JPMorgan Asset Management has offered an upbeat assessment of the prospects for European opportunistic real estate investing given some €413 billion of distressed sales should materialise over the next five years.
In a report called ‘Carpe diem’ – translated from Latin as ‘seize the day’ – the largest bank in America noted that, despite the current interest in southern Europe, it was core European markets that would provide more immediate reasons to invest. The report stated: “Not only is there a substantial universe of distressed owners in core European markets that need to sell, but this is combined with the expectation of an earlier recovery, relative political stability and clearly less risk of sovereign default.”
The €413 billion figure relates to the latest estimate of assets likely to come to the market over the next five years from a range of sources, including the banking sector, CMBS, REITs and open-ended funds going through the process of liquidation, as well as local and central governments. Of that, some €185 billion was likely to emanate from the UK, Germany and France, and €125 billion would be in the “opportunistic segment” of the market, such as non-prime assets.
The subset of assets of particular interest are those that have been held in suspended animation for some considerable time, the report said, explaining these are assets where the borrower has lost most, if not all, equity and where the lender has been unwilling, or unable, to inject fresh capital. It also found that, while there may be €125 billion of opportunistic sales in the UK, Germany and France, there was only €25 billion of available “firepower” held by the major opportunistic funds targeting them.
Peter Reilly, head of real estate for Europe at the bank’s Global Real Assets Group and co-author of the report, said: “The opportunistic sector remains significantly under-capitalised given the balance between the volume of distressed sales coming to the market and the small amount of investment firepower targeting the European region. Just as 2009 to 2011 proved to be a wonderful period to buy ‘core’ assets, we believe 2013 to 2015 will be the equivalent for the opportunistic segment of the market.”
When it came to southern Europe, JP Morgan argued it would become a rich source of opportunity but that there was no “urgency”. It also pointed out that there should be greater emphasis on single asset transactions around Europe. This is because sales from distressed owners, particularly from state-owned banks, were becoming politically charged, and there was a general problem of valuing large and complex portfolios.
Tackling the issue of how potential acquirers of real estate had been “surprised and somewhat disappointed” by the apparent lack of stock on the market so far, it blamed heightened and unrealistic expectations and a mistaken belief in a re-run of the Resolution Trust Corporation in America in the early 1990s. Perhaps the most important reason though was simply that banks didn’t dispose of the sort of volumes expected because they didn’t need to.
JPMorgan stated: “They were able to take advantage of the safety net provided by governments, the frequent injections of liquidity by the central banks and the general stance taken by regulators, which clearly recognised the inability of even the major banks to take the requisite write-downs on their balance sheets.”
Posing the question what had changed to suggest that more investment product would come to the market this year and next, JPMorgan said the main reasons for increased optimism included major banks having begun the long road to recovery with improving levels of performance. This has allowed a few of the main operators to begin the process of writing down the value of assets on their balance sheet. Other reasons included a narrowing bid-ask spread, fear of further deterioration in value and, most importantly, that opportunistic transactions had increased significantly over the recent past.
Investment activity by opportunistic investors rose to 12 percent of all investment activity in Europe in 2012 compared with an average of just 6 percent during the 2007 to 2011 period. In 2012, just under $15 billion was transacted in Europe by opportunistic investors. While it is reasonable to expect total investment activity in 2013 to be similar to the level recorded last year, the opportunistic segment of the market is expected to continue to increase its market share to perhaps 15 percent to 20 percent of total capital invested.
Joe Valente, head of research and strategy, said 2013 might offer an “inflection point” to investors in the opportunistic sector, which has remained unloved as prime assets have recovered.
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