EUROZONE: Time to take the contrarian view

It struck me at the EXPO Real property show in Munich last month that little has been learned from the events of the past few years.

Here was I, little more than a year after Lehman Brothers’ collapse, and the herd-like mentality still prevailed unabated and unchecked.

The clearest example of this was watching British property folk trying to tap up Continental European (mainly German) institutional and private capital, explaining that the UK is the best market to invest in.

For that reason alone, I think experience suggests that the UK might not be the best market to consider, unless one can take advantage of the trend by acquiring slightly sub-core property, quickly turning it into core and selling to the weight of capital looking for core.

Robin Marriott

That the UK was billed the best market in Europe was just one commonly held view repeated like a mantra in Munich. There were plenty more, such as that the days of highly leveraged investments in Europe are over. The rationale behind this statement seems solid and certainly well documented and logical. But there are factors to consider that suggest this could be a false assumption. One sees Re-REMICs [the re-securitisation of real estate mortgage investment conduits] in the US, the resurgence of the German Pfandbrief market, as well as the number of banks already increasing their size of loans, not to mention the return of mega bonuses on Wall Street unchecked by governments.

Added to that, intelligence reaching me that a very large US bank plans to put real estate loans on its balance sheet in a major European market where it hasn’t done so before, and I start to question the received wisdom about the end of leverage.

Here’s another theme from EXPO that’s worth rethinking: We are heading into a golden era for opportunity funds to deliver superior returns, such are the opportunities that are coming. Intuitive, yes. The problem is that so many people think this.

There are a lot of funds out there that have raised capital or are in the process of doing so. The contrarian view is that actually we are going into a period of mundane returns, even if high leverage returns, as I believe it will.

Any one of a number of things can emerge that will dilute returns to investors, such as European directives on alternative asset managers, insufficient volume of real estate being sold at low prices, big changes in tax treatment and the unfriendly way some countries are dealing with foreign tax efficient structures. 

Finally, I’m repeatedly told, that it will be the established firms with solid track records and no legacy issues that will do best. After all, these are the firms that investors and banks will be comfortable with. But that doesn’t quite gel with what is happening on the ground. Sure, the familiar names will do okay and in some cases really well, but I take particular note of Avington Financial, which has only been around a few years but has raised €300 million for a distressed hotel fund. I also see people with huge experience of European debt adding their experience to smaller, less well-known firms or start-ups.

To my mind, investors should be paying fees to true opportunistic fund managers for outperforming those that simply follow the trend. Having witnessed the herd mentality still prevailing at EXPO, investors would do well to prefer those managers with contrarian views.