With hindsight, 2009 was a great time to buy core assets, but this was not evident to all at the time, partly because of the inevitable lag between the emergence of some definitive piece of evidence pointing to a sustained period of economic recovery, and the upturn in real estate values.
Reilly and Valente argue that 2013 may offer just such an inflection point to investors in the opportunistic sector, which has remained unloved as prime assets have recovered. The authors believe the real estate cycle is moving into the "relief" phase, where investor risk appetite begins to re-emerge, yet there is such a pipeline of distressed asset sales in Europe that the market is squarely in favour of the buyer.
In spite of persistent fears over a sovereign default in Southern Europe, the region has stepped back from the brink and risk appetite is beginning to re-emerge. However, the report argues: "The critical point is that this sharp and significant improvement in investor sentiment has not been reflected in a narrowing of property yield spreads. The inevitable conclusion is that the real estate market has not only over-reacted but is also lagging the gradual improvement in sentiment."
In the report, Reilly and Valente look at how increased risk-aversion in the post-financial crisis years compressed the ‘core’ segment of the real estate market in Europe to only the very best assets in the very best locations, leading to mispriced opportunities in the secondary areas just outside the super-prime segment.
However, Europe is now firmly on the radar of opportunistic investors, with $15bn transacted in 2012 – nearly twice the average level of investment activity for the previous five years.
Valente and Reilly argue that the best opportunities are away from the periphery of Europe, where a continued lack of resolution to the economic crisis means property prices are likely to fall further before they recover. The pipeline of distressed assets from major banks elsewhere in Europe is increasing as they begin to recover and turn their focus to writing down the value of assets on their balance sheets.
Valente, Head of Research and Strategy in J.P. Morgan Asset Management’s Global Real Assets Group, said: "Distressed sales from the banks are not only growing but becoming increasingly politically charged. As a result, we would expect the pendulum to shift from the headline-grabbing large portfolio transactions to greater emphasis being placed on single-asset deals. Such a shift will be particularly attractive to those investment managers with the requisite skills to safeguard income and employ specific property repositioning strategies."
While banks are a major source of distressed sales, they are by no means the only one. Distressed sales are now reaching the market from a variety of different sources including governments, REITs, commercial mortgage-backed securities and open-ended funds, all of which are driven by different objectives, motives and time horizons. In total, the programme of announced sales expected over the next five years has now reached just under EUR 300 billion.
Reilly, Head of Real Estate Europe in J.P. Morgan Asset Management’s Global Real Assets Group, said: "The opportunistic sector remains significantly under-capitalised given the balance between the volume of distressed sales coming to the market and the small amount of investment firepower targeting the European region. Just as 2009-11 proved to be a wonderful period to buy ‘core’ assets, so we believe 2013-15 will be the equivalent for the opportunistic segment of the market."
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