Investors are venturing to Spain, Italy and even Greece in search of bargains on commercial property, reasoning that the lure of higher returns trumps the risk that Southern Europe will remain mired in sluggish growth.
For much of the extended slowdown that plagued the European Union, many investors focused on offices and high-end residences in cities such as London and Paris, where real-estate markets came through the euro crisis in relatively good shape.
While rents and occupancy levels in Southern Europe remain anemic, the region is benefiting from the widespread belief that the worst of the financial crisis has passed.
“People are just waking up to the fact that Spain didn’t fall into the Mediterranean,” says Eric Adler, chief executive of Prudential Real Estate Investors, which invested about $1.5 billion in European real estate in 2013 and is hoping to do more this year.
Last year, investors purchased €177.8 billion ($245.3 billion) of commercial property in Europe, up 17% from the prior year and the highest since 2007, according to Real Capital Analytics.
In Southern Europe—comprising Spain, Portugal, Italy and Greece—transactions picked up speed in the fourth quarter, with deals doubling from a year earlier to €3 billion, according to broker JLL, formerly Jones Lang LaSalle.
Among this year’s transactions in the region was the €61 million purchase by a UBS real-estate fund of a shopping center in San Sebastian, Spain with 62 stores and 11 restaurants.
International investors are even looking at Greece, the longest-suffering country in the euro zone, where the economy has shrunk more than a quarter since 2008.
Houston-based Hines is considering investing in the Greek hotel and retail sectors because tourists are “pouring in” while many property owners and their lenders remain financially distressed, says Michael J.G. Topham, chief executive of Europe for Hines, which controls assets valued at approximately $25.2 billion.
“They need us,” Mr. Topham says.
The surge in real-estate deal volume in Europe is part of a broader trend resulting from the low interest-rate environment in much of the world. Pension funds and other institutions are increasing allocations to real estate in the hunt for higher returns, something Spain and Italy both offer.
For example, the largest public U.S. pension funds last year increased their allocations to global real estate to 7.4%, according to Wilshire Consulting. Before that, the high-mark for this group was 6.4% in 2008, says the National Association of State Retirement Administrators, which tracks public pension-fund investments.
Opportunistic investors also are scooping up portfolios of distressed property loans that European banks are trying to get off their balance sheets. Commerzbank AG has seen high demand for Project Octopus, its portfolio of Spanish property loans with a face value of €4.4 billion that will be one of the biggest such deals in Europe this year.
Some of the big investors in Europe continue to be U.S. private-equity funds that showed up early, including Blackstone Group LP, Lone Star Funds, Apollo Global Management LLC, Cerberus Capital Management and Kennedy Wilson Holdings. Pacific Investment Management Co., the giant Newport Beach, Calif., asset manager, also has been looking at deals.
Blackstone Group last week closed a €5 billion Europe-only property fund, the largest ever of its kind, which it raised in just six months. Recent Blackstone deals include a purchase of a portfolio of Italian offices and retail centers from AXA Immoselect, an open-ended German investment fund, for about €180 million, according to a person familiar with the deal.
New players also are showing up on the Continent from countries such as South Korea, Malaysia and China. Chinese property developer Dalian Wanda Group, for example, purchased an iconic Madrid skyscraper for €280 million from Spanish lender Santander, according to data from Real Capital Analytics. At the end of last year, sovereign-wealth fund China Investment Corp. acquired Chiswick Park, one of London’s largest office developments, from Blackstone for 780 million British pounds.
Other sovereign-wealth funds are turning to European real estate, too. Such funds invested €13.6 billion in European real estate last year, a 31% increase in activity from 2012, Real Capital data show. Globally, allocation to real estate from sovereign-wealth funds increased only 9%.
Until recently, investors in European real estate had little appetite for risk. Most of the deals involved trophy, fully-leased office buildings, shopping centers and other properties in cities like London and Paris.
But demand for those so-called core properties drove up prices to the point that some are now at record values, reducing yields for buyers. For example, an investor buying a core property in London today would wind up with less than a 5% annual yield from the building’s income.
By contrast, in markets such as Spain, yields are over 6%. That has set off a rush for property in that country, putting upward pressure on prices, according to real-estate executives in Spain. “It wasn’t like the sun slowly going up,” said Rupert Lea, head of retail for real-estate broker Cushman & Wakefield Inc. in Spain, describing the increasing interest. “It was like a ricochet.”
Some owners are taking advantage of the interest by putting property on the block. The Spanish region of Catalonia, for example, plans to meet with international investors in New York this week to drum up interest in a portfolio of 13 buildings in Barcelona.
The roadshow was in London last week. Even the investor presentation in Barcelona was conducted in English.
“Many investors we are meeting have mandates to invest in Spain,” said Isabel Tornabell, a director in Catalonia’s real-estate office. “That’s something new…they are looking for what to buy, not if.”
But as demand increases for property in riskier markets, some experts are warning that investors are moving too quickly given the tepid pace of the economic recovery.
“When the pendulum swings back, it almost always overshoots,” said Ric Lewis, chief executive at Tristan Capital Partners, a private-equity firm that recently raised €950 million for an opportunistic fund aimed at buying distressed European assets. Demand for the vehicle was €5 million oversubscribed, he said.
Mr. Lewis said competition has got hotter in the past three months, and he often gets outbid for individual assets by as much as 30%. “I think we’ve making a pretty good bid on the fundamentals. And we’re wrong by 30%? These aren’t complicated assets,” he says.
Source: stream.wsj.com/
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