Friday Letter Debt, Putin and private equity tourism

A number of international organisations were in Cannes, France, this week to hear about an acute shortage of debt financing for European property.

A group of seven sombre-suited Asian gentlemen and one woman sat around table in a restaurant. The woman took the lead in ordering on behalf of the group, and the French waiter followed her finger to several items on the menu as they worked to make themselves understood.

This group was representative of a number of attendees at the MIPIM property show in blustery Cannes, France, where the PERE team has been camped out all week. They essentially were here as property tourists, looking around for opportunities and trying to be understood. They typically move in a defensive huddle, observing the throng of several thousand real estate people swirling between hotels, cafes, hospitality tents, the Palais des Festivals and the famous beachside promenade. They even meet with some of these people from time to time.

More importantly, this group was not alone in its fact-finding enterprise. There were many groups that similarly came to Cannes to sample the market and perhaps establish a property network. The groups varied between Korean institutional investors being shown around by the European Union’s Chamber of Commerce to people representing an extremely wealthy Central and Eastern Europe individual wanting to invest in real estate and a US organisation looking to write out large cheques to the right fund managers. In addition, there was a cluster of Russian oligarch-types that now see quite an urgent need to get their money out of Russia and into international property since Putin won Russia’s presidential election this week.

It’s not quite clear what overriding themes the tourists will take away from this event, but they certainly would have picked up on one of the major themes of MIPIM 2012 – debt. Indeed, debt was the talk of Cannes (admittedly, in the absence of a major breaking story), as several property services firms released research earlier in the week exposing how dramatically traditional banks had recoiled from property lending in Europe.

The flip side to that coin, of course, is that a significant number of players are actively pursuing plans to raise senior debt funds because they see demand and conditions for interesting margins. Some firms already have raised their first debt fund and now are looking ahead to launching their second one (M&G Investments and Aeriance, for example). Many of the names looking to bring a debt vehicle to market have been made public, although some haven’t. For example, one person told PERE that he was aware of at least two other €500 million to €1 billion-plus vehicles targeting the region.

Perhaps one solution for those property tourists perusing their options in Europe is to become investors in these debt funds. Indeed, the opportunity represented by such funds seems poised for real growth over the next few years.