JPMorgan Asset Management has published a paper outlining the case for opportunistic real estate investment in Europe and revealed a four-pronged strategy.
In a 20-page report, the Wall Street bank said the opportunistic investment market unfolding in Europe was unlike anything in the past, given the key driver of returns had shifted from the ability to deploy debt to the quality of the manager. Against a backdrop of continued uncertainty in the region, a shrinking pool of commercial real estate debt and little or no prospect of growth on the horizon, the bank said a strategy should be built on four elements.
In the first, the bank said the market has overreacted to risk aversion, leading to a large swathe of good quality and institutional real estate temporarily being “left high and dry”. Even though these assets only have a minor impairment such as a little vacancy, they are being priced as secondary. However, the bank argued they would re-price as the market “takes stock”. It said this kind of asset could be rectified through an injection of fresh capital or active management.
In the second theme, JPMorgan said there was a large group of assets “in suspended animation” on bank balance sheets. It said the borrower might have lost its investment and the lender might have inadequate asset management skills and an unwillingness or inability to invest. The value of these assets was deteriorating “by the day”, but the impairments could be ameliorated via fresh capital or active management, said the paper.
The third leg of its strategy was based on the European market being priced as it if were a single one. However, the bank said this couldn’t be further from the truth. It said the “considerable degree of divergence” allowed opportunistic investors to seek value at both ends of the “polarised market”.
Lastly, JPMorgan said that asset management in the main would be the key driver of opportunistic returns given high leverage investing was over. “Unlike previous phases of opportunistic investing, no investor would be rewarded for taking macro positions on Europe. No longer will the manager be able to rely almost solely on debt fuelled returns. The backcloth of little or no growth places the emphasis squarely on the ability of the manager to drive investment returns forward,” the bank said.
“The winning strategy may have to be underpinned by a recognition of the value derived from the extreme risk aversion, the re-capitalisation of defunct capital structures, the active management of assets that have been in suspended animation for the last four to five years and, above all, a recognition that the diversity of the European real estate market is both mispriced and under-valued.”