Goldman Sachs' real estate business has just signed its first European deal in three years despite its generally cautious stance towards Europe as an investment market, delegates at the PERE Summit Europe heard today.
During an on-stage interview at the Royal Garden Hotel in London, James Garman, global co-head of real estate, said Goldman had acquired a $100 million portfolio of office properties in Paris that previously were owned by a bank. He noted that the strategy was an opportunistic one, which involves investing in a portfolio at an “attractive price” and then improving the assets. He explained that the deal fit with its theme of investing in assets that are owned by organisations for whom an asset or assets had become non-core.
Prior to this deal, Goldman had been “relatively more optimistic” about the opportunities in the US real estate market and had been “relatively inactive” in Europe. “We have been very cautious on Europe,” Garman said. “We think the European Central Bank's LTRO programme earlier in the year seemed quite effective in providing some breathing room, but you can see with the shifting political dialogue – and with Greece and now Spain back in the spotlight – the problems have not been solved and, in fact, seem to be becoming more acute. I think this will drag on. That said, as investors and owners of assets, I think we need to accept and embrace that volatility and realise that it can throw up possibilities.”
Garman added: “In practice, we have been focusing on two types of opportunity in our equity business – the first is repositioning and trading opportunities in markets where we see some signs of strength and liquidity despite the turmoil. I would include London, Paris and Germany in that category. In those markets, we have been looking at situations where good quality assets have, for whatever reason, become non-core. The portfolio we just acquired in Paris is exactly that. The other area we have spent a lot of time on is some of the more distressed markets, such as Spain and Ireland, though it still feels early. We are being patient and disciplined and are only spending time on situations where we see real value that reflects the likely further downward pressure on values and a very long recovery.”
Garman told delegates at the Summit that, as well as pursing investment strategies in both the US and Europe in the “classic REPIA business,” Goldman has added a “second leg” – a debt strategy – providing new debt capital to clients of the firm looking to refinance or purchase assets. For its debt strategy, he explained that the firm sees good opportunities in performing high-yield credit, which provide returns of 7 percent to 10 percent. “We are not trying to compete with the providers of true senior debt on core assets,” he said. “Equally, we’re not trying to compete with those firms offering classic riskier mezzanine finance in the low teens. Our model is somewhere in the middle. We are gearing up to bring this product to Europe.”
In the past 18 months, Goldman has deployed more than $2 billion of capital from REPIA, virtually all of which occurred in the US and more than 70 percent via its debt business. “Even in the US, we have found what we think are better risk-adjusted returns in the debt business than we have been able to find in equity opportunities,” Garman said. “That said, we expect that mix will change in the coming years. We are definitely seeing some more interesting equity opportunities in the US as growth emerges in some sectors, and so we think the balance in the US will shift. Likewise in Europe, things are slowly changing. I expect the equity business will become more active as the distress and deleveraging story gradually unfolds.”
On the sensitive issues of the forthcoming Volcker rule and how that is affecting Goldman, Garman preferred to keep his counsel. However, he added: “We currently manage $49 billion of equity across our merchant banking platform, which includes private equity, real estate and infrastructure, and we are managing all of these funds to come in compliance with the Volcker rule. Going forward, we expect to pursue our real estate investing strategies either through funds that comply with the regulations or through investments using our own capital, often alongside our clients.”
Garman noted that today Goldman manages around $40 billion in property globally, just under half of which is in Europe. He said the REPIA team, which has been reduced to around 40 staff, has been focusing on operating and financing its assets and opportunistically harvesting. In Europe alone, the firm has executed around $10 billion in debt financings and restructurings over the past two to three years. It also has leased or renewed around 20 million square feet of space and sold about $6 billion in assets, with similar levels of activity in the US.