On 4 May, an interesting event in London highlighted the conflicting (and sometimes mindboggling) fortunes of the countries that comprise the Eurozone. For on that day, the Spanish government began the first leg of an international tour to try to get foreigners to buy residential property in the country.
While seemingly an inconceivable proposition just one year ago, the idea is to tempt private buyers, including private equity real estate firms, with news of large price drops – up to 40 percent in some places – so that investors will start buying up some of the overhanging residential property stock in the country. This, in turn, would reactivate the Spanish property sector, which would have a positive effect on employment in the construction sector and boost the economy as a whole.
In some senses, the gathering between the Spanish government and private equity real estate firms was a strange one. On the advice of Richard Ellis, Spain’s government agreed that it couldn’t assemble 50,000 Brits in order to give them the sales pitch to buy a pad in the country. Instead, it invited institutions that had bought property in Spain in the recent past.
The sort of firms that were invited – and most attended – included AREA Property Partners, Benson Elliot Capital Management, Europa Capital Partners, Perella Weinberg, Goldman Sachs, Rockspring Property Investment Managers, Cerberus European Capital and JPMorgan. PERE’s spy at the ensuing discussion said there was an obvious divide.
“Lots of private equity real estate houses were there hoping to hear something new from the Spanish government,” the source said. “However, there was a clear difference in views. On the one side were officials who believe that, with up to 40 percent drops in prices from the top of the cycle, residential now looks very attractive. On the other side, investors were saying they need further write-downs in order to make it work.” He added that all the questions were about the bid/ask spread and what the government could do to force the hands of the savings banks.
In a way, this to-and-fro showed some misunderstanding on both sides. The officials do not understand that Spanish residential is not an institutional product (especially on the coasts) and that opportunity funds need further rebates to make it attractive and less risky. Opportunity funds, meanwhile, think that all Spanish residential is similarly distressed, hence the urgency, but clearly they aren’t getting the same feedback from the banks.
Spain undoubtedly has suffered a huge blow due to its overbuilt residential sector, but private equity real estate firms are not really interested in buying holiday homes on Spain’s coasts, even if they are 20 percent to 40 percent below peak prices. That brings us to the contrast with other parts of Europe.
In the UK, for example, the difference could hardly be greater as institutional investors are indeed getting interested in residential – especially the upmarket segment. Indeed, The Carlyle Group wants to expand on a successful start in Chelsea by pushing further into upmarket residential and is looking to grow a land business to build additional units.
Furthermore, there are plenty more firms besides Carlyle that are getting excited about residential in the UK. Just a few days ago, the latest of them became London’s Mountgrange Investment Management, which in collaboration with Pluto Capital announced the UK’s first residential mezzanine debt fund targeting London and the wealthy Southeast.
The interest in UK residential argues that, while the number of residential units has dropped radically between 2007 and 2010 from 200,000 to 90,000 units per year, population growth and increasing household fragmentation should increase the number of residential projects in the UK at an average of 252,000 units each year until 2031. Central London and regions close to London are expected to outperform and will lead the recovery in the residential market.
Then consider Germany, where Goldman Sachs’ Whitehall Funds and partner Cerberus Capital Management recently executed an initial public offering of a majority holding in German residential property company, GSW Immobilien. As the largest private owner of residential property in Berlin, with nearly 49,000 residential apartments, GSW attracted numerous blue-chip, long-term investors to its shares. And why not; everyone knows that German GDP is racing ahead, unlike that of Spain.
Such varied results between markets are one of the difficulties in generalising about Europe and one of the pleasantly interesting aspects to note about European property. The variation also makes it interesting for investors when it comes to choosing fund managers to access the region. In particular, it helps explain why there is a shift towards country- and region-specific funds at the expense of more generalist European vehicles.
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