NYC investors take aim at Europe

Developers and private equity firms look to take advantage of ‘imploding’ economy

With every crisis comes opportunity, and the European debt crisis is no exception — especially for savvy real estate investors.

The uncertainty on the continent has brought a battered currency, struggling economy and stubbornly high unemployment. Indeed, financial land mines have popped up from the Mediterranean to the Celtic seas.

The European Union has, of course, pushed through bailouts for Greece, Ireland and Portugal while imposing depression-style austerity measures to stop the financial hemorrhaging, but so far the global markets aren’t convinced.

Meanwhile, the distress has trickled into the European real estate markets. Real estate investment in Europe has slowed noticeably in recent months and a year-end report from the CBRE Group confirmed an investment divide between the financially stronger northern European countries and the economically afflicted southern ones.

For example, commercial real estate investment activity in Italy dropped 35 percent in the fourth quarter from the previous period, CBRE said. By contrast, investment activity in France, the Nordic countries, Belgium and Luxembourg all jumped by 40 percent or more during that time. The U.K. and Germany saw smaller increases in investment, but still saw rises in the single digits. The report did not break out activity for Portugal, Spain and Greece, but said generally that Portugal, Spain and Italy all suffered lower activity last year versus 2010.

A recent report from Real Capital Analytics also found that cap rates — which measure the rate of return on a real estate investment — in Southern Europe were between 7 percent and 7.5 percent, showing that properties there were less valuable than in Northern and Western Europe, where the rates were 6.5 percent.

Meanwhile, American real estate investors, many of them headquartered in New York, have been watching the drama unfold. And some have started sniffing for bargains.

Boots on the ground

“Europe is going to implode,” Barry Sternlicht, the CEO of Starwood Property Trust, declared a few months ago at an NYU Schack Institute of Real Estate conference.

With that, he noted that his real estate investment trust was working on eight mixed-use and residential property deals there, according to the Wall Street Journal.

Sternlicht isn’t the only big New York City area real estate investor targeting European distressed deals.

The Carlton Group just brought in a “major European investment banker” who spent the last 12 years at Lehman Brothers and Apollo, said Howard Michaels, the company’s chairman.

The new hire joins about a dozen others at the firm focusing solely on European business.

The company opened an office in London in April and in Athens in September, and recently hosted a luncheon in Spain for 50 bankers, some clients and some potential clients, to help their institutions sell distressed assets or recapitalize existing positions. It also has people in Italy and is helping European institutions come up with plans to sell non-core or toxic assets along with loan positions, Michaels said.

“For the most part, a lot of the funds that presently are headquartered in New York are regularly making trips to Europe to invest overseas,” he told The Real Deal. “Obviously, there is a lot of distress in Europe, with assets and companies both trading at significant discounts.”

In addition to the Carlton Group, other New York–based investors that are taking advantage of conditions in Europe include Fortress Investment Group, the Blackstone Group and TIAA-CREF, a provider of retirement services for the academic, research, medical and cultural industries, said Steve Collins, the international director of Jones Lang LaSalle’s international capital group.

According to Real Capital Analytics, two New York–based firms ranked in the top 10 for most active buyers in Europe last year through the third quarter.

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The Blackstone Group, headed by Stephen Schwarzman, ranked third, buying 26 properties worth 1.65 billion euros, or $2.05 billion. Cerberus Capital Management, also native to New York, came in tenth. Only two other U.S. institutions — AEW Capital Management and Invesco Real Estate — broke into the Top 20.

Blackstone’s acquisitions included the European hotel chain Mint. It bought the eight-hotel portfolio in September for 600 million pounds, or $948.4 million. The group also scooped up a German multifamily portfolio for 220 million euros, or $282.3 million.

JLL’s Collins added that high-net-worth individuals are also looking for European deals, while pension funds are a bit more cautious, opting instead to invest through a fund vehicle.

“It’s all an allocation issue. Some have jumped in, and some are just looking because they’re sensitive to the market falling in the months to come,” Collins said. “However, the big institutions all have European offices with ‘boots on the ground,’ so they’ll be ready when the time is right to invest.”

Debt at a discount

So far, many players have been making indirect real estate investments by buying distressed debt with property as collateral, said Glenn Rufrano, president and CEO of Cushman & Wakefield.

“Because liquidity has dried up in the banking system [in Europe], there is a perceived need for banking, and the ability to provide financing,” he said. “Starwood, Brookfield, Blackstone, Cerberus and Lone Star are some of the companies that we know that have been looking at opportunities.”

Rufrano noted that institutions are not picking up assets in the most-struggling European economies, such as Greece, Italy and Ireland. Instead, they are looking to buy leased-up, Class A properties in the bigger, more traditionally sound cities.

That goes for those looking to invest directly in properties, too, he said. A recent snapshot on Cushman’s blog showed that the “winning” investment cities in Europe were London, Paris, Stockholm, Berlin and Hamburg.

This summer, Tishman Speyer bought the Sanctuary Buildings office in London for 175 million pounds, or $268 million, from Irish property company Vico Capital. The building is occupied until 2017, according to various media reports.

The cities attracting investment are in countries expected to have better economic growth in the coming years, which makes for less risky bets, Rufrano said.

One exception is the September purchase by investment management firm W.P. Carey and Company — which has offices in Midtown — to buy a fund that owns 20 stores in Italy leased to retailer Metro Italy for 300 million euros, or $400 million. It marked the firm’s first foray into the country’s real estate market. But Metro Italy’s parent company, Metro AG — the world’s fourth largest retailer — also guaranteed the store’s obligations under the leases, thus reducing some of the risk associated with the stores’ location.

The euro threat

“Of course, the other variable is currency,” Rufrano said. “It’s my sense there is concern on the part of U.S. institutions because there’s little clarity on what’s going on over there.”

As the dollar grows stronger against the euro, it makes prices in Europe cheaper for New York-based investors who are looking for a foreign deal.

But many local building owners in Europe aren’t ready to take their losses, said Jahn Brodwin, a senior managing director at FTI Consulting, so not much is up for sale.

“They bought properties when the euro was strong, so they would take a loss on real estate valuation and on the currency exchange,” he said. “They have no equity in many properties to pay off their loan.”

Additionally, while no one is ready to bet that the euro’s existence is in danger, there are outlying worries that some countries, such as Greece, may drop the currency. That could spell disaster for real estate bought and leased up in euros in those countries.