Friday Letter Ugly market, but not everyone is afraid

Is the number up for private equity real estate in Europe as we’ve known it? If you’d skipped in and out of the seven panels, five keynote addresses and four workshops of the PERE Summit: Europe this week you might be forgiven for thinking so.

Mark Newman, founder of London-based real estate investment management firm Broadcliff Capital Partners and chairman of the two-day event, painted a sobering picture of a European economy inflicted with a long-term structural, and not a cyclical, downturn. He pointed to heavy and rising unemployment coupled with weakening demand and a slowdown in growth in the world’s supposedly high-growth and emerging markets: China, India and Brazil. He highlighted weakening consumer and corporate confidence, inflation, flat or falling revenue, rising expenses and depressing margins.

“What’s happening in the markets is ugly,” Newman said. “Europe is fighting for its very life, trying to achieve a fiscal union to match the monetary union that it entered into over a decade ago with so much fanfare.”

Newman finished his opening address by asking what Europe’s private equity real estate firms are going to do and what signals should they seek for answers. Candid and honest, he admitted that, like so many others, he underestimated “the almost scary confluence” of economic and political factors we all face today.”

With a real estate funding gap in Europe of €400 billion to €700 billion outstanding, of which €350 billion to €500 billion is coming due between 2012 and 2014, the fund managers in the main conference room of the Royal Garden Hotel in West London’s Kensington neighborhood, know there is property to be bought.

But if there was one key takeaway from the headlining interview between PERE editor Robin Marriott and Rory Cullinan, chief executive officer of the non-core business at Royal Bank of Scotland, one of Europe’s biggest lenders to property, it was that there would be no sell-off of its remaining £35 billion of real estate assets at big discounts to the pound. Further, there would be few more ‘Project Isobels’ – the large loan book sold to The Blackstone Group last year.

Cullinan’s admission, delivered apologetically to PERE’s audience, surprised few. Nonetheless, his confirmation that heavy discounts weren’t to be had from the majority state-owned bank was consumed like sour milk – with a wince.

To compound the gloom further, in another session, panel chair and founding partner of Roger Barris challenged his panellists to address the question: Does our industry really have a reason to exist? What are we – harbingers of levered beta, or providers of genuine alpha? Barris even asked delegates which film best represented the current state of the European real estate opportunity fund industry. The audience chose, with 41 percent of the votes, Zombie chiller “Night of the Living Dead”.

Yet, for all the doom and gloom, some rays of light also could be found. For one, approximately 300 delegates attending was a statement of resilience in itself. These professionals are plugging ahead, regardless of its headwinds.

Second, evidence of current activity was delivered on stage, even from unlikely sources such as from Jim Garman, global co-head of the real estate business at Goldman Sachs. Garman informed the audience that Goldman Sachs had just completed its first equity investment in Europe in more than three years, snapping up a $100 million portfolio of office properties in Paris.

Also, among the LPs in attendance was Robert Sessa, director of real estate for the Employees Retirement System of Texas. The $23 billion pension system awarded an €85 million multi-manager mandate to Aberdeen Asset Management for Europe in February. Sessa's presence was evidence that it is keen to be shown more.

Irvine Sellar, the property entrepreneur behind London’s iconic Shard, said on stage in his keynote address: “It’s not all bad.”

These anecdotes confirm what even the biggest pessimists would privately concede: Europe may be in dire straits, but it is still rational to seek out the opportunities that markets in upheaval always generate.

Investors in private equity real estate, by definition, are supposed to act opportunistically. The PERE Summit: Europe was, amongst other things, a reminder to all that this mandate, given to the industry by its investors, is still the most important guiding principle.