Two of the biggest names in private equity real estate told an audience attending a MIPIM panel hosted by PERE how they actively are engaged in seeking real estate opportunities in Europe’s secondary markets.
Robert Weaver of Fort Worth, Texas-based private equity firm TPG Capital and Bernard Phang, head of investments for the real estate division of the Government of Singapore Investment Corporation (GIC), said that a “profound” and “unprecedented” rush to core real estate investments had led them to seek deals in the region’s secondary markets instead.
TPG Capital currently has approximately $49 billion in assets under management, predominantly in the private equity and buyout space, although its real estate movements have started to visibly increase. Despite that, its European exploits have received little media attention to date.
Offering a rare insight into the firm’s European strategy, Weaver said: “One of the areas we are thinking through currently is secondary markets with good office-using employment groups that are being overlooked. That might be a French market outside of Paris, or it might be a UK market outside of London, perhaps Edinburgh or Manchester.”
“We’re trying to find places where there might be a good opportunity to buy portfolios or platforms,” Weaver added, illustrating that ‘spreads’ today in assets like these are between 300 basis points and 500 basis points wider than “you might get in London.” Without revealing further details, he noted that TPG currently is in the advanced stages of such a transaction in the Benelux region.
Meanwhile, Phang told PERE’s audience: “We like to invest in prime assets, but there needs be an adjustment in pricing expectation. At the moment, the numbers don’t stake up.”
“We like value-added and secondary investments that are below the radar,” Phang said, pointing to the secondary cities of the UK and Germany as examples of markets where GIC Real Estate recently has transacted. “These places have not been the focus of many foreign investors,” he noted.
In addition, the sovereign wealth fund has purchased secondary fund investments as well, picking up stakes at discounts in situations where the seller needed to liquidate its position prior to the fund’s expiration, according to Phang. “We’re also looking at debt financing,” he said.
Indeed, GIC Real Estate is pricing both junior and senior real estate loans, although Phang admitted that senior loans currently are proving harder to generate the ‘right’ returns. In the US, GIC also has partaken in CMBS transactions, he noted.
Both Weaver and Phang agreed that the rush to core properties by investors in Europe was without a stable basis. “Real estate is used to provide some diversification, correlation to the wider portfolio, some yield and, frankly, some safety,” Weaver said. “A lot of these tenets went out of the window, and what’s happened is people have just rushed into core. London and Paris arguably have been overbought. They are now producing yields of between 3.5 percent and 4.5 percent. While that might be attractive relative to fixed-income alternatives, it is historically higher on a price per square foot basis than it’s ever been.”
The PERE panel also included Juan Pepa, managing director at real estate debt specialist Lone Star Funds, and Peter Pereira Gray, managing director of investments at The Wellcome Trust. Keep checking perenews.com and look out for the next edition of PERE magazine for more coverage of the session.