Real estate fund managers must be strategic about their European allocations, focusing on specific cities with exit opportunities rather than investing at the continental level, according to Joe Valente, the London-based managing director of JP Morgan Asset Management.
Speaking at the European Association for Investors in Non-Listed Real Estate Vehicles (INREV) conference in New York on Wednesday, he said: “If the notion you have is ‘I want to invest in Europe,’ my advice is ‘don’t.’ No investor’s going to be rewarded for taking such a macro position.”
For better risk-adjusted returns, Valente recommended looking outside the popular – and potentially overheated – markets of London, Paris and other major European cities. Those cities, he said, are fully priced, with their best risk-adjusted return period back in 2009 to 2012.
Western European nonprime markets with exit opportunities in stable countries – cities like Manchester, Cologne and York – are a good bet, he said. These types of markets now have significant funding from domestic institutional investors that can’t afford the high cost of capital required in London and similar cities. And where there’s institutional funding, Valente said, there’s a door for exits – the crucial ingredient for opportunistic investors looking to get out of a property in the next three years.
“They don’t necessarily grab the attention of international capital, but they’re nevertheless the sort of markets where the average domestic investor will be investing all day long,” he said.
Investors in these nonprime markets also benefit from a delayed post-recession recovery. With values and rents still 20 to 30 percent below their pre-downturn rates, Valente sees opportunities for income plays in additional to capital appreciation plays. These underfunded markets have a stock of capital-starved assets, the kind that can generate a 1.8 or two times multiple, he said.
Valente didn’t recommend looking at all western European nonprime markets, though. A macroeconomic view still makes exits in countries including Spain, Greece and Italy uncertain, despite many available deals.
Currently, 40 percent of US capital goes to the UK, 12 percent to France and 15 percent to Germany. Investors would do well, Valente said, to continue seeking opportunities in these countries away from a few pricey urban hubs.