For a couple of years now, it has felt like five major tour operators have been lined up in London trying to attract passing tourists for a tour of major European cities.
The red-shirted, peak-capped salesman with a clipboard stands outside one bus stop telling passers-by that they can tour Madrid, Paris, Milan, Frankfurt and Amsterdam in 10 days if they buy a ticket. At the next bus stop, someone else in a short-sleeved blue shirt is selling basically the same tour of Europe’s hotspots, and next to him is another in green, another in yellow and another in orange.
Similarly, European private equity real estate fundraising has been a competition between a handful of the largest, most popular fund managers, and there is nothing to criticize in that. Investors have had a decent choice of opportunistic vehicles from the likes of Perella Weinberg Partners, Orion Capital Managers, Tristan Capital Partners, Lone Star Funds and The Blackstone Group. Why not go on a tour of Europe’s distressed real estate markets organized by a firm that knows its way around?
After all, the contract is simple. The tourist (LP) wants to go to interesting places and, for a fee, the tour operator (GP) will determine how they get there. The problem, however, is there hasn’t been much room for the niche or single-destination operators. While managing to get some passengers, trade has been slow and difficult for them as the bigger, glitzier operators have filled their vehicles.
However, things could be about to change for those single-destination and boutique operators. Real estate professionals are predicting that these managers should find it easier to raise capital this year given that there is less competition now. Indeed, big funds such as Tristan and Orion are now out of the market at a time when there seems to be more LPs looking to allocate to European real estate.
Anecdotal evidence aside, data emerged last month to back up this view. The global Investment Intentions survey, jointly produced by the European Association for Investors in Non-Listed Real Estate Vehicles (INREV), the Asian Association for Investors in Non-Listed Real Estate Vehicles (ANREV) and the Pension Real Estate Association (PREA), showed that investors, on average, expect to increase their property allocations to 10.3 percent from 9.5 percent.
Furthermore, the survey suggested that interest in joint ventures and club deals, which still remains high, may have passed its peak. At the same time, fewer investors are planning to reduce their allocation to the non-listed sector. Only 18.5 percent are saying that now, compared with 30.5 percent in 2013.
On the other hand, investors did confess to INREV that the availability of suitable products emerged as the main reason not to invest into European non-listed property funds for 55 percent of them and that they prefer value-added funds at the moment. Then again, the line between value-added and opportunistic is itself a muddy area in terms of returns expected and style of investing.
At some stage last year, many investors wondered whether the big funds being raised in Europe actually would lead to an overhang of capital. However, JPMorgan issued a riposte, pointing out several things. First, the amount of capital –
€38 billion raised – is small compared to the size of the market opportunity. And, of the €38 billion raised, some €12 billion of that was raised by a small number of large global funds. In fact, only €4 billion was raised for focused property repositioning strategies in Europe, providing hope for those other fund managers.
Certain GPs – and indeed their placement agents – certainly are hoping the going will get easier for them now that the large pan-European managers have finished fund-raising. It is the likes of Resolution Capital, Ares Management (formerly AREA Property Partners), Europa Capital and Frogmore Property that should benefit this year.
To re-use the tour operator analogy, there are tourists that still want to go to places in Europe, and they must find ways of satisfying their allocation of capital. If the big European operators have left, then these investors will have to consider their options. Or, perhaps the visitor already went on the Continental tour and is looking now at something more bespoke.
As one placement agent said, one shouldn’t forget either that, in Europe, consultants are a powerful bunch, recommending mangers to their clients that can gain exposure to European real estate. If the big ones are no longer available, the advice of the consultant will be to look at the smaller, more targeted ones.
This does beg the question whether some fund managers got it wrong by going to the market too early. Nevertheless, managers that focus on more focused opportunities must stand a better chance of becoming a beneficiary of capital compared to 2013.
Two years ago, those in European private equity real estate were looking at all of the funds in market and calling it a ‘capital crunch’. With the big funds now done and more investors looking to allocate to European property, it could be that 2014 is more of a ‘capital glut’.