FEATURE: More coffee, less champagne

It was not exactly vintage MIPIM at this year’s event in Cannes, France. The annual property conference no longer heaves like it used to prior to 2008, when junior professionals took full advantage of a week in the sun alongside their senior colleagues.

This year, MIPIM was more coffee than champagne as senior people made better use of their time. The weather also played its part, as it was untypically cold along the Boulevard de la Croisette, which is as famous for its climate as it is for its five-star hotels – the Carlton, the Majestic and the Martinez – and the red carpet of the Palais des Festivals.

Like the weather, the event – held between 6 March and 9 March – threw up pockets of brightness. Of course, people did party until 4 am or 6 am, and there was some serious money spent on corporate hospitality away from the masses, including live ‘mermaids’ at a private villa’s swimming pool and cage dancers at another soiree. Overall, however, proceedings were pretty low key.

The usual flurry of research preserved until the event by property agents, lawyers and other service providers offered the week’s main talking point – real estate financing. Indeed, there was more of a fixation on European property’s existing debt than on its equity as property players and their lenders considered and reconsidered what to do with the little legroom they have.

The signs of this were dotted all about MIPIM. On Wednesday night’s WP Carey party, one ex-Eurohypo banker from Barcelona described the Catalan capital’s real estate debt space as introverted now that international lenders “don’t want to know.” Eurohypo closed its Barcelona operation last year, prompting his departure, and he was in town to promote his debt ‘advisory’ practice and locate interest in a market that has, for many, fallen off the investment radar. His situation was not isolated.

A shortage of financing is the single biggest threat to the recovery of the property market in Europe in 2012, property services titan CBRE announced on Tuesday. The Los Angeles firm said 43 percent of 340 property investors it polled could either not locate financing for the transactions they wanted or were being priced out of the market.

Pioneering spirit

From the private equity real estate perspective, however, there were beams of light to be found. CBRE’s closest rival, Jones Lang LaSalle, reported on Wednesday that it expected European loan sales to exceed $20 billion in 2012 as the Continent’s lenders were experiencing “increasing pressure to deleverage” in the face of large volumes of debt coming due in 2012 and 2013 – music to some opportunistic investor’s ears. The Chicago-based firm said there would be more portfolio transactions between $350 million and $1 billion, and recovery rates would rise to or even exceed book values.

Peter Nicoletti, managing director and global leader of notes sales for Jones Lang LaSalle’s capital markets division, said: “We expect a significant increase in loan sale activity in the US and Europe this year as investors look to establish an early foothold in these pioneering loan sales markets.”

Accordingly, many of these pioneers are private equity real estate firms, and their plans became the stuff of breaking news stories as MIPIM progressed. One example was Paris-based AEW Europe, which revealed plans for a €350 million opportunistic fund. Newly hired managing director Russell Jewell said the AEW Europe Partners Fund would include debt and mezzanine ‘situations’ in its investment thesis. “We’re trying to keep as broad as possible,” he added.

Meanwhile, more seasoned players in the non-performing debt space were visibly in their element. Juan Pepa, managing director at Lone Star Funds, told an audience attending a panel hosted by PERE (see Lights, camera, action, p. 44) how the Dallas firm had no problem gaining access to deal situations. “Today, in terms of volume of product in Europe, we see a lot,” he said. In his experience, banks have been prompted to sell for various reasons, including pressure from analysts and as a consequence of being taken over by other banks.

Today, in terms of volume of product in Europe, we see a lot
Juan Pepa, Lone Star

Some firms not intent on mopping up existing debt are instead launching investment vehicles to bridge the region’s financing gap. According to data provider and news service CoStar, New York-based Fortress Investment Group – already well known for its dexterity in the debt space – has initiated plans for a European debt fund following the hire of Deutsche Bank’s former European head of real estate Cyril Courbage, who joined the firm in February. In another example, on Thursday, PERE broke news of Luxembourg-domiciled fund manager Aeriance Investments’ plans to raise a €500 million-plus debt fund in partnership with a Kuwaiti sovereign wealth fund.

Requiring opportunistic returns for such vehicles – typically 20 percent – these firms are not lending on the cheap. Fortress, for instance, reportedly wants 600 basis points over the benchmark lending rate for its debt, marginally less expensive than mezzanine finance. Another new fund is understood to want 400 basis points over – still expensive for senior debt or even ‘stretched senior’. Regardless, pricing like that backed up CBRE’s thesis that investors are being priced out of the borrowing market.

Cushman & Wakefield, the world’s third-largest property services firm, stated on Tuesday that the restrictive scale of senior debt availability has resulted in providers of mezzanine financing struggling to lend their high-yielding debt as there were fewer situations for their capital to bridge. Michael Lindsay, head of corporate finance for the EMEA region, pointed to a 33 percent drop in active lenders in the region since last year. “With senior debt availability [currently] in tight supply, mezzanine funds may face challenges in deploying capital in 2012,” he said.

Stealing the headlines

With such an intense focus on Europe’s debt markets, it was little wonder most of the breaking news was orientated around lending. More surprising, however, was the limited attention directed towards the slated takeover of Deutsche Bank Asset Management – owner of real estate investment management business RREEF – by little-known Guggenheim Partners. In late February, Deutsche Bank issued a press release offering scant detail but outlining that it was in exclusive negotiations with the Chicago- and New York-based firm over the sale of the business, which was made subject to a ‘strategic review’ in November.

Meanwhile, RREEF flags flapped wildly on My Alaska, its rented yacht moored at the Jetée Albert Edouard, just as they did last year. At a PERE breakfast on board the yacht on Thursday, the subject of the impending mega-merger was raised by guests, who seemingly had more questions than answers. The general feeling about the deal was to ‘wait and see’ for more details and indications of certainty to emerge. 

Away from My Alaska, private conversations in cafes on La Croisette were being had. One private equity real estate professional described Guggenheim as “a securitisation specialist more visible in B-piece trades” and less of a global alternative asset manager. As such, he said: “I see this as more of a reverse takeover,” nodding to Deutsche Bank Asset Management’s $539 billion in assets under management compared to Guggenheim’s smaller $125 billion. Another PERE source questioned where the capital would come from to finance a deal of such magnitude. Would a wealthy partner emerge? At press time, there were no answers for that.

Little focus on Deutsche Bank and Guggenheim meant that Simon Property Group’s $2 billion acquisition of a 28.7 percent stake in Klepierre from BNP Paribas was the biggest industry news to break during the event. The US retail REIT’s investment – at a significant premium to Klepierre’s net asset value – single-handedly shoved the value of Europe’s quoted property sector upwards.

Simon had been hunting in Europe for some time, and the REIT almost concluded a significant investment in London-listed Capital Shopping Centres before an overly-publicised transaction process and a more popular rival bid forced it to abandon its approach. Its investment in Klepierre – announced on Thursday – smacked of opportunism, as the REIT took advantage of BNP Paribas’ need to shrink the size of its balance sheet. Hurt by the ongoing Eurozone crisis, the French bank is trying to achieve a 9 percent Tier I capital ratio by next January in order to comply with Basel III regulations.

Selective dating

While the week saw the relationship between Simon and Klepierre crystalise, others used MIPIM to find their own bedfellows. One common theme was identifying small concentrations of partnerships. For example, a private equity firm new to real estate told PERE that it was in Cannes to fill limited quotas of partners, ranging from operators to brokers, in an effort to create a European infrastructure for his firm.

Matthew Ryall, head of indirect investments at Allianz, the German insurance business, revealed how he also was on the hunt for ‘select’ partners. “We don’t just want dozens and dozens of relationships,” he said. Accordingly, the insurer’s five-strong indirect team has written just a few, meaningful cheques to investment partners such as AMB Property, which received €400 million for a logistics joint venture last year.

We don’t just want dozens and dozens of relationships
Matthew Ryall, Allianz

Simple fact-finding was the order of the day for other groups. On Wednesday, PERE met with Seoul-based Samsung Fire and Marine Insurance and its manager responsible for real estate investments, Jin Seo, in the Carlton Hotel. He said he was in Cannes to better understand the impact of the Eurozone crisis and how to position that against the insurance group’s real estate investment strategy. For 2012, that strategy includes investing a minimum of $100 million, primarily into direct core property but also into one fund – the news of which was broken and keenly followed by readers of perenews.com.

Seo was not the only Korean in town on a reconnaissance mission either. A gaggle of other Korean institutions, including the Korean Teacher’s Credit Union and the Korea Scientists & Engineers Mutual-aid Association, were pressing the flesh of potential partners. The property tourists were led by Victor Jung, director at Real Estate Corea, the representative body for real estate companies in Korea. During the week, PERE met with a couple of fund managers that were pleased to have been included in Jung’s itinerary and to have met this potential new source of equity.

Indeed, pitches were taking place everywhere – sometimes right out in the open. In one café near McDonald’s, two presumably Danish men were explaining the idea of investing in property outside of Copenhagen, where opportunistic returns apparently can be had. A female representative listening patiently said her organisation wrote out large cheques to funds with solid strategies. The group eventually parted on pleasant terms but, on reflection, her organisation’s cheque book might be too big for the fund the gentlemen were pitching.

More coffee, less champagne

Signs of a more sober atmosphere than four years ago were everywhere. At its peak in 2008, MIPIM says it attracted more than 29,000 delegates. The parties were bursting with ever-younger professionals, and everything was chargeable, from the rooftops of buildings to the very sky itself (one UK property services firm apparently was charged to fly a banner along the beach).

In 2012, many groups took a toned-down approach. Savills, the London-based property agent, ditched a yacht presence three years ago, opting instead to commandeer the nearby Café Croisette Corner. There, it served cappuccinos and croque monsieurs to clients. Elsewhere, CBRE Global Investors, the world’s largest real estate investment management firm after consuming ING Real Estate Investment Management last year, parked a branded mobile café outside the front doors of the Palais.

Nevertheless, there were events reminiscent of MIPIM’s opulence of yesteryear. At WP Carey’s party on Wednesday night, guests were greeted by female models offering champagne in the main hall of the luxury Villa l’Abri before being ushered into a room to view an imported Picasso exhibit. Upon alighting from the villa into the garden, guests watched mermaids splash around in lit swimming pool while grazing from a gourmet buffet. Deep into the night, networking was interrupted by a live rendition of The Marriage of Figaro, performed by a pair of classically-trained opera singers.

For an altogether different experience, guests at another party of one private equity real estate firm were exposed to a pair of cages containing scantily-clad dancers providing the visuals to an evening closer resembling a night in Ibiza than one of the world’s largest business conferences. Needless to say, journalists were invited to this extravaganza on the condition of anonymity.

Some mainstream property professionals say their absence at MIPIM is more noticeable than their presence. Still, whatever the driver for being there, 2012’s event remained a well-populated affair – even if the lavish parties of old gave way, for the most-part, to a more serious rendezvous.

Lights, camera, action

GIC Real Estate, Lone Star Funds, TPG Capital and The Wellcome Trust took to the stage to examine the opportunities in distressed real estate investing in Europe

It isn’t often that a premier private equity firm, a sovereign wealth fund, a charitable foundation and a big beast of private equity real estate get together in public to compare notes on European property investing. Yet, during a MIPIM panel session hosted by PERE on 7 March, four such organisations did indeed present their views before an audience inside the Palais des Festivals.

There really aren’t a lot of things going for Europe at the momen
Bernard Phang, GIC Real Estate

In a discussion entitled “Private equity: European distressed investing,” it quickly became apparent how the organisations involved were approaching the region from differing angles. US private equity firm TPG Capital, for example, is in the early stages of boosting its exposure to the asset class in an organised fashion, but it has yet to raise a dedicated real estate fund. GIC Real Estate, the real estate arm of the Government of Singapore Investment Corporation, has been an investor in Europe for years, both directly and indirectly, while Lone Star Funds has raised billions of dollars for real estate funds and has put that capital to work investing in pools of loans offered by European banks. Meanwhile, The Wellcome Trust, an institutional investor without a set allocation to one asset class or another, was the only true Europe-based organisation.

Robert Weaver, a partner at TPG, said his firm had arrived at the view that bringing a “corporate angle” to real estate investment in the US and Europe was something it felt it could do well. “One of the areas we are thinking through currently is secondary markets with good office-using employment groups that are being overlooked,” he said during the session. “That might be a French market outside of Paris or it might be a UK market outside of London, perhaps Edinburgh or Manchester. We are trying to find places where there might be an opportunity to buy portfolios or platforms.”

Bernard Phang, an executive vice president at GIC Real Estate with responsibilities for investments in Europe, said the Singaporean sovereign wealth fund likes investing in prime assets, but there needs to be some adjustment in pricing expectation. In addition, he noted that GIC usually needs to meet three conditions for investment: there needs to be confidence in the market, yet this is lacking in Europe at the moment; there needs to be growth, but that isn’t obvious for the next two, three or even five years; and there needs to be financing, but banks generally have been retreating from lending in the region.

“There really aren’t a lot of things going for Europe at the moment,” Phang said. “Nonetheless, Europe is a significant part of our investment universe, and it is here to stay. Where we do find interesting investment opportunities today is in the value-added space or in good secondary assets.”

Phang revealed that GIC has invested in those areas mostly through funds or separate arrangements with niche players that operated “under the radar screen. In the last few years, we have done very well by investing in smaller assets in smaller cities in the UK, which has not been the focus of a lot of investors, especially foreign investors,” he said. “We also have been active in Germany, where there has been quite a good (economic) story, and even in Italy, where we have bought into a few secondary units in partnerships because the LPs wanted to pull back from Europe.”

Furthermore, Phang noted that GIC Real Estate currently is having an internal discussion about whether it can find the “right sort of fund” within GIC to provide senior financing to the market. Indeed, his reference to a lack of debt financing in Europe picked up on a major theme running throughout both the panel discussion and the broader MIPIM conference.

Peter Pereira Gray, managing director in the investment division at The Wellcome Trust, rounded out the discussion by casting a shadow over European real estate. He suggested the region exhibited “pricing that is relatively expensive for assets today” compared to other asset classes in which the foundation invests. Still, that doesn’t mean the charity isn’t interested in distressed assets. 

 “Would Wellcome find distressed assets interesting to buy? We would, but we would need a very strong partner with the infrastructure to do that,” Gray said. “My observation at the moment is that there is quite a lot of risk being taken in the distressed deals being done, and there are relatively few firms that are competent enough to take on those deals.”