Last month, a bidding war broke out between two heavyweights of the global private equity real estate industry: Morgan Stanley and Goldman Sachs. The competition was remarkable not just for the participants involved, but also for the location: Italy, where the investment banks faced off in a competition for two publicly listed real estate funds.
According to industry observers, it is the first time in quite a while, if ever, that a competitive bid situation has broken out for an Italian real estate vehicle. The two funds, Tecla Fondo Uffici and Berenice Fondo Uffici, have a combined enterprise value of approximately €1.6 billion ($2.1 billion).
The battle between the two property titans underlines the competitiveness among the largest opportunity funds operating in Europe. Though such competition has always existed, it is being exacerbated these days by the amount of capital in the market and the growing number of funds looking for opportunities. Last month, for example, both morgan Stanley and Goldman raised multi-billion dollar vehicles.
At press time, Morgan Stanley, which had teamed up with Pirelli Real Estate in its bid, had just increased its offer for one of the funds. Whitehall had yet to respond, though a counteroffer was still expected.
The battle between the two property titans underlines the competitiveness among the largest opportunity funds operating in Europe. Though such competition has always existed, it is being exacerbated these days by the amount of capital in the market and the growing number of funds looking for opportunities. Last month, for example, both Morgan Stanley and Goldman closed multi-billion dollar vehicles.
The increasingly competitive landscape of the European property markets was brought into stark focus last month in London, where delegates gathered for PERE's third annual European Private Equity Real Estate Forum. At the conference, John Carrafiell, Morgan Stanley's co-head of global real estate, gave a keynote address that delineated the changing nature of the private equity real estate industry. “There will clearly be winners and losers,” he warned, not just in Europe, but around the world. The “easy wins are over,” he said, and “performance will deviate massively from the mean.”
By easy wins, Carrafiell was referring, of course, to the significant yield compression witnessed worldwide. Yet, his was not a downbeat address—far from it.
Though capital inflows are at an all-time high, there is much to celebrate in the European real estate market, including the return of certain fundamentals such as rising rents in major markets. (Witness, for example, Morgan Stanley's newly announced participation in an office development in London's central financial district, where rents are climbing.)
This means that there are some clear opportunities from Morgan Stanley's perspective, according to Carrafiell. Buying vacant buildings or those with short leases looks like a good bet as demand for space is generally outpacing supply in most markets. Hotels, development projects and plays on the aging population in Europe, as well as the young population in emerging markets, should also figure somewhere in investors' thinking, he noted. So, too, should transportation nodes and even farmland. His biggest call in Europe, by the way, is office and retail property in Germany. Italy—though not mentioned specifically in his address—is clearly on his map as well.
Most of the delegates and speakers echoed Carrafiell's sentiment, noting that while the risks are great in Europe, the current state of the market bodes well for the future. As they sipped coffee and later enjoyed cocktails, many remarked that this is certainly a good time to be investing in private equity real estate. In an interview, Noel Manns, a principal at Europa Capital, said: “The cycle is not dead.”
However, as long as the cycle remains as robust as it has been, there will be probably be more bidding wars to come. Whoever wins the competition for those assets may win the battle, but they have yet to win the war. That will be played out in Europe (and beyond) for a long time to come.
Who does Carrafiell think will win in the global property markets? The answer, he said, are those with scale, platform, local market presence, the ability to rotate portfolios—and the battle scars to prove it. In other words, ladies and gentlemen, his obvious answer: Morgan Stanley.
Time will tell if he is right.