Friday Letter Fighting it out

Last month, a private equity real estate bidding war broke out in a very unlikely place: Italy, where a clutch of investors faced off in a competition for two publicly listed real estate funds. According to industry observers, it was the first time in quite a while, if ever, that a competitive bid situation developed for Italian real estate assets. The two funds, Tecla Fondo Uffici and Berenice Fondo Uffici, have a combined enterprise value of approximately €1.6 billion. 

Early last month, Gamma RE, a joint venture between Morgan Stanley and Pirelli Real Estate, was able to claim victory in the Tecla fight. This week, the fate of the Berenice vehicle was most likely sealed, as fund owner Pirelli gave the nod to Goldman Sachs, with a bid from the US investment bank besting overtures from Merrill Lynch’s Gigante fund and Gamma RE.

The battle for Berenice underlines the intense rivalries among the largest opportunity funds operating in Europe. Though 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.

But while capital inflows are at an all-time high, and the low-hanging fruit may be increasingly hard to find, there is much to celebrate in the European real estate market, including the return of certain fundamentals like rising rents in major markets.

This means that there are opportunities for savvy players. During a presentation at PERE’s 2007 European Private Equity Real Estate Forum in London, John Carrafiell of Morgan Stanley pointed out a number of strategies the firm is looking at in Europe: buying vacant buildings or those with short leases looks like a good bet as demand for space is generally outpacing supply in most markets, for example.

Hotels, development projects and bets on the aging population in Europe, as well as the young population in emerging markets, should also figure somewhere in investors’ thinking, he added, along with transportation hubs, farmland and German office and retail investments.

Property investors throughout Europe have been echoing Carrafiell’s upbeat sentiment, noting that while there are risks on the continent, the current state of the market bodes well for the future. And, as long as the cycle remains as robust as it has been, there could be plenty more bidding wars to come.