I recently wrote here and elsewhere about how sentiment appears to have shifted from bullish to apprehensive in the Asian institutional investor community.
The exact opposite kind of sentiment shift appears to be taking place in the European institutional investor community.
Asian institutional investors today are becoming increasingly concerned and fearful about asset bubbles. Europeans, on the other hand, have been concerned about deflation, stagnant economic growth and the potential implosion of their bond markets and with them, the continued viability of the euro as a common currency.
Having weathered what most believe is the worst of this “it” storm, Europeans today are starting to think about investment prospects once again.
We saw signs of this sentiment shift among the 24 investors who attended our last Editorial Board meeting in Barcelona last fall, and confirmed it once again among the 17 or so investors who joined us at our second annual Visions, Insights & Perspectives – Europe Investor Roundtable in Berlin in April (100 in total attendance).
The hallmark of both of these meetings, of course, is intimacy. What makes them different is the opportunity for investors to speak with each other, and with the investment managers who attend. We downplay the importance of formal speeches and panels, which really are there to establish context for the much more important interplay that takes place between participants at the small-group roundtable sessions that take place repeatedly throughout the program. And, as Yogi Berra reportedly once noted, “If you listen, you can hear a lot.”
The investors who spoke during this most recent conference were still largely focused on core investing, although much less strategically than they have been in the past. Today, it’s less a matter of which markets or which regions or which property types or which financial structures, and much more a matter of the specific fundamentals associated with each individual opportunity. In short, investors in Europe have shifted from a largely strategic point of view to a much more tactical, much more opportunistic frame of mind.
A few of the investors even noted that they recently have been willing to entertain well-defined opportunities in such previously redlined markets as Spain and Northern Italy.
But the strategic view is not altogether absent in Europe. Almost everyone engaged in the discussions at the conference was intrigued by the opportunity to step in and help plug the huge financing gap. As European banks continue to struggle with overleveraged balance sheets, lending volume has slowed down considerably. With the exception of mezzanine financing, for which a whole plethora of funds recently have been formed and closed, there’s a considerable shortage of senior debt to finance new acquisitions and refinance trillions of euros of existing loans that rapidly are maturing and will continue to mature during the next three to five years.
Because there’s plenty of mezzanine debt, the spreads for mezzanine debt have narrowed considerably, reducing the attractiveness of the space. Some creative investment managers have been approaching the problem by offering attractive rates to borrowers on slightly higher loan-to-values than had previously been available to the market, then slicing those senior loans into A and B pieces, holding on the engineered mezzanine debt B-pieces, and selling off the senior lower LTV pieces. One participant even suggested this may be the way in which the CMBS market gets rejuvenated and relaunched in the euro zone. (Regulatory changes have taken the profit out of the traditional bundle-and-sell approach to packaging and selling CMBS in the euro zone, which is why the CMBS market hasn’t regained as much momentum in the euro zone as it has across the pond in the states.)
The bottom line is that, while American investors remain concerned, and while Asia Pacific investors are growing increasingly apprehensive, European institutional investors finally appear to be returning to the markets and once again appear to be willing to rejoin the ranks of major capital providers around the globe.
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Geoffrey Dohrmann is president and CEO of Institutional Real Estate, Inc.
