Friday Letter State of the European market

There were many revelations at the PERE Forum, hosted by us at the Renaissance Chancery Court Hotel in London on Tuesday and Wednesday. Not even a London Underground tube strike could prevent around 170 delegates taking part in an event packed with market luminaries, including Roger Orf, president of Citi Property Investors, and John Carrafiell, special advisor to Morgan Stanley. In case you missed it, below are some key takeaways:

There are reasons to be cheerful: Citi’s Roger Orf said property is bombed out, investors are “shell shocked” and times like these can ”try one’s soul”, but he also pointed to some “silver linings”. Real estate fundamentals are generally in balance going into this downturn, the absolute rate of interest is likely to remain low, the global real estate market is more liquid than ever before, $35.5 billion of equity was committed to private equity real estate in 2008 alone and the level of distress property will outweigh the level of demand , meaning you can buy cheap.

Green shoots in the capital markets: Some capital market events in the UK are helping confidence to grow. John Carrafiell, special advisor to Morgan Stanley, highlighted the IPO of Max Property last month, which was oversubscribed. NewRiver Retail – which announced plans for an IPO on the stock exchange at the same time as the PERE Forum was being held – was also seized upon by some delegates. These firms are tapping institutional capital in order to opportunistically acquire property in the UK.

Blind pools see a future: There is divergence of opinion about the immediate future of blind pool funds. Some LPs at the event say they are more likely to take on more club deals where investor interests are aligned. However, there are question as to how many LPs have the experience or structure to cope with such arrangements.

Debt workouts are tough: Though Lone Star is reportedly bidding to buy a €2 billion loan book from Credit Suisse, delegates to the PERE Forum reported seeing very few large packages out there for sale. This view was underlined by Wilson Lee, head of ING Real Estate’s opportunistic platform in Europe. The feeling is that even if large packages became available, only a handful of firms exist who can take these down and manage them. The good news is that existing mortgage debt instruments that will be sold in the future are likely to offer equity-like returns.

LPs need to be leaders too: It is easy to bash GPs at the moment, but LPs should shoulder some responsibility to be more pro-active in these difficult times. There are only a few examples around of LPs banding together to upset the divide-and-conquer approach that some GPs take with concern to terms and conditions. John Dwyer, head of real estate at Fleming Family & Partners, confirmed this view in a discussion about the LP, GP relationship.

Wanted – defensive professionals: There is a void in the number of senior executives able to further “defensive” strategies at large private equity real estate platforms. Jeff Jacobson, chief executive officer at LaSalle Investment Management, made the point on stage. That said, recruitment specialists say there is a lot of talent available, particularly those made redundant from investment banks. Start-ups will help provide demand. Even established firms will begin rehiring in 6 to 12 months’ time when they have restructured.

The tough have gotten going: If the willingness of delegates to fight against a London Undergrounds strike is anything to go by, there is enough resilience to get through these challenging times. With this grit, European private equity real estate should be well placed to emerge stronger.
The New York PERE Forum is 12 and 13 November – sign up here