Industry in a merry state at Expo Real

At Expo Real this year, most people were smiling. There was a sense that anything was possible and that wasn’t just because of that warm glow you get after a couple of steins.

There was a conviction in those Munich air hangers that for every asset or platform on the market there would be a buyer. For every reawakening market there was a tonne of interest and not enough stock. “Other than somewhere like Ukraine where there’s political instability, I can’t think of a single market we’d rule out,” a senior director at one of Europe’s biggest institutional investors said.

It’s a good job too because there was talk of plenty of new opportunities coming to the market from exotic European jurisdictions. Distressed portfolios in the likes of Hungary, Denmark or Portugal are coming to the fore as a wide appetite for risk and yield drives investors into these markets and minimises the losses sellers and state “bad banks” are having to crystallise.

That is not to say that there is any less attention being paid to core markets. Plenty of people were aghast at current pricing in the UK, but no-one could be found who thought it would be cooling off soon. If London’s Gherkin is going to be sold for 4% that just means there’s a new wall of money happy to keep piling in, with Far Eastern institutions increasing their real estate allocations, and a permanent repricing of core assets will take place… or so the theory goes.

Spain was still the enigma everyone wanted to talk about following a pricing realignment more rapid than anyone could remember. Is the investment market rushing ahead of the leasing market and broader growth?

Well, basically, yes, in a word – everyone could agree with that. But does that mean Spain is actually overpriced in relative terms? What else are you going to do with your money? There isn’t really a consensus about this: one view was that even though it’s loads more expensive than it once was, it’s a bit cheaper than most places to buy a shiny building that you can stick on the front of an investor pack. A positive litmus test that was trotted out was that Spanish retailers have asked for so many rent reductions that they’ve either gone bust or can now afford to pay again.

Others, however, complained that the number of Spanish transactions doesn’t match the hype, suggesting, in the phrase du jour, that the ‘bid-ask spread’ remains too wide for anything other than prime. One adviser said Commerzbank’s brilliantly-timed sale earlier this year of the €4.4bn ‘Octopus’ portfolio of property loans at a blended discount of around 20% wasn’t doing the secondary/distressed market any favours; sellers were using it as a benchmark, holding out for high prices.

There were mutterings and frustrations about Sareb not auctioning off assets fast enough, with no-one able to do as many deals as they would like, in a similar fashion to the way those same players were moaning about Lloyds or RBS three years ago. Much as it might irritate those with capital, Sareb seems to be playing a good game; those two UK institutions have come out relatively well.

Similarly, Italy as another big southern European economy that got smashed to bits was a market with potential, but one that hasn’t caught fire yet. The country’s recent decreto competitivita law “is a great thing” said one debt adviser, adding with feeling “shame France can’t sort out some of its legislative lending issues”. Allowing lenders without banking licences on the ground to lend without punitive taxation, the law change is expected to improve Italian debt liquidity and hence property values.

Generally debt is getting dramatically cheaper for the best assets and for the best borrowers. How quickly banks would be following the geographical path of their optimistic borrowers was not quite a dead cert – even in that most darling of markets, Spain, gearing levels are still conservative.

Lenders have definitely got keener on the Netherlands. A senior fund manager at one of the biggest investment houses who’s been restructuring funds there said margins on senior debt had halved – in just six months. Days before Expo opened, Deutsche Bank priced a Dutch CMBS giving the borrower 57% leverage (yes, called ‘Tulip’) at a blended margin of 119 basis points.

Admittedly, hardly any economies in Europe are actually showing any signs of growth. That of course was not really seen as a problem – everyone claimed it wasn’t being factored into their forecasts and strategies anyway. The prospect of an interest rate rise was readily dismissed as miles away (Eurozone) or not coming around the corner just yet (UK) and when it does, too slight to have any impact.

No-one was salivating over the prospect of there being a deluge of opportunities coming out of the imminent results of the Asset Quality Review and bank stress-testing process either. Investors were simply poo-pooing it as a long, drawn out process and that the banks would find a way of avoiding a mass sell-off.

None of that was enough to put any real pause in the positivity though. Carried by a wave of capital rather than much belief in any core fundamentals the industry appeared to be in a rather merry state. Here’s hoping no-one starts getting tired and emotional. Prost!