Walk, Forum Steglitz was one opportunity deemed worthy of investment. The 32,600m2 retail asset is one of the two established shopping locations in Berlin, built in 1970 and recently refurbished by Hammerson. Tenants include Hennes & Mauritz, Quelle, Karstadt Sport, Lidl and Esprit. Europa aims to reduce its 17% floor space vacancy rate and to implement a series of "value-creating initiatives".

"Germans are very established in their shopping habits," says Graham. "Of course, it is going to be affected by sentiment and how the economy is going, et cetera. But they will tend to go shopping where they have always shopped."

Europa purchased Forum Steglitz for approximately €70m, reflecting an initial yield of 8%. Graham describes the pricing of the deal as "realistic", the culmination of a willing seller and buyer agreeing on the current value of the asset. He stresses that Hammerson, which soon after sold Les Trois Quartiers in France for €210m and more recently its 75% stake in the Bishop's Square development in London, was not a distressed seller.

"A lot of the deals that are happening at the moment are from realistic motivated sellers," he says. "They are not fire sales. Hammerson recognised they wanted to boost their balance sheet with cash, so they highlighted three or four of their key investments and wanted to sell them. Frankly, it's realistic pricing - it's an 8% yield. That's not off the charts; it's not 12%." However, Graham complains that most German real estate assets on the market are being over-priced by "unrealistic sellers".

At the IPD conference in Barcelona in June there was a debate over whether property valuers should take into account forced sales or, as was described by one German adviser, transactions deemed not to be based on "sound investment decisions". Whether the Forum Steglitz deal was perceived by local valuers as applicable transactional evidence or something to be ignored is source for another debate, but both Graham and Manns believe such deals are leading to consternation among local market participants in continental Europe.

Manns picks up the baton. "Hammerson are selling assets because they need cash, or they want to replenish their cash stocks, and they are prepared in foreign markets to sell at a price," he says. "Local markets are asking: why was that deal done? Well, that was actually the price. That is what the real price is for an independent willing buyer and seller in the market - to price things at the moment if you want to sell something. But if you look at most of these markets there is no activity and almost nobody wants to sell anything because they don't want to reveal the price. That is a bit of a problem."

Of course, Manns understands what is happening and empathises with those with the unenviable task of managing balance sheets in the current environment. "The natural inclination for people would be to not crystalise a loss unless they really have to and the natural inclination for people running a balance sheet is if they have to reduce values they do it over a period of time. The inclination of valuers has been historically the same - to bring down values gradually. UK valuers didn't do that; they went down," he says, clicking his fingers, "which was extraordinary. Clearly, on the continent that hasn't happened."

At the time of writing, the European Commission had begun a consultation to determine how to assess market values in the absence of transactional evidence and arrive at a method for determining the value of an asset's long-term economic or sustainable value.
Manns talks about such "rumblings across the EU" as being full of good intentions, but he is at a loss to explain how the commission's aims can be achieved. "I don't know how they will do that," he says. "It's like saying, well actually, British Airways' share price over a 10-year period should be £3. I'm going to ignore the fact that it is £1 at the moment for my balance sheet, because I think it should be £3. I think it is terribly difficult to come up with this concept."

There is perhaps some justification for using an old price for longer on a balance sheet, because of the global financial crisis. But it will be impossible - and potentially dangerous - to "make up a price", he says. Not for the first time he utters what seems to be favoured mantra: "The price is the price".

In terms of Europa Capital's investment strategy going forward, Manns reveals that the firm is in a position to "invest pretty much anywhere across Europe and probably in most types of property-related assets", thanks to both its Europa Fund III and Europa Emerging Europe vehicles being fully committed.

However, there will be a focus for the time being on prime locations, so neither Graham nor Manns expects to be seeing too many opportunities in the eastern European markets in the near future. Central European markets such as Poland and Romania, however, still hold interest. "Those countries will continue to grow. Some of them are still in positive growth territory, as it happens," Graham says.

There will also be less focus on smaller markets such as Portugal and Italy, while the Spanish market would be deemed premature. The UK and Germany are two obvious locations for capital, as evidenced by Europa's recent acquisitions.

"Our business is to buy things and be transitional capital, to change buildings or go into illiquid markets and when they become liquid move them on," says Manns. "So we have to think about which markets are likely to become liquid again."