EUROPEAN REAL ESTATE
How long to the bottom?
Overhang from banks will hold prices back for some time.
Eventually banks will have to sell, won't lend in big way until
then – without that, no significant recovery.
Will banks start lending? Shrunk in big way. Overall still going
down, bankers constrained by existing positions and capital
ratios. But banks ARE willing to lend. Varies very much bank to bank
– some banks very active for new business. LTVs clearly down. French
banks in better way than most
At moment a very “bitty” market, “corrugated bottom”, a few
one-off trades. Tenant demand still weak in may areas.
Interest rates are key – if they remain low. it will support a
recovery .
UK may well have lower interest rates than Euro Zone for some time. Long
term rates in US have to increase.
Italy likely to be supported by massive repatriation of capital.
London – massive crash but incredible recent recovery especially the West
End. City slower but clearly huge demand
for high quality assets. Very difficult for buyers, rents recovering
in good buildings. Investors don’t have a
high risk appetite
Spreading now to rest of Europe – growing investor interest in
quality assets
France – shortage of good space so rents
have held up well in Paris. They did fall but not as much as London. Core buyers (e.g. German funds) driving yields back down.
POLL -- European real estate will reach bottom and start to recover in:
DISCUSSION & INDIVIDUAL COMMENTS
A recovery in 2011 or after is plausible, but it could also
be still a long way to go. In general, a real recovery will be only
possible if banks start to deal with their problems.
There is currently a growing investor’s interest in quality
assets. [«back]
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Western Europe - Where is the value now?
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PRIVATE EQUITY REAL ESTATE
AND OPPORTUNITY FUNDS
Who will survive and how?
Which model works?
- Financial service owned, privately entrepreneurial owned, division
of non
financial company
- Global, regional, local
Opportunity Fund business will be less
lucrative
- Fees changed to cost, carry paid at the end
- Investors want more control
- Fund managers that send investor relations people instead of
deal people will be less successful
- Fees will change for the worse, governance will be more
intrusive
As investors look to make
changes, managers that “don’t get it” won’t be here in 5 years
- Fund managers that give up on current investors (complaining about
lack of incentives due to loss of carry) will struggle to raise
money. Their challenge is however how to incentivize junior staff
- Managers need to be more empathetic to the state of mind of
their constituents
- Trouble happened when managers went out of their box
- Personal conduct, culture and philosophy matter. So do track record, transparency and operating skill
Business had a good run, it will be
changed and it will be successful again
- Good platform, good reporting, open dialogue, hire good team
- Asset class has not been damaged
POLL -- Real Estate Opportunity Funds 3 years hence will do,
as a % of the investment they used to do annually in 2003-2007:
DISCUSSION & INDIVIDUAL COMMENTS
Private Equity Real Estate and
opportunity funds will not perform as well as they used to and there
will be no improvement in the next 3 years.
There is still capital coming into
real estate and capital seems to be growing.
It could be the same business
coming back into the same hands.
But banks will be not be settling
soon. We will face a slow period, but recovering
in due course. In the next 3 years, opportunity funds might be more
important lenders than banks.
The asset deal volume
may be lower, but the equity deployment may be the same or even
higher. [«back]
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PROPERTY IN
DISTRESS
where is the opportunity?
The market was expecting much more property in
distress in 2009: the reality is pitiful …
Theoretically we should have seen many
more opportunities
There is no work-out with banks, going
slower than in the 1990s
Spain
- Pricing is difficult – banks are loath to take losses
- Banks buy the assets: quicker, cheaper, “good for everybody”
- Liquidity problem over the next 2 years for banks
Focus on Ireland / UK
- Banks have got to get smaller
- CMBS
will need to get sold. Could be a
catalyst for trade
- Banks:
more worried about governmental messing around
(salary discussion)
No leverage - is that the new game
Restarting the market needs a catalyst
- CMBS ?
- Banks pulling
the plug on foreign operations?
- Withdrawing the stimulus money ..but
managed by politicians ….it therefore will take time. Nobody wants bad news again (especially
the politicians)
- If Japan's lost decade is anything to go by, nothing will happen until sometime in the next decade. Maybe.
POLL -- Distress buying opportunities in 2010 – 2011 will be:
DISCUSSION & INDIVIDUAL COMMENTS
There will be
opportunities on a volatile basis. The real skill going forward will
be when to jump in and when to jump out...
There have been good opportunities
in 2009 (CMBS, bonds, etc.) and deals were done at advantageous terms.
It is not really a real estate
crisis, with the exception of Spain. It’s a global economic crisis.
There is no dramatic oversupply on the real estate market (exception
of Spain) – therefore there won’t be as many opportunities as in the
crisis of the 1990’s. [«back]
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GLOBAL INVESTORS RETRENCHMENT FROM EMERGING MARKETS
Lasting withdrawal or short-lived
suspension?
What are the real problems in
emerging markets?
- Perception is that the security of investment is weak due to
less robust property rights.
- Investors believe they can get superior returns in developed
markets like North America (distressed opportunities) or Western
Europe (distressed debt or higher yielding stabilized assets).
- Harder to buy completed assets in many emerging markets (supply
of institutional assets is thin in most emerging markets). This
pushes investors to take development risk, which today is
uncomfortable for many classes of investors.
- Exit is considered to be much more uncertain.
Markets Must be Differentiated
- Central Europe: Poland held up well. Greece is a disaster.
- Russia / Eastern Europe: Highly volatile and risk perception is
high. Boom to bust.
- China: Fantastic now. But is it a bubble?
- India: Performing well, but lacks transparency.
- Brazil: emerging market star.
- GenerallY: countries are less
relevant, cities are more.
Is debt available for Investment?
Development? If not, when?
- Debt is very limited for investment, virtually non-existent for
development.
- International investors will not return until debt is readily
available.
Do the returns warrant the risks? What
risk premium will encourage capital to return?
- If developed Europe has yields of 6% to 7%, then
- Poland should probably be 7.5% to 8% (call it 150 basis points)
- Russia: perhaps 10% to 12%
Will the superior growth in
emerging markets continue? Will it warrant return of
investment?
- Yes: China and India are key to this trend.
- This will cause investment to return over time, but the question
is when.
POLL -- Global Investment into emerging markets will
return to similar levels as 2003-2007:
DISCUSSION & INDIVIDUAL COMMENTS
Investments are less secure, but in
general the outlook is tentatively positive for 2011 - 2013.
Tremendous growth at grass-root-level.
E.g. growth outside Mumbai.
There has been a decoupling: Western
markets no longer set the rule for emerging markets. [«back]
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Emerging Markets Investment Opportunities -- Where Next?
DISCUSSION & INDIVIDUAL COMMENTS
Most investment opportunities will be outside Europe…
Big issue: withdraw of money of banks in CEE (they take their money home).
Long term perspective: Czech Republic (office) new investment opportunities.
India: difficult market. [«back]
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2009-2011 will be the best buying opportunity in a generation?
[«back]
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DEBT FINANCING
What is the new “normal”?
What are the recent experiences
with raising new debt?
- Situation improved after summer 2009
- Banks want more control
- 65 % LTV, margin 200 - 260 bps in Western Europe
- More due diligence, more complicated decision making in banks
- Competition among banks coming back for prime product
- Existence/quality of future cash flow crucial
- In development situations: Pre-leasing requirements, margins
going up, volumes lower, but development financing coming back
slowly (i.e. residential in France)
What is the approach by banks?
- Reopening over summer last year
- Much more conservative structures
- Higher pricing
- Lending capacities exist
- Market opportunities limited
- Financings < 50 % LTV easily available (Pfandbrief) – although
not for all kinds of assets
- Tighter above, but 60 – 70 % possible
What are “normal” levels of leverage and
structure?
- Loan volumes available for real estate lower for years
- Leverage above 60 % historically rather exceptional
- “Second mortgage” or mezzanine capital potentially filling the gap
- “Equity is not such a terrible thing”
What risks still come from the banking
system?
- Banks still have to manage their legacy
- Only Pfandbrief market as source of refinancing has really
opened
- Government and central banks support still driving the situation
- Syndication still fragile
- Securitizations still years down the road
Can the business be run with 60 -
65 % debt?
- Unanimous agreement
- Opportunity funds do not necessarily require high leverage
- Lower leverage can mean lower prices
POLL -- What level of senior debt financing for
reasonable quality assets do you need for you business to work:
[«back]
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What keeps you up at Night? (Economy)
DISCUSSION & INDIVIDUAL COMMENTS
Example Greece: lack of tax income is a problem.
Big issue: end user demand/market supply. [«back]
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Will the 2010 Long-term European interest rate environment be....
[«back]
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In the medium-term you expect inflation to be....
[«back]
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What percent of the total provisions required have
The European banks taken to date
[«back]
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European banks will manage their existing real estate loan
portfolio by....
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When will the European Banks start to sell their bad assets?
[«back]
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CASH IS KING
Who’s investing and what are they after?
Who is investing?
- are 20% IRR opportunities available?
- Do institutions believe in 20% IRR stories?
- Is Real Estate a 20% IRR asset class?
- With high leverage (not available)
- Emerging Markets
- Development
- Vacant property/Story property
- Corporate situations
- NPLs
- Are investors happy with lower returns?
- Retruns of mid/high teens still a win
- What is the point of Opportunity Funds if they don’t achieve
high returns?
- Should OFsgive the money back?
- Core investors
- REITs?
- Open ended funds
- Listed companies (Investing rights issue proceeds)
- Private Buyers
- Will pensions lower asset allocations to real estate as returns will be lower? Probably not, same allocation but massive deleverage will lead to fewer deals
What are they buying?
- Major cities
- Investment property
- Property where there is a prospect of cap rate compression
- Capital markets driving cap rates
- Shortage of debt for ‘story’ property
- Development in first class locations could be attractive
. But how to fund it?
- Partnership models (with institutions)
- Agricultural land
- Government property (debt reduction)
- Wind down of CMBS market
POLL -- The biggest real estate investors in Europe in
2010 will be:
DISCUSSION & INDIVIDUAL COMMENTS
As soon as
opportunities begin to show up, one will see a lot of buying. There
is no lack of investment capital. The issue of debt is more
crucial.
Banks will end up being the largest
owners of real estate
People can’t find their value to achieve
their returns
A short shift was given to
the opportunity funds to some degree, there are two
opportunistic investors actively doing deals.
There will be a
return of CMBS. But in the meantime, the world can go on without
CMBS.
The biggest real estate investors in Europe in 2011 and
beyond will be:
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Will you be a net buyer or seller of assets in 2010?
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GERMANY
Is the worst behind?
2009 was not a deep crisis in Germany – values and rents did not decline dramatically. Unemployment did not
rise significantly and retail sales held up (e.g. car sales)
Real Estate Yields stay low - why invest
there from outside?
Low interest rates continue to create
pressure on increased prices for quality prime properties. German
Funds preferring to invest in German property because it is stable (particularly compared with other
countries)
So, why did foreign investors lose money? Went for lower Quality, high leverage, highly priced assets
Rental Levels (effective) remain under
some pressure as new supply coming on. So the worst is not behind for
underlying fundamentals.
Where is the economic driver for any GDP
growth? Unclear. But, country and population is not as highly leveraged - so
safer, lower returns.
Residential: people generally bullish on
rental income investments, stable income – new specialty funds, more
capital coming again.
Demographic changes negative, but
migration into certain regions /cities.
German Banks – outlook – still bad news
to come, pressure to deleverage, but no fire sales. Fair amount of
CMBS hanging out over Germany.
German Insurance companies likely to
pursue property investments to obtain yield.
POLL -- German commercial property value
declines will continue:
DISCUSSION & INDIVIDUAL COMMENTS
The recovery has already begun in Germany… but there are some challenges to face…
Prime assets seem to be holding up
well. B-class assets, many of them bought at expensive yields. These
type of yields will never come back.
Secondary property is
tougher in Germany than in the rest of Europe. [«back]
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The key issues for the german market are....
DISCUSSION & INDIVIDUAL COMMENTS
No quick recovery for the German market…
Lack of growth as the key issue.
Rising interest rates are a concern.
Weak government as a reason for a lack of growth. [«back]
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The key issues for the UK market are....
DISCUSSION & INDIVIDUAL COMMENTS
Weak tenant demand (particularly in the retail market) is the serious issue in the UK especially in central London, but also rising taxes.
We also need to take interest rates seriously, if they rise prematurely. [«back]
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The key issues for the French market are....
DISCUSSION & INDIVIDUAL COMMENTS
Insufficient value correction to date is a problem, but what other aspects should we consider…?
Weak tenant demand is the issue.
Market value is quite attractive in France, insufficient value is in the minds of the French because of the other markets. [«back] |
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The key issues for the iberian market are....
DISCUSSION & INDIVIDUAL COMMENTS
Oversupply of housing as the key problem – are there any positive news?
Good opportunities in the next 18 month
Distress in Spain means that there are some good opportunities for investments
We need economic recovery to solve all the problems. [«back]
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Russia/CIS - too hot to handle?
DISCUSSION & INDIVIDUAL COMMENTS
Opportunities for risky investors
A big market, but rough times ahead. In 2-3 years there will be some good opportunities again. [«back]
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Do emerging EUROPEAN market returns justify the risk?
DISCUSSION & INDIVIDUAL COMMENTS
Central Europe: every country is different, tricky to compare them.
Long CEE, strongest country in CEE is Poland [«back]
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Does your firm have a policy for Sustainable Buildings?
[«back]
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