Blackstone, the world’s largest real estate manager, executed more than half of its total real estate investments for 2023 in Europe. According to James Seppala, head of real estate for the region, the firm – which consistently ranks number one on the PERE 100 manager ranking by capital raised – could be even more active in Europe in 2024.
Although Seppala believes the current period of market dislocation will continue to impact real estate “for a little while yet,” he anticipates an uptick in transaction activity throughout Europe from the beginning of 2024. While outlooks diverge depending on the sector, he tells PERE why previously reticent buyers and sellers will soon be tempted back into the market.
Europe has accounted for more than half of Blackstone’s real estate transaction activity this year. Do you expect that approximate proportional balance to continue into 2024?
While we remain selective and disciplined in the current environment, our pipeline in Europe remains reasonably robust. While the US was quieter for us as investors in 2023, the size and depth of that market means that when transaction opportunities do arise in the US, they tend to happen at scale and reasonably quickly, so we could well see activity rebound there fast over the course of 2024.
Even so, I expect this year to be more active for us as investors in Europe than 2023. A meaningful proportion of both buyers and sellers have stood on the sidelines in the past 12 months amid the uncertainty and volatile macro environment we have experienced. We are in the fortunate position of having a significant amount of dry powder to invest and expect to see meaningful opportunities as more willing sellers and buyers return to the market.
What do you expect to see driving the recovery of transaction volumes in Europe generally?
I expect 2024 transaction activity to be higher than 2023, in part driven by investors’ desire to sell assets, or dispose of a portion of their assets, to rebalance their liabilities versus assets and pay down debt. That will take some time to play out – companies have debt maturities or hedges that roll off over years, not months – but I would expect activity to pick up from the beginning of 2024 as a result.
The recovery will also be driven by a degree of greater visibility on the trajectory of inflation levels, and of interest rates, which may give more confidence to the market than we enjoyed last year. I expect 2023 to have represented the trough in activity.
This time last year consensus was that deal activity would return in H2, but that did not materialize. What gives you the conviction the recovery will begin in earnest this year?
Possibly the single most important factor is the reduction of inflation levels around the world, which gives investors a better sense of the rate environment. The inflation prints that we have seen – with the eurozone at 2.4 percent in November, down from 2.9 percent in October – should bring investors back into the market.
How much variety do you see across sectors in terms of the bid-ask spread?
Sectors that are facing structural changes, in the case of certain segments of the office market, or sectors where growth is lower than inflation, such as regulated residential in certain markets, are where we are observing the largest bid-ask spreads and the most limited levels of transaction activity.
On the flipside, sectors where people believe in the structural occupier story and where investors can underwrite near-, medium- and long-term growth are much healthier, and the bid-ask spreads are narrower. Logistics is a prime example of that – we actively bought logistics assets over the course of 2023 and will continue to do so in 2024. But, at the same time, we have also been selling logistics assets and portfolios, and have seen reasonably robust liquidity for what we have brought to the market.
Residential is a popular choice for investors in the current market given the positive supply-demand dynamics. Why do you think the bid-ask spread is among the widest in that sector?
With regulated residential, where some of the stock is older, capex requirements can be quite high, and so cashflow conversion from rental income down to net cashflow to the investor is lower than elsewhere.
Over the past 30 years, because of the extreme stability of cashflows in the sector at a time when yields were declining meaningfully, cap rates were, to some degree, a bond proxy. But in a world where rates have moved up as much as they have, that kind of hyper-stable cashflow – which grows but does not necessarily grow in line with high levels of inflation – is more challenging for investors to get their heads around.
How accommodating are the credit markets in Europe at this point?
At a reasonably digestible sizing, in the right sectors, and at around 50-55 percent loan-to-cost attachment points, there continues to be reasonable liquidity in the financing market for the right assets. To give you a sense, Blackstone has raised over €12 billion of new financing and refinancing in 2023 across 30 executions. Transactions that required over €1 billion of new financing were more challenging over the course of 2023. However, some of that may ease over the course of 2024, in anticipation of rates starting to ease.
What may be a concern, however, is that liquidity crises at certain market participants – such as we have seen recently with Signa filing for insolvency – might lead to unforeseen issues for certain financing institutions. That is something we may need to remain watchful over.
We obviously saw the US regional banks go through a crisis early in 2023 that none of us, at the beginning of last year, would have necessarily anticipated. We remain confident in Blackstone’s ability to navigate this new environment, as we have successfully done in more challenging environments before.
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