Cannes, France: It looks like a second Normandy landing here in the south of France: As Europe’s recovery settles into a long upward leg, U.S. investors are invading, grabbing buildings and real estate securities like they’re going out of style.
And that surge will likely multiply the shares of real estate investment companies beginning to emerge across the 11-nation Euro Zone, with profound implications for Old World ways of property management.
Those are only some of the trends evident at the recent MIPIM, the world’s premier property show, which drew a record crowd of 12,212 attendees and 1,629 stands from 61 nations, a 25 percent rise over 1999’s turnout.
U.S. money managers’ exploding interest in Europe was felt throughout the mammoth gathering here at Cannes’ Palais des Congres. And that commitment is rising, said Jeffrey H. Title, managing director of mortgage and real estate investments for New York-based Teachers Insurance and Annuity Assns. (TIAA), the largest U.S. pension system.
ABOVE RIGHT: Cannes’ vast Palais des Congres could accommodate a
MIPIM 2000 turnout 25 percent over 1999 and 50 percent over 1998.
‘We’ve put US$400 million into European investment since 1995, but this year alone we’re planning to put another $200 million across the board in the UK, France, Belgium, Italy, Spain and Portugal,” Title said at one MIPIM session. “We’re not in this for opportunism. We’re a long-term investor, rather than speculator, and we take standing investments, rather than developments. Still, we’re looking for returns in the 11 percent range.”
Similarly, Morgan Stanley Dean Witter Managing Director Ted Bigman noted, “Since 1997, we have put $500 million into indirect investment in European securities. Pension funds are predominantly focused in direct investment, but our strategy is to go into indirect investment, primarily in securities shares.”
Equally bullish was Edward Siskind, head of the Whitehall Fund at Goldman Sachs International UK, which has 10 percent of its $50 billion in worldwide real estate investment located in Europe. “We expect to put $300 million to 500 million in European equity investments this year in all sectors, product types and properties,” he noted.
U.S. Investors Advantaged?
What’s all the fuss? Some think U.S. investors, schooled in a half decade of blistering U.S. growth, may be particularly primed to capitalize on Europe’s brisk recovery.
Said Morgan Stanley’s Bigman: “The paradigm shift is coming to Europe. The pan-European listed public real estate market is four to five years behind the U.S. market. U.S. investors tested in the bracing combination of high productivity, low inflation and deregulation may be better able to take advantage of the same phenomenon now emerging in Europe.”
The Yanks may also bring the outsider’s fresh view.
“European managers, saddled with non-performing assets hung over from the downturn, may be less nimble at grabbing new opportunities at low prices. Americans don’t have this problem, and may move quicker,” said Bigman.
Across-the-Board Openings
Where are the opportunities?
Said Title, “All markets are up. Delinquency and vacancy rates are down across the board.”
Added Bigman: “In the tradeoff between growth and value, growth is in phase, and value is out of phase ”
Though big players are shy at showing their hands, some at Cannes revealed preferences.
Said Goldman Sach’s Siskind, “We’ve put quite a lot of money into France in the past two to three years, and we still think Paris is a very attractive market. But we’re also in Germany and Italy. In view of the size of our fund, we’re looking all over, so we’re even taking a close look at some things in Central Europe.”
Observed Blackstone Group Vice President Chad Pike, “We think major urban capitals’ growth drivers will keep their value through good and bad times. So we’re putting our emphasis in cities like Paris, Rome, London, Amsterdam or Geneva, rather than Charlotte, N.C., or Tulsa, Okla.”
Some are more cautious about Central Europe.
Said Title, “There are some interesting situations in Central Europe, but for these markets to take off, you’re going to have to see some secondary trading of assets by those who’ve held them four or five years. Investors are going to have to see that if they go into these markets they’re going to be able to find buyers and transfer capital when they want to get out. ”
Even smaller markets are drawing takers. Noted Bigman, “We’re pretty bullish on Sweden. It’s earlier in market recovery than other parts of Europe, and Swedish management is doing a good job of providing transparency.”
REITs Have the Edge
Sidelined during a decade of decline, oversold property stocks may also offer opportunity.
Said Bigman, “We look at how companies are trading compared to their underlying asset value. Spanish property companies are selling at a 40 percent discount, which has to be an opportunity. We’re also looking at the old-fashioned listed UK companies, not because the UK is in an early stage, but simply because the companies are so cheaply priced.”
But some ripe-looking markets lack cash vehicles.
Said Bigman, “We’re very interested in Italy. But we can only buy publicly listed real estate securities, so it’s a pretty small investable universe at this point. There are simply not enough investment vehicles.”
Most feel the continent’s surging capital tide will flow to real estate investment companies, not to direct ownership.
“A few million dollars in indirect securities investment can get you access to every asset class across the world, while the same direct investment would require hundreds of millions of dollars,” Bigman observed.
Some feel U.S. investors’ surge may alter Europe’s more traditional investment pace.
Noted Pike, “We haven’t seen much European capital in the riskier ventures like hotels, development projects and land speculation, This is where we’re focused. If you apply 60-to-80 percent leverage on these kinds of ventures, you can get 20-to-25 percent returns. But you have to tolerate higher risk. You can’t get that kind of return on fully leased office buildings in Central Paris, Rome or London.”
Caveat Emptor
Still, Yanks face some daunting challenges in Europe’s dizzying array of national markets.
Said Goldman Sach’s Siskind: “Americans often look at Europe as one entity, and this can be dangerous. An investor has to understand that Europe is a mix of vastly different cultures, economic environments, and legal and taxation systems. Each has to be understood individually to succeed.”
Added Bigman, “If we could improve companies’ disclosure in Europe, I think we could get more attractive capital coming, but I think they have a long way to go.”
Nonetheless, some see a glimmer of light.
“Five or 10 years ago, you had to find the one guy in central London who knew all the leasing terms. Well, we saw some data-mining software at some continental firms’ MIPIM stands that we still haven’t seen in the U.S. So things are improving,” observed Blackstone’s Pike.
Added TIAA’s Title, “I think Europe’s growing sophistication will lead to a more transparent market, and this will facilitate new investment inflow.”
The Euro Zone’s increased internal capital flows are broadening the market, Siskind asserted: “We’re seeing German investors in France and Italy, and French investors everywhere across the Euro Zone. This sends a positive message and gives the market some depth.”
Could the rush create a bust?
Observed Pike, “Maybe we can learn from the U.S. We went through a U.S. mini-crisis, particularly in Dallas. You have to manage these things. If you give money to developers, they’ll build.
“In Dallas, there’s a lot of land. But local authorities engineered a soft landing; lenders stopped lending; banks imposed strict controls. Developers had to lease up their assets, so things settled down.”
— Site Selection European correspondent Michael Sullivan is based in Juan Les Pins, France.
Phone, (33) 493-673-877; e-mail, 100664.2415@compuserve.com
