One of the more obscure types of property vehicle: Italian retail real estate funds, have been attracting a great deal of attention this summer, both domestically and internationally.
There is an estimated 20 of these funds, most of which were sold to retail investors before the global financial crisis. As a result of low liquidity and poor analyst coverage, many of these vehicles are trading at meaningful discounts to net asset value (NAV).
It is because of these discounts that opportunistic funds have paid attention, particularly this summer. “Over the last seven years, there has been about five offers for these types of funds, yet this summer there have been five offers already – though none have been successful,” said Alexandre Astier, managing director of Italian capital markets at property services giant CBRE.
One fund, Atlantic One, owned by Italian asset management firm Idea Fimit, has attracted interest from Blackstone over the last two years, while another, UniCredito Immobiliare Uno, owned by Italian real estate management company Torre, saw inquiries from Global Wealth Management (GWM) Group. Neither episodes precipitated deals. Other private equity firms, such as Capstone Equities, Fortress Investment Group and Elliott Management, have launched unsuccessful tender offers over the last few months.
“The interest is there because of the discount to NAV, but many of the offers have been unacceptably low,” he added. By Astier’s reckoning, these low bids are reflective of managers factoring in a margin of safety with Italy’s uncertain economic prospects in mind.
One Milan-based fund formation lawyer, who asked not to be identified, said a discount of around 20 to 25 percent for the good assets in the funds should be enough to prompt sales. Despite the bidding failures to date, the lawyer said the feeling in Italy was that the firms would continue to make offers and eventually succeed.
“The feeling is by the end of the year there is going to be an equilibrium and these funds will be sold. The market seems to think that this is a privileged exit for these funds because there aren’t many other exits coming soon,” the lawyer added. “With the cost of money so low, with returns on non-alternative assets so low, reward from these transactions seems to be interesting, especially for the US and UK opportunistic players in the real estate space.”
Besides the country’s retail funds, there is interest in other parts of the Italian real estate market, said Astier. “There is plenty of demand, both locally and internationally, for core assets. High street, retail and office are especially popular in Rome and Milan. The problem is a lack of sellers. Many of the assets are owned by wealthy families who have no intension of selling, whatever the price,” he said.
Compounding the seller shortage is a prevailing belief that, despite the country’s current economic state, it is turning the corner after the lows of the Eurozone crisis, the Italian lawyer said.
“It is very simple. Slowly trust is coming back. There is still a lot of wealth in Italian families and inflation has been zero. So what is changing now is a general feeling that the next five years are going to be moderate. The economy has been over the cliff edge, but confidence is returning,” he said.