European commercial real estate investors are seeing a varied set of opportunities in the region, but the residential sector continues to demonstrate the most extreme supply-demand imbalances, according to panelists who spoke today at PERE’s America Forum 2021 in New York.
The panel, moderated by Peter Plaut, executive director of London-based family office Wimmer Group, included Michael Bego, managing partner and founder of secondaries specialist Kline Hill Partners; David Christie, CEO of London-based Matter Real Estate; Javier Faus, chairman of Barcelona-based Meridia Capital; and Philip Thomas, a managing director at New York-based Marathon Asset Management.
Faus, citing the lack of housing that has hampered the growth of Barcelona’s tech hub, told attendees he believes cities that don’t have a strong housing policy will struggle over the next 20 to 30 years. This goes beyond traditional residential housing and into student housing and beyond, he added.
“Housing will be the key element to drive cities,” Faus said. “This is happening in Spain, where there is no place to live in Barcelona’s tech district. It is the same for student residences. We are huge believers in student residences – you are paying €1,200 to €1,400 a month for an apartment and that is getting too expensive.”
Additionally, there is a strong link between ESG and the availability of safe, high-quality housing. “You can’t talk about ESG and have your employees drive and hour and a half to their job site,” Faus added.
Matter Real Estate, which focuses on residential strategies throughout the UK and Northern Europe, invests mainly in single-family residential in those markets. “This space is quickly developing, with a number of investors seeking assets. There are barriers to entry and a strong mismatch between demand and supply,” Christie said.
Christie said the availability of housing is a key issue throughout the UK and Europe, noting that the rising cost of housing has outpaced salaries.
“The forgotten majority – most people who rent live outside of Central London – they are 35-55 and renting is not a lifestyle choice, it is a necessity. House prices have outstripped salaries and these people may never have the opportunity to buy,” Christie said.
The lack of housing has also made it difficult for employers to attract and retain staff, with Christie echoing Faus’s observation about Barcelona’s tech district.
“You have employers who are unable to attract staff because they can’t house them. We are working with local authorities to help solve their housing issues in urban locations,” Christie said, citing a 400-unit development the firm completed with the city of Liverpool that is yielding about 6.5 percent. “We are getting enhanced returns and we’re taking agency on the ESG issues.”
Finding a niche
Panelists noted there are many different ways they can access investments, with Bego’s firm focusing on secondary transactions and Marathon Asset Management looking up and down the capital stack.
Marathon focuses on value-added real estate and can provide bridge loans or other capital solutions if it believes that it is the best entry point, Thomas said. The firm has been very active in the leisure and hospitality markets in the UK and Europe and has been increasingly active in the residential sector, with a focus on the middle market segment.
While Marathon likes what it sees in the residential sector, Thomas said the firm sees less opportunity in industrial and logistics.
“Otherwise, Europe provides a very compelling opportunity set at this point,” Thomas said. “If you go back to the dislocation that followed covid-19, the US was down 3 percent, Europe was down 7 percent and the UK was down 11 percent. If you go about the recovery curve, you see a very patchy, very slow curve. This is a continuation of value-added opportunities being available and accessible across both the UK and more liquid markets, like the Netherlands, Germany and Spain.”
Thomas had one caveat: think about the ability to exit an investment. Greece, for example, is easy to buy in but difficult to sell in. “Exit planning is paramount to thinking about the market,” he said.
Having a global investment platform has given Marathon the ability to compare investments by geography. “We have the benefit of comparing the US to Europe through our global investment committee and we think Europe provides a very compelling set of opportunities,” Thomas added.
Finally, Bego noted secondary funds are effective at this stage in the cycle, explaining there are GPs with investors who need liquidity but need more time to execute an investment strategy. “It is a different way for private equity funds to provide liquidity,” Bego added.
Interest rate outlook
The panel believes interest rates will be low for the near-term, which is affecting where capital is being allocated.
“Interest rates are going to be low for the foreseeable future and the smart money doesn’t want to buy buildings in Hamburg or Munich at 2 percent,” Faus said, adding that other markets in Spain, Italy and farther afield are showing greater value – and maturity. “Spain used to be a boom or bust market and you had to enter at bust times. When we were raising money five to six years ago, people were saying we were too late. But we have been able to make money since then, which shows you the market is mature,” he added.
The panel sees cities that will be winners and losers globally, with Faus saying Meridia is betting on metros where young people will want to work for the next 20 years. The firm is focused on Lisbon, Madrid and Barcelona, with about 80 percent to 90 percent concentration in those cities, Faus said.