‘Risk-on’ switch is powering up private equity real estate buyers


writes Jane Roberts

Jane editor cut out2 for webTwelve months ago, life was still extremely tough for most managers of European-focused private equity real estate funds.

There was equity capital for property and plenty of distressed assets, but investors with money were still extremely risk-averse, while US endowments and public pension funds, the clients that had been the mainstay of opportunity funds, were shunning Europe (see Special report, Private equity).

Fast-forward a year and the picture is changing rapidly, so much so that the new horrible buzz phrase at property functions is that the ‘risk-off’ environment has become ‘risk-on’.

There is a widespread feeling that the holders of distressed assets have become more willing sellers. The notion that most transactions are of core assets to sovereign wealth and pension funds is no longer correct.

By the end of 2012, opportunistic buyers such as Cerberus, Lone Star, TPG and Blackstone were up there too, according to Real Capital Analytics’ figures (see Analysis, Capital flows to property 2012).

So is this one of those moments in property markets when capital starts to flow in a new direction – an inflection point?

JP Morgan Asset Management believes it is. In a note called Carpe Diem, the bank’s real estate asset management team says 2013 will be to opportunistic investing what 2009 was for core and that the window to invest will last for a couple of years.

They are not suggesting that everyone, everywhere will suddenly switch strategies and rush out to buy riskier assets, or that European economies will return to vigorous growth now they have stepped back from the eurozone break-up brink.

But their arguments for why more distressed property will come to the market this year and next seem sensible. Paraphrased, they are:

  • That the banks still standing are on the road to recovery, with their performance relatively improving. This allows them to start writing down the value of assets on their balance sheets, helped by regulators delaying Basel III’s full implementation.
  • This process means banks can afford to sell more at prices that buyers want to pay – in the jargon, the narrowing of the bid-ask spread.
  • The ‘pretend and extend strategy’ adopted by banks after the financial crisis was partly based on the hope of recovery and the re-emergence of growth, which would inflate values. But that hasn’t materialised, leading to further deterioration in values for assets held on balance sheet and making their disposal increasingly urgent.
  • Distressed sales are reaching the market from a variety of sources, including governments, defaulting CMBS deals and open and closed-ended funds. All this means 2013 will be a vintage year for opportunistic investors, JP Morgan says.

Another piece of good news is that fixed-income investors are increasingly interested in buying structured property debt (News,’Toys R Us puts CMBS into play to refinance UK debt‘ and Analysis, ‘More CMBS may be served up as investors regain appetite’).

This means CMBS or high-yield bonds issues are again an option for refinancing some of the pile of maturing property debt. Time to seize the day?