All swash, and very little buckle, for the pioneers of yesteryear

At this time of year we always try to find time in our diaries to attend IMN’s European Real Estate Opportunity & Private Fund Investing Forum in London. The event’s title has grown progressively longer over the years as participants attempt to adequately define what industry they’re actually in.

As Russell Jewell, the head of private equity at investment manager AEW Europe, succinctly put it, “No wonder people don’t understand what we do – we need to stop making up complicated names for ourselves. We used to be distressed investors, then high yield, then opportunistic investors – now we’re private equity real estate managers.” He has a point, although it can’t be denied that the whole private equity industry is facing major consolidation, with small and midsized managers bracing themselves to see their numbers shrinking rapidly.

The event took place in parallel with another multi-barrelled get-together, the European Bank & Financial Institutions Conference on Real Estate Workouts, so there was a certain overlap of interests. Was it just our imagination, or were many of the delegates at the second event the same as those who had been on the delegate list for the first event six years ago...? We couldn’t be sure, and decided that no good could come from putting our hypothesis to the test...

No matter. The new name of the game is debt finance, and everyone’s scrambling around to see where they can get a toehold on the next train pulling out of the station. Loose talk of waves of German distressed property deals coming down the turnpike has since given way to the realities of a European banking and political agenda that is prepared to dig its heels in until its protagonists have scrambled safely over the line to their own personal pension nirvana. That message is coming across loud and clear, at least on this side of the Atlantic.

American visitors to Europe note how much more swiftly American banks are trying to clear dead wood off their books so that their finance markets can begin functioning again – in contrast to their continental European brethren, who have to be dragged kicking and screaming to the table before they might consider outsourcing a workout or recognising incipient losses. It’s as if we’re witnessing the transformation of the distressed, high yield, opportunistic investment community into becoming the mainstream of cross-border investment. The swashbucklers of yesteryear have become the middle managers of today, and the industry regulars are knuckling down to honing their reporting skills. Leaving the winners over the next couple of years to be the lawyers (as always) and, of course, the special servicers, for whom an abundance of work awaits.

Of course, not all is doom and gloom. A number of speakers did suggest that the German banks were less stand-offish than they had been a year ago and the deleveraging process HAS picked up, albeit slowly. Roland Schmidt of Forte Capital in Frankfurt said that while commercial portfolios are being held back, there was a noticeable up-tick in the number of individual assets that banks were prepared to offload. They were also much more open to trading troubled residential portfolios – not surprising, given the buoyant state of the sector.

While most of the deal flow in non-performing loan portfolios is currently happening in the UK and Ireland, Germany was nonetheless very much at the forefront of the IMN conference’s agenda, reflecting the high degree of interest in the market from the very international group of delegates. The many German attendees were, in the main, subdued about the prospects for much further imminent growth in their commercial property market.

The gap between core and the rest in the office sector is becoming ever wider, with most lesser assets unfinanceable at any price. Returns in Germany for new market entrants are likely to disappoint, was the general tenor in open discussion. Rüdiger von Stengel from Art-Invest in Cologne, which invests as a partner in several high-profile German office properties, and Alexander Fischbaum of Orion Capital Managers dismissed notions of 20% IRR as utopian and belonging to another era – a goal probably realistically given up on already by most of their audience – and argued persuasively that the way ahead was to invest in second-tier assets capable of being turned into ‘core’ assets, which every investor in German is now desperate to get their hands on. Given the ongoing financing bottlenecks, this approach seemed eminently sensible to us.

In any event, given the carnage in neighbouring real estate markets and the ongoing pain being suffered in the eurozone’s periphery economies, Germany is likely to remain a focus for investors for several years to come. Funds for investment abound, and much of it is finding its way into German residential, with new retail funds being announced almost on a weekly basis.

So, with even the reputable GFK research index now showing German consumer sentiment to be at a five-year high, and German real wages finally beginning to actually rise, this ought to be good news for German retail. But no, it seems. However positive the sentiment, disposable income is not finding its way into the retail trade.

The country’s biggest retailer Metro AG just reported a 60% fall in net profit – reflecting weak demand in southern Europe and lower income from real estate disposals. However, more significantly, sales dropped 2% in Germany, well below expectations.

Metro and department store group Karstadt have just announced big job cuts, and the last few months have seen a number of high profile retail insolvencies, including mail order titan Neckermann and drugstore chain Schlecker. With Germany lagging other markets in internet shopping by at least two years, there is even more upheaval ahead for high street retail. We will be watching it closely.