Was it good timing or bad? This year’s MIPIM property show was held between Tuesday, March 12 and Friday, March 15, just as last year’s shocks to the Eurozone were starting to fade into memory. By the time delegates had returned to their desks the following Monday, however, Europe seemed to have been plunged into a fresh crisis.
Suddenly, Cyprus was under pressure to accept a €10 billion bailout from the European Union that involved raiding the bank accounts of ordinary citizens. There was outcry from the outset that the scheme set a ludicrously dangerous precedent for similarly vulnerable countries in the Eurozone. Later that week, the Cypriot parliament rejected the bailout, leaving the island nation searching for a Plan B. At press time, that seemed like it could involve an emergency investment by Russia, given the close ties between the two countries. In fact, there already are jokes that Russia ‘buying’ Cyprus could become the best distressed deal of all time in Europe.
Had Cyprus’ dramatic problems come to light one week earlier, it would be fair to assume that it would have been mentioned 80,000 times during MIPIM – assuming the reportedly 20,000 delegates attending the property show in Cannes mentioned the stricken country at least once every day. As it turned out, Cyprus remained a small country in the Mediterranean Sea that was not really worthy of mention at all.
Instead, most of the talk at MIPIM revolved around how Europe no longer presented a serious and present danger to investors, given that the ‘worst was over’ economically speaking. To that extent, the organisers of MIPIM were lucky because they could suggest there was more optimism at this year’s jamboree, as indeed there was. Julian Newiss, founding partner of London-based Catalyst Capital, summed up the mood best, saying: “There’s generally more enthusiasm that we’re past the worst.”
There were several reasons for the increased buoyancy. “I think the main thing is the increased availability of debt priced at a number that works for people rather than the numbers that were being talked about last year,” ventured Newiss. Part of the explanation for that phenomenon stems from the new entrants into the lending market.
Indeed, during MIPIM week, there were reports of how Norges Bank Investment Management, which has been investing in direct real estate for the past two years on behalf of the 4.14 trillion kroner (€551 billion) Norwegian Government Pension Fund Global, had issued a request for proposals for a feasibility analysis of the European real estate debt market. Market participants seeking to win that mandate would have preferred the report hadn’t surfaced during the event in order to preserve their perceived competitive advantage. Still, the potential entry of another big player into real estate finance was roundly taken as a positive.
The other reasons for enthusiasm were as follows: the repeated emergence of international money for direct real estate and the general expectation that Europe’s banks will begin releasing their distressed assets and loans into the market.
During MIPIM, the point about international capital was underlined when AXA Real Estate Investment Managers announced it had led one European and two Asian investors in a joint venture to buy Ropemaker Place in central London for £472 million (€551 million; $714 million). One of the investors reportedly was Gingko Tree Investment, a Chinese state-owned entity.
As new pockets of capital continue to open up, everyone could agree that there is huge interest in prime property in cities such as London. One example of that hunger is the State Oil Fund of Azerbaijan, which in December made a £177 million (€217 million; $287 million) investment in an office property at 78 St. James in the West End of London. A representative of the State Oil Fund was said to be at MIPIM seeking to further relations and lunched with luminaries such as Pierre Vaquier, global head of AXA Real Estate.
All about the investors
Plenty of institutional investors made it to Cannes to speak to fund managers and gauge the opportunity in Europe as a whole. A random list of those with full diaries, especially on Tuesday and Wednesday, included Hanadi Shabakouh, head of real estate investment fund division at the Kuwaiti Fund for Arab Economic Development; Mark Shoberg, managing director of investments at University of Texas Investment Management; and Craig Rochette, investment manager at the Teacher Retirement System of Texas.
One group that is highlighted to reach Europe’s shores next, probably for core real estate, is the fraternity of Australian superannuation funds. Certainly, PERE is aware of at least one such investor that is busy formulating plans as of the time of this writing.
On the other hand, Ivanhoe Cambridge, the real estate arm of Caisse de dépôt et placement du Québec, has been investing in Europe for years. Bill Tresham, president of global investments, and his team were on hand inside the ‘bunker’ of the Palais des Festivals, where the Canadian pension had a stand. As well as having a raft of developments under its belt, the Ivanhoe Cambridge team has been busy showing its opportunistic capability by partnering on distressed property deals. The investor revealed that it had teamed up with TPG Capital and Patron Capital on the takeover of Dutch property company Uni-Invest – not something that has been widely publicized.
MIPIM director Filippo Rean indicated that the number of sovereign wealth funds and pension plans present at the property show is a noteworthy trend. “This year, we welcomed a record 60 pensions and sovereign wealth funds to Cannes,” he said.
Brad Olsen of Atlantic Partners, who appeared to be using the JW Marriott hotel as an unofficial base for meetings, said one feature he had picked up on was the way US investors in particular were beginning to think about Europe seriously. The question, though, was to what extent they actually were writing out checks to fund managers.
The theme of US investors and their attitude towards Europe was revisited constantly during MIPIM. In a suite on the first floor of the Majestic hotel, Peter Reilly, head of real estate for Europe in JPMorgan Asset Management’s global real assets group, had little doubt that there has been a big change in sentiment among Americans.
Around nine months ago, US investors for the most part were unable or unwilling to entertain serious discussion about investing in Europe, Reilly noted. However, since the start of the year, that has changed. Plenty of US investors have been making the trip to London to talk further, he added, and some were present at MIPIM.
Russell Jewell, head of private equity at Paris-based AEW Europe, which has launched a capital-raising program for European opportunistic investing just as JPMorgan has done, said the bigger question was ‘how’ investors would enter the fray. During a panel session hosted by PERE, he noted that he had just returned from the US, where conversations about programmatic investing through clubs, separate accounts and joint ventures were taking place as much as those about commingled funds.
Overall, Jewell confirmed: “We find it is easier to have a conversation with US investors about opportunistic investing in Europe than it is to have one with Europeans. The positivity in the US is flowing through their veins, and they are starting to think about where they go next.”
The value-added proposition
Despite the positivity, there was an undercurrent among some fund managers in Europe. In a room of an apartment block away from the heaving bars and cafes, PERE attended a meeting with a large pan-European real estate investment manager that is contemplating a value-added investing proposition for investors.
It seems real estate fund managers are beginning to see a broadening of interesting deals involving quality income-producing real estate that nevertheless require asset management to make decent long-term money. The strategy involves going up the risk curve by taking some leasing risk, for example, but keeping things within acceptable parameters to deliver a gross return in the 15 percent to 17 percent range.
This theme of ‘value add’ was detectable at MIPIM, and it reveals a conundrum. In order to face sovereign, currency and legal risk in Europe, some US investors want to see opportunistic returns of 20 percent-plus coming out of the region. Meanwhile, there are European investors who don’t believe this is possible anymore and think those returns will be in the mid-teens at the very best. Therefore, the compromise for investment managers is to launch something that most investors will agree has ‘acceptable’ higher risk.
In fact, firms already are acknowledging that perhaps a commingled fund is not the answer at all because of the tensions just described. Instead, the answer might lie in a value-added segregated account, joint venture or club-type structure involving fewer like-minded investors.
Dogs of war
Meanwhile, at the sharp end of opportunistic investing lies distress, and most observers believe that opportunities will come out of the banks, whether in Spain, Germany, the UK, Ireland or elsewhere.
Indeed, Spain was very near the top of talking points. One real estate professional was amazed how many people, particularly investors outside the Eurozone, were asking about it. Another top-ranking investment professional, however, expressed some reservations, agreeing that perhaps foreign investors were getting excited without fully understanding the risks and challenges of a market such as Spain.
There are rumors that one private equity real estate firm has struggled with an investment in a loan portfolio made a while ago, given that values have since fallen. A Madrid-based expert with a good vantage point counseled that the local banks are not to be underestimated. Though they might be deemed forced sellers, their extensive branch networks meant they knew exactly the value of properties on their books better than anyone, he explained.
There was a sense at MIPIM that European loan opportunities will require patience as well as an aggressive, persistent mentality. As one person put it, the ‘skillset’ required to deal with problem loans is to be a pit bull. If you are not a deal person who goes home and is psyched because you managed to rip a few more euros out of a guy’s throat, then maybe Europe isn’t for you.
Perhaps the people of Cyprus can identify with that mindset. After all, they feel similarly attacked by the International Monetary Fund and the European Central Bank. Although the European bankers’ efforts have been stymied so far, no one can say for sure how long the people of Cyprus will avoid their day of reckoning.
Amperes in the amphitheatre
‘Positivity’ is ‘flowing through the veins’ of US investors, leading many to look to Europe
On Wednesday, March 13, PERE was on stage in auditorium A of Les Palais des Festivals to lead a conversation on global private equity real estate. Joining us in the discussion were Michael Levy, chief financial officer and chief operating officer at Morgan Stanley Real Estate Investing; François Trausch, chief executive officer for Asia Pacific at GE Capital Real Estate; and Russell Jewell, head of private equity at Paris-based AEW Europe.
Levy kicked things off by explaining how the US was seeing most parts of its economy improve, which had translated into “better fundamentals” for the real estate sector. For example, the energy boom created by shale gas and fracking activity has moved economies that never would have been considered before, he added, noting how North Dakota and Ohio have become hotbeds of activity. All of that activity has been reflected in the capital markets, with CMBS making a “comeback” and low base rates leading to low borrowing costs for real estate investors, he said.
Despite fewer private equity real estate participants, Levy noted that significant amounts of capital are being raised. Indeed, according to PERE Connect, some $55 billion was raised by private equity real estate funds in 2012 – a 100 percent increase over the year before. Still, the larger distressed transactions already may have been done.
“There are a lot of smaller transactions taking place now,” Levy said. “The multi-billion recapitalization opportunities have mostly worked through the system in 2010 and 2011. Today, the new owners are seeking exits for them – often breaking those portfolios up and selling them in smaller groups in order to maximize pricing levels.”
However, Levy also noted that the world is in transition. “At the margin, you see redevelopment and development opportunity in the US, as well as other opportunities for higher returns. Even more interesting are the conversations about when and whether the opportunity is coming in Europe – not only among US investors, but Asian investors as well. It is clearly dominating discussions we have today.”
AEW’s Jewell just returned from the US. “We find it is easier to have a conversation with US investors about opportunistic investing in Europe than it is to have one with Europeans,” he said. “The positivity in the US is flowing through their veins, and they are starting to think about where they go next.”
Jewell continued: “There are still a few investors that think there are enough opportunities in the US, but I would say the majority definitely are looking more towards Europe. The bigger question is how they will do it.” He noted that conversations suggest programmatic investments in clubs, separate accounts or joint ventures are taking place as much as commingled fund investments.
While US investors like the idea of opportunistic investing, Jewell pointed out that many are nervous of leverage. “Some have preferred to talk about 15 percent or 16 percent returns using lower leverage rather than getting to 20 percent returns using 70 percent leverage,” he said.
Morgan Stanley’s Levy acknowledged that his firm is experiencing demand from investors for shorter lifespans for funds. “We are starting to see shorter investment periods – eight-year fund lives and two- year investment periods – to address greater volatility and less visibility in markets,” he said.
In Asia, it is Japan that has attracting distressed investors, but other opportunistic returns would come from growth markets such as China, said GE Capital’s Trausch. Just as important has been the export of capital out of Asia, which started with Korean investors and now encompasses Chinese entities, he noted. Major markets in Europe, such as London, have been the prime beneficiaries of that trend.
A collection of short news items and anecdotes coming out of the MIPIM property show
The weather was a huge talking point, as snow in places such as Paris, London and Frankfurt delayed a significant number of delegates from arriving in Cannes per their original schedules. PERE’s own Jonathan Brasse was one of those affected, as delays at Paris Orly airport scuppered plans for him to arrive on Tuesday afternoon. His duty leading a global private equity real estate discussion at the Palais des Festivals on Wednesday morning had to be handed off to PERE editor Robin Marriott. Even in Cannes itself, the weather was not its usual sunny self as delegates needed umbrellas close at hand for sudden showers.
Contrary to the weather, there was a general enthusiasm that Europe was past the worst economically speaking. Part of the enthusiasm stemmed from a perception that there is an increased availability of debt priced at a “number that works for people,” as one delegate put it. Adding to some joie de vivre, property services firm Cushman & Wakefield predicted lending to European real estate would increase by 22 percent in 2013, following an increase of 29 percent over the past 12 months, thanks in part to an increase in the number of debt funds being raised and new entrants to the market.
The mayor of London, Boris Johnson, visited the property show for the fourth time, this time with a headline-grabbing plan to create Britain’s largest ‘floating village’ on a six hectare site at London’s Royal Victoria Dock. Johnson challenged investors to come up with spectacular designs for the project. Also in Cannes for the event were the mayor of Moscow, Sergey Sobyanin, and the mayor of Istanbul, Kadir Topbas.
This year’s country of honour at MIPIM was Turkey. John Forrester, DTZ’s chief executive for Europe, the Middle East and Africa, said: “Turkey was a great choice for Country of Honour. What we have seen at MIPIM is that investors in particular are looking for new opportunities and to increase their understanding of markets beyond well-established territories in Europe.”
Delegates noted how Chinese money was flowing into prime UK real estate as British Land announced the £472 million (€551 million; $713 million) sale of Ropemaker Place, a 593,000-square-foot office in central London, to Frasia Properties Subsidiary, which is a consortium led by AXA Real Estate Investment Managers that reportedly includes Gingko Tree Investment, a Chinese state-owned firm. Meanwhile, UK property professionals remained impressed with British Land, which also announced plans to raise around £500 million via a share placement to help boost investments. Proceeds from the share placement and the sale of Ropemaker have given the UK real estate investment trust a £1 billion war chest to buy London offices and south east retail property.