RREEF Real Estate, the global real estate firm, has produced a research paper called The Case for European Opportunistic Investing, which argues that now could be the best time to adopt an opportunistic investment strategy for the continent.
In a paper sent to clients last month and seen by PERE, the New York-based firm says regulatory initiatives will require institutions to recapitalise their balance sheets. It says: “As history has shown, events such as these can provide opportune moments to achieve outsized performance by investing in opportunistic investments.”
RREEF defines opportunistic strategies as those seeking to generate ‘attractive, risk-adjusted returns’ by identifying dislocations and illiquidity in real estate markets over the course of a market cycle.
The firm says history had shown that real estate cycles typically exhibited a similar pattern over long periods. It also found that in Europe, total returns for European opportunistic strategies over an eight year period between 2002 and 2012 were 11.7 percent, beating the 4.8 percent total returns for value added over the same time frame, and the 2.8 percent for core. Meanwhile, returns for the EuroStoxx 600, which represents large, mid and small capitalisation companies across 18 countries of the European region, were just 4 percent.
Notably, in both Europe and the US, RREEF says value-added strategies underperformed significantly in a five-year period. Conventional wisdom would hold that value-added performance should deliver total returns between core and opportunistic, it says. However, the firm did not observe a consistent pattern of relative performance in either Europe or the US. The report says: “Our general belief is that value-added strategies tend to rely on fundamental and economic growth to achieve their total returns. In contrast, core tends to rely more upon income whereas opportunistic may rely more upon structuring and a low investment basis to achieve their total return. If the growth period is not long enough, then value-added funds may not have sufficient periods of time to succeed.”
Additionally, RREEF found that over a 17-year period, investors entering the opportunistic space intending to invest across multiple cycles and during different phases of the cycle without regard of entry point timing, were provided with a superior risk-reward trade-off relative to core and value-added strategies.
Mark Roberts, managing director at RREEF and global head of research, and Simon Durkin, director and head of European research, told PERE that some investors had come around to considering Europe as a place to invest opportunistically.
Roberts said: “Our thesis was to discover how higher-returning strategies perform relative to core, and also to try to give investors a better indication of when they should allocate more to real estate.” He explained that “risk aversion” towards Europe began to come down towards November and December last year when some US economic indicators began to look more favourable. “Now more people are looking at Europe,” said Roberts. “Whether they are investors from the US or Asia, I think there is belief that says ‘maybe things are going to play out differently in Europe because there isn’t a Federal Reserve’. The European Central Bank (ECB) does not have the mandate that the Federal Reserve has.”
Added Durkin: “Market dislocation, and hence opportunity in Europe is being driven by as diverse a range of factors as the source of the economic problems. It is not the same single problem facing Italy as it is in Spain.”
He said countries were more likely to develop local solutions to improve liquidity. To raise capital ratios, banks may need to sell assets more aggressively than their US counterparts, he explained. Also, to respond to drastic austerity measures, governments may need to sell assets, said Durkin.
For more on the report, click here.