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Partners Group: ‘UK closest to bottom’

The Swiss-based alternatives firm which advises some of the largest investors in the world says only very few markets such as the UK have reached the ‘late downturn’ stage. The finding comes as Blackstone is tipped to buy a 50 percent stake in a London office complex for £150m.

The UK real estate market is the closest to the bottom, followed by the US and France, according to Swiss-based alternatives firm, Partners Group.

In research out this month, the firm has identified a pecking order of countries according to where each real estate market is in the cycle.

According to the work led by Nori Gerardo Lietz, chief strategist of private real estate, the UK has reached “late downturn” state, followed by the US which is just about to come out of the “advanced downturn” stage to join the UK. Next is France and Japan – both said to be also in the advanced. Meanwhile, India is close to reaching the advanced stage, while Spain and Ireland are still in the “early downturn” stage.

In the report, “Investing in distressed real estate opportunities throughout the market correction”,  early downturn means a period when signs of a looming property market correction are not being acknowledged. Such a market is exemplified by reduced sales activity and a lack of clarity on pricing.

In this phase, cap rates start to expand, first slowly, then at accelerating speed. For this reason, Partners Group advises investors to sell existing real estate if possible. Partners Group says only a few markets around the globe are still in the early stages, but Spain and Ireland are examples.

“Advanced downturn” is described as a period when market participants “broadly acknowledge” that a correction is underway. However, the extent of the re-pricing is still unclear because the transactions market has not yet recovered. A majority of markets including the US are in this phase, along with much of Continental Europe and developed Asia Pacific.

“Late downturn” is described as a period when the extent of the asset level correction becomes clear thanks to growing sales activity. In such a market, mortgage spreads stabilise and even start to decline albeit from a high margin, says Partners.

“Only very few markets around the globe, such as the UK, have already reached this late stage of the cycle where distressed equity investments are attractive and where debt and secondary transactions continue to offer appealing returns,” it says.

That conclusion coincides with a report in the Times today that New York private equity firm The Blackstone Group is in talks to acquire a 50 percent stake in British Land’s Broadgate office complex near London’s Liverpool Street station for around £150m.

If a deal materialises, this would mark the firm’s tentative return to UK property. The last significant real estate deal Blackstone invested in was in 2008 when it acquired Changshou Commercial Plaza, a shopping centre in Shanghai, China.

Of the UK, Partners Group says the contraction in capital values is expected to come to a halt in the coming quarters. Though rents are likely to be adjusted downwards, stable cash-on-cash returns can be achieved where long term leases are in place with credit worthy tenants, highlights the report.