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MIPIM 2014: Risk appetite is increasing

Fundraising activity and deals are ‘skewing away’ from core and core-plus to higher-returning strategies, attendees of the PERE panel heard.

Global investors are significantly upping their appetite for ‘risk’.  During a PERE panel session at MIPIM yesterday, Macquarie Capital’s head of European real estate Jonathan Harris told the audience that his firm was seeing real estate transactions ‘skew away’ from core property to value-added and opportunistic strategies, as well as development and niche strategies such as student housing.

The comment comes against a backdrop of improved sentiment, particularly in Europe. According to Cushman & Wakefield, global property investment volumes will hit $1.33 trillion in 2014 – a 22.6 percent increase on 2013 – as prime yields return to pre-crisis levels.

Anthony Myers, head of European acquisitions at The Blackstone Group, said his firm raised its $13 billion global fund in 2011 and 2012 and currently is approximately two-thirds invested. He explained how Europe probably is two years behind the US in terms of banks divesting real estate. However, UK banks were ‘slowly’ getting active and, in 2012 and 2013, the firm was very busy investing more than €2 billion in Europe in each of those years, he noted.

“It is getting harder to find opportunistic deals in the US given the flow of capital and the re-flation of asset values,” Myers said. “We see much more interesting opportunities here in Europe. It is all about the banks. “

However, Myers added that Blackstone was starting to see what it witnessed in the US with increased capital and North American firms setting up in London. Meanwhile, in Asia, it is seeing far less competition, though it is more challenging executing deals, he summed up.

Simon Blaxland, head of investments at AEW Europe, said there was “clearly room” for other European players despite the recent fundraising by Blackstone. He explained how various investors had allocated a high proportion of capital to alternatives such as real estate and infrastructure and typically would be invested with a large global fund manager such as Blackstone, Fortress Investment Group or Lone Star Funds, giving them access to distressed deals and nonperforming loans. “Now, they are ready for more niche strategies with managers such as AEW and its peers,” he added. “I think we are complimentary now.”

Blaxland noted that the ‘fix up assets and sell them as core’ strategy that a lot of US investors have employed in their domestic market seems “over,” and now the opportunity is in Europe. “Investors want to replicate the strategy,” he added. “They are increasing their allocations to European managers as a result.”

In terms of deal flow, Blaxland said it was “all about the banks, their non-core book and talks about recapitalizing assets or a sponsor. Similarly, there are plenty of ownership vehicles that are closed-ended funds in run-off mode.

Blaxland explained: “It is only two years ago that the ‘clean up’ started in Europe. Even though we are in a low growth environment, where it is hard to make opportunistic returns in Europe, I think we are fortunate because we still are only halfway through the ‘clean up’.”     

Focusing on Asia, Goodwin Gaw, whose Gaw Capital Partners recently closed a fund that raising more than doubled its target size, said investors were looking for firms with the right track record and local teams. In China, investors had discovered in was difficult to execute deals directly, so now they are “going back to managers with the right track record together with an ability to secure off-market deals and generate a sizeable co-investment,” he said.

Thomas Garbutt, senior managing director and head of global real estate at TIAA-CREF, said US capital was looking more and more outside of the US and there was “much more talk about Europe this year compared to last by a wide margin. As far as moving up the risk spectrum, I think that is very natural as part of the cycle. There is compression in every asset class. Naturally, investors are starting to migrate up the risk curve to get yield.”

Garbutt added that the “threat” to opportunistic real estate and core real estate in a rising interest rate environment was “definitely there. But I also think the yield premium in real estate is still rather attractive, given where fixed income rates are today.”

Despite increased appetite for risk, Blackstone recently has introduced a new business line for investing in core real estate. Myers noted that many of its limited partners had come to the firm asking for advice on investing in core and core-plus property. “In some cases, they asked us to execute on our behalf,” he said. “They recognize that we see a lot of transactions across the globe and not every deal fits in with the opportunistic strategy that we pursue.”