Against a backdrop of destabilizing election results in Greece and France, a panel of real estate executives whose companies invest in Europe addressed the ULI Spring Meeting in Charlotte, North Carolina, attempting to answer the question: “What happens when Europe gets the flu?” Their most definitive answer was that investment opportunities arise – but not for the faint of heart.
The good news, according to John R. Herbert of HSBC Bank, is that by some measures, the European debt situation is actually better than that of the United States. Bad news includes sky-high unemployment in Spain and a new French president, Francois Hollande, who promises to roll back the retirement age from 62 to 60, raise the top tax rate to 75 percent, reduce the work week to 35 hours, and renegotiate that country’s fiscal pact with Germany.
Scott Malkin of Value Retail, which owns and operates high-end outlet retail centers throughout Europe, compared the Europe situation to the movie “Speed” – an out-of-control speeding bus that cannot be stopped until it crashes. Both he and Van Stults of Orion Capital Managers agreed, however, that the ever-worsening conditions will create substantial opportunities for savvy international investors.
Europe’s highly regulated and “dysfunctional” banking system provides numerous opportunities for private equity investors, particularly in acquiring senior debt, said Malkin. The focus, however, is on primary markets, particularly in Europe’s capital cities. Demand remains weak in secondary markets and is not expected to improve.
What are the best real estate sectors for investment? Malkin pointed out that value retail centers are succeeding even in debt-straddled southern Europe because they are patronized mostly by tourists, particularly those from Russia, China, and Brazil. Another promising play is residential development. Said Roger Orf of Apollo Management International: “With [the] exception of Spain and Ireland, the European residential sector is not overbuilt, and we like that. We are aggressively buying rental properties in central London, and we are looking to invest in UK homebuilders.”
It’s not just one big buying spree for deep-pocketed investors, however, the panelists agreed. Unlike in the U.S., where banks quickly unloaded bad debt in the wake of the recession, European banks are afraid of losing value and have a cultural bias against selling property to foreign interests, they explained. Furthermore, under the new Basel III global bank capital requirement standards, banks must maintain high capital ratios, so they are reluctant to sell at a loss. “The only thing they can afford to sell is their good assets,” said Charles H. Fedalen, Jr. of Wells Fargo Real Estate Banking Group.
Investing in Europe, given its uncertain economic future and shrinking population, requires going back to the fundamentals, said Malkin. “It’s still a very wealthy place, and its stability looks attractive when compared to some of the emerging markets,” he said. Added Fedalen: “We have a rising tide, and Europe does not. You have to watch the demand drivers for each type of investment or loan.”
Finally, the panelists predicted that Europe is most likely to slide into a Japan-like decline, rather than experience a “Lehman Brothers moment,” and that sooner or later, the U.S. also will have to face its alarming national debt.
