INTELLECTUAL PROPERTY: Over there

With March here, thoughts turn to the arrival of spring and the start of a new season. The private equity real estate industry also is facing a new season, one filled with both challenges and opportunities. That is why the MIPIM property show in Cannes, France comes at such a good time of the year – it is the perfect point to take stock of the markets so far, assess the potential of future opportunities and formulate a game plan for the rest of the year.

Last year, I remember heading down to MIPIM with enthusiasm, excited to be a part of the 18,000-plus attendees overrunning the seaside resort town. GPs and LPs alike were looking to put the gloom and doom of the credit crunch and financial crisis behind them, and evidence of the market’s renewal was on full display at the event. Although attendees questioned the current pace of recovery and what assumptions should be made about the speed and longevity of any rebound (rightly so, it turns out), the fact is more deals got done last year than the prior one.

Alas, I will not be at MIPIM this year due to other obligations. However, it seems a number of American private equity real estate firms and investors may be attending instead.

Indeed, a number of market players smell an opportunity in Europe, particularly among its banks. One such firm is The Blackstone Group, which told attendees of the PERE Forum in London last June how it was seeing a trickle of transactions become a “stream.”

Chad Pike, co-head of real estate at Blackstone at that time, told the audience that Europe’s chapter seven-style bankruptcy procedures, as well as the inevitable maturity of loans taken out pre-credit crunch, are presenting more opportunity. As typical five-year loans become due, he joked that “it doesn’t take a rocket scientist to work out that a lot of transactions are coming to the point where they needed to be refinanced, recapitalised or otherwise need to enter into bankruptcy proceedings.”

Explaining the trickle of deals, Pike said banks cannot afford to take “hits,” as losses would be material. As an example, Blackstone estimated that the big banks of Europe are more than 21 times leveraged, based on €303 billion in core equity supporting more than €6.4 trillion in assets. Higher reserve requirements will mean that €80 billion of new high-yield debt and €100 billion in equity will be required to recapitalise the transactions of 2004 to 2007.

Furthermore, it is not just GPs that are circling Europe. A recent €85 million commitment to Aberdeen Asset Management by the Employees Retirement System of Texas is a perfect example of how the appetite for European real estate has grown among American institutions.

The $23 billion pension system awarded a multi-manager mandate to Aberdeen to construct and manage a pan-European portfolio, seeking a broad spectrum of funds targeting all property types across Continental Europe and the UK. Though it will seek opportunities that run the gamut of the risk spectrum, the emphasis is on properties on the higher end of that spectrum.

According to Jon Lekander, global head of property multi-manager at Aberdeen, the mandate is part and parcel of the increased interest in Europe by US institutional investors, as such investors are attracted by market re-pricing and the ability to diversify and globalise their portfolios. “Europe is not in the best position right now, but there are opportunities that will arise in these environs,” he said.

Bolstering this enthusiasm is new research by RREEF Real Estate. In a paper called “The Case for European Opportunistic Investing,” the firm argued that now could be the best time to adopt an opportunistic investment strategy for the Continent as regulatory initiatives will require institutions to recapitalise their balance sheets. “As history has shown, events such as these can provide opportune moments to achieve outsized performance by investing in opportunistic investments,” the firm noted.

Mark Roberts, managing director and global head of research at RREEF, and Simon Durkin, director and head of European research, told PERE that some investors had come around to considering Europe as a place to invest opportunistically. “Our thesis was to discover how higher-returning strategies perform relative to core, as well as try to give investors a better indication of when they should allocate more to real estate,” Roberts said. “Now more people are looking at Europe.”

Durkin added: “Market dislocation, and hence opportunity, in Europe is being driven by a diverse range of factors.” For example, to raise capital ratios, banks may need to sell assets more aggressively than their US counterparts, while governments may need to sell assets to respond to drastic austerity measures, he explained.

Therefore, if you or your firm are among those headed to Cannes to explore the European opportunity, good for you. Enjoy the trip and the event. If not, what are you waiting for? The timing may never be better than now.