France is increasingly overlooked, deals in Spain are small, central Europe is not on the radar screens, German banks hold onto distressed assets and even in Italy, where there is a welter of untapped opportunities, returns will be lower than the target ones
The days of virgin property markets offering easy and rich pickings for US opportunity funds are past. Rewards are still to be had, but buyers have to work that much harder to make the right acquisitions and sweat the assets.
Chicago-based Jacques Gordon, international director, investment strategy, at LaSalle Investment Management, says: “I do not see Europe as an opportunity play. Japan and developed Asia is where I see the best returns. In Europe the approach is to add value and go for growth.”
According to Jonathan Short, chief executive of Pricoa Property Private Equity Fund: “Gone are the mid-1990s days of French discounted assets or loan portfolio sales, when investors could just sit there and bag a large profit. Now you have to think much more about it.”
But Short adds that 20% returns are still obtainable in France, Italy, Germany and Spain. “Private equity is a better way for us to secure returns, by backing companies. We will be backing development risks or emerging asset classes. Look at the French and Spanish companies trading at a discount; you can exercise a public to private deal at a significant discount. With leverage you should achieve a return near to 20%, assuming you can execute a deal, buy at a discount, leverage and then sell,” says Short. But he concedes that generally, returns are harder to make than in the 1990s.
Peter Reilly, who runs the European arm of Peabody Group, the joint venture between US investment bank JP Morgan Chase and New York-based JW O’Connor real estate group, says investors are less enthusiastic about France now, given the “toppy rents”, but there is still activity.
“The market is shifting,” adds Reilly. “Around 1997, people were buying into Paris because prices were so low, then they moved on to Spain, then to Italy. A sure sign of stabilising markets in Europe is the shift from the big, macro investment approach to a deal-by-deal strategy.”
Europa Capital Partners is one of the investors to have cooled on France. According to director Noel Manns: “We feel the market is pretty fully priced. We jointly managed a fund with AIG in France and did quite well off that, buying quite early. Pricing has changed as rental values have fallen a bit and bank lending is less easily available than it was 12 to 18 months ago. France has had a good run, but it is not an obvious place for us to achieve the opportunity fund returns we are seeking.”
Apollo Real Estate Advisors, meanwhile, is targeting the French industrial sector. “Not the new, bulky assets but bread-and-butter, middle-market property, because you can still buy such assets at below replacement cost and it is the largest market in Europe,” says Bill Benjamin, managing director of Apollo’s European arm. “There will always be opportunities in the office market but you need to be cautious and not be underwriting rental growth in offices,” adds Benjamin.
All the opportunity investors are extremely keen on Italy but not all have managed to get a significant foothold in the market. Morgan Stanley’s real estate fund scored its first hit in the country in March 1997, when it bought a portfolio of distressed loans from Istituto Bancario San Paolo di Torino. The investment bank paid just over ¬100m for loans with a face value of around ¬248m.
Since then it has acquired other big-ticket portfolios in Italy, including the Ras portfolio in a ¬1.7bn joint venture with Italian property company Pirelli & C Real Estate. According to Jay Henry, head of the real estate investing group at Morgan Stanley: “Italy, France and Germany are core markets for us. The opportunities we find are mostly related to corporations and institutions which are going through restructurings; we buy in bulk from them then place the assets, managing them along the way. We are finding opportunities which are giving us our target returns, which are in the high teens net.”
Last year, in France, Morgan Stanley bought a 60-building portfolio from Electricit
