PERE Europe: Europe’s distorted investment universe

The head of research and strategy at JPMorgan, Joe Valente, illustrated for PERE’s audience how large institutional investors’ rigid investment criteria actually was leaving core-like real estate in Europe’s major markets to be picked off by opportunistic investors.

Overly specific investment criteria set by the largest institutional real estate investors has distorted Europe’s investment universe, claimed one of the market’s best-known researchers on the second day of PERE’s annual European conference. This distortion, he said, would lead to the region’s next big opportunity for those managers with opportunistic capital.

Joe Valente, head of research and strategy at JPMorgan, told delegates at the PERE Summit: Europe that prerequisite conditions set by certain investors for their real estate capital allocations had meant property that should be considered core in nature actually was being disregarded as secondary.

Valente noted that there was €120 billion of real estate investment activity in the region over the last year, in keeping with its long-term average, but he pointed out that the vast bulk of that capital was being channeled into a long queue for very specific assets in London, Paris, Frankfurt, Munich and Berlin. “These investors are looking for the same thing: 100 percent income-producing, Grade A, CBD assets. That has moved pricing at the core end, and now there are no bargains to be had,” he said.

“And that flow of capital has distorted the investment universe,” Valente added. “If assets do not tick those boxes exactly, they are no longer of interest to the dominant source of capital in the marketplace.”

Valente gave a hypothetical example of an asset in a central location that was 90 percent leased with eight years on the lease, rather than 10 years. “That asset is being mispriced into the secondary market,” he said, adding that it should present an opportunity for investors seeking higher-yielding acquisitions. “While the spread between the two markets historically was 100 basis points, the spread is 500 basis points today. Is that justifiable? Across the market as a whole, I don’t think it is justifiable, despite the weaker leasing market.”

Valente emphasized the importance of capitalizing on this moment in time, which he called a ‘lag’. “That lag is incredibly important as it creates opportunity,” he said. “Lags exist to be taken advantage of. There is no other reason for a lag to exist.”

Valente estimated there currently is approximately €250 billion of real estate that needs recapitalizing in Europe, but he admitted that number was of arbitrary consideration. “Whether its €250 billion or €500 billion, it’s a big number,” he said. “And when you add up the fire power of every value-added and opportunity fund, plus leverage to the tune of 60 percent, you get about €23 billion. That tells me opportunistic equity is incredibly valuable right now. Of course, that will change in years to come.”