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By Ricki Shenfeld Tishman ’18 and Patricia Craig ’19
At the 2017 Columbia Business School Real Estate Symposium, Lance West, Senior Managing Director, Chairman and Management Committee Member at Centerbridge Partners, shared the winners and losers in the current European real estate market.
Given the tall task of summarizing the European markets in twenty minutes, West provided analyses on the business drivers across the continent and the recovery post-financial crisis, zeroing in on three key countries.
He opened by reminding the audience that Europe business fundamentals are like those here in the US, but 28 local markets have unique events that drive changes across borders. The complexity of the continent is, in part, why the European recovery has taken so long. By and large, European policy decisions have been much slower than those in the US, which made recovery tepid.
With regard to the core drivers in Europe affecting real estate opportunities, West added that there is still lots of money looking for smart investments. Investors are taking much more operational risks and creating new asset classes to find yield. Like the US, Europe is pricing to perfection. Cap rate compression has helped European real estate look affordable to sovereign bonds. Additionally, margins on commercial real estate debt have compressed. Funds are now competing aggressively for assets, including expanding into more operational ones like co-working spaces. Following Brexit, however, UK spreads widened due to increased uncertainty, and we saw €300BN of UK-based assets sold, which created a reduction in liquidity.
West characterized the European recovery from the financial crisis as “sluggish, but genuine.” As the economy has improved, the far right and far left politics have dampened, and the economic sentiment is increasing. He described the winners and losers from three main domestic political decisions and their effects on real estate.
For Brexit, he named the UK as the loser and the winners as Frankfurt, Dublin, and Paris. As the UK is moving through uncharted waters, companies are looking to move to more “stable” cities for regional or international headquarters. Many large banks are eyeing relocations to Frankfurt, Dublin, and Paris in the next two years. High-end residential properties have softened as consumers don’t want to make large scale commitments in such an unstable economy. However, international investors are still sweet on the UK given the now net 10% drop in pricing after the vote. Given the prices, non-prime assets and assets outside of London can be mispriced and offer great opportunity. Cap rates are up 200-300 basis points for these assets. There is new opportunity to rezone farmland and tertiary retail to add logistics real estate. Additionally, there is still a need for multifamily real estate.
In Germany, the government’s choice to provide asylum for refugees from the Syrian civil war and beyond has only helped the country’s real estate. West claimed nobody was losing and anyone with class B or below assets was winning. All units are filling up given the population influx. Additionally, retail, especially high street, is growing and the cost of living is relatively cheap. West claimed the “market is on fire” and that Berlin is the “hottest city in Europe.” Young, tech-minded individuals and families have been flocking to the city for its affordability, opportunity, and culture. In Frankfurt, where some companies are moving shop, office real estate is up, but there is a supply constraint. West expects that there are bespoke opportunities to be found.
In Spain, the creation of SAREB is a success story and the country is also showing others how to address the issues that were unearthed during and after the financial crisis. Winners from these moves are non-performing loan buyers and the hospitality sector. Barcelona placed a moratorium on hotels and hotels have skyrocketed with the imbalance. On the other hand, West suggests that residential, if everything in the pipeline gets financed, may again become overbuilt. The main risk facing the country now is the Catalan vote. Banks are restricting lending in Catalonia, slowing the pace of development. Two of the country’s largest banks, Caixa and Sabado, are moving their headquarters out of Catalan. The shift in focus is good for Madrid, but the instability from a secession may not balance things out.
There is an overarching question for Europe, around how and when the ECB plans to reduce the 7-year €2T stimulus plan and unwind the negative interest rates. With Italy and Greece nationalizing the commercial real estate system, the progress is good, but slow. Recovery will likely continue longer than expected. Additionally, if there are further leadership changes at 10 Downing Street, domestic and international taxes for commercial real estate are at risk of further changes.
When asked how to choose an operator for the European markets, West advised to always make sure, even if pursuing many European markets, to always have operators who know the local details as opposed to just continental trends. He reminded the audience that Europe is not a monochromatic region and that each city and region has special nuances that are of utmost importance.
West was then asked why, with so many supposed opportunities in Europe, European Banks are making large loans in the US. He responded that due to the negative deposit rate structure, they can borrow in euros and swap to dollars, which creates more purchasing power in the US. He furthered that European banks believe this will be successful and are hoping to get exposure to the US market. West himself believes this is a risk and is cautious that central banks may be making weak loans.
West was able to provide a bird’s eye view of the pressing European dynamics and help the participants of the Symposium take a step back and appreciate a global perspective.
Ricki Shenfeld Tishman ’18 is a second-year student at Columbia Business School focusing on Real Estate and Entrepreneurship. She is the recipient of the Real Estate Circle Fellowship and serves as the VP of Site Tours for the Real Estate Association. Prior to enrolling at Columbia, Ricki worked in Acquisitions & Capital Markets at DDG, a luxury real estate developer in Manhattan with offices in San Francisco and Palm Beach. Ricki spent her summer at Silverstein Properties in Acquisitions & Development.
Patricia Craig’19 is a first-year student at Columbia Business School focusing on Real Estate. She serves as the AVP of Case Competitions for the Real Estate Association. Prior to enrolling at Columbia, Patricia worked as a management consultant at CAST Management Consultants in Los Angeles, specializing in financial services and pharmaceuticals. She completed her undergraduate education at the University of Southern California.