Europe dominated private real estate fundraising in 2014, raising a total of $40.3 billion, which is 82 percent more than in 2013, according to research from PERE’s Research & Analytics division. According to fund managers and investors, this improvement shows no sign of abating due to an expected influx of US cash.
One fund manager speaking at PERE’s Investor Council held in Versailles in late March revealed that he raised €250 million for Spain in only five months, primarily from US investors. Another European fund manager in attendance said he was also on the fundraising trail, and targeting US investors, but declined to give his target away.
Rockspring Property Investment Managers, which is nearing a €150 million to €200 million first close on their latest core-plus/value-add fund TransEuropean VI, is also zeroing in on US capital. Rockspring’s chief executive, Robert Gilchrist, told PERE that his firm is determined to raise meaningful capital from the US.
These fund managers targeting US investors are doing so at a very opportune moment as many macroeconomic factors are making European real estate one of the most attractive asset classes to park capital.
Firstly: the falling Euro compared to a relatively strong dollar is making real estate investments cheap, according to one European fund manager who recently closed a value-add fund. A recent DTZ report backs this up. Despite capital targeting real estate on the continent falling by 1 percent to $141 billion, in Euro equivalents, available capital actually rose 12 percent, but the fall in the Euro wiped out this gain.
Dollar investors will be able to make their capital go further compared to six months ago, said Nigel Almond, head of capital markets research at DTZ, in the report.
The European fund manager says that although much of the talk in Europe has been on how low yields are US investors tend to look at how far away the market is from certain peaks. For instance, how far below peak are rents and how far below peak are capital values?
The fund manager adds that if you don’t look at yields but capital values per square foot in dollar terms the values are a long way below peak. That means it is fundamentally easier for institutions in the US to make a case for committing to European real estate. As an aside, he also says that a number of large US institutions are coming back to funds having declared previously that they were moving away from giving managers discretion which aids fundraising.
The second macro condition that makes European real estate look good in the eyes of US investors is the rhetoric surrounding interest rates on both sides of the pond. The industry was buoyed on renewed optimism among investors that the Federal Reserve would stay on track to raise interest rates later this year. On the other hand, European Central Bank (ECB) president Mario Draghi suggested that low interest rates in Europe will likely persist as the ECB continues its bond-buying program for another year or more. BlackRock’s chief executive Laurence Fink also said that he expects to see more and more people moving into alternatives, including private equity real estate, in Europe due to low interest rates.
The last, and somewhat pseudo-macroeconomic condition, which looks set to play into the hands of European real estate fund managers is that Blackstone isn’t fundraising at the moment. The Blackstone effect can almost be considered a macro event in itself now given its combined equity commitments these past few years have been larger than the value of all the goods and services produced by many countries. The firm put most of the finishing touches to a record $15.8 billion global property fund in March and raised the largest opportunistic fund in Europe, Blackstone Real Estate Partners Europe IV, which attracted $8.7 billion between two tranches in 2014.
The impact of Blackstone in fundraising mode say some fund managers is that the firm, and other mega fund managers such as Lone Star Funds which, recently held a first and final close on $5.5 billion, simply hoovers up investors’ capital allocation. One fund manager moaned to me that every 18 months the firm appears on the horizon and investors are left only available to write small tickets, if at all, once they have clambered into a Blackstone fund.
So, with no Blackstone to contend with, low interest rates in Europe and a relatively strong dollar, European fund managers should have little trouble in attracting capital from the US, for a short while at least.