Last year could not have been much uglier for European real estate. And with rental incomes in decline as leases come up for renewal, combined with further falls in capital values, 2009 does not look any prettier. Unsurprisingly, some of those at the heart of the current crisis — notably investment and retail banks — remain desperate to reduce their exposure to an industry broken by the mega deals they helped finance.

The banks are faced with double trouble. Firstly, as their loans to property companies mature they are desperate to get their cash back to balance their own books, rather than renegotiate their loans. Secondly, as the value of their investments in shares plummet many have to dump property in order to keep their holdings in real estate at an agreed maximum proportion of their total investment portfolio. 


That all adds up to a real problem. Tony Horrell, head of European capital markets at property agent Jones Lang LaSalle, says: “We fully expect it will take three to five years for banks to repair their balance sheets and they will only begin to address this problem in 2009. They will most likely be ultra-cautious and conservative in their handling of their outstanding real estate exposure and highly selective in their lending criteria.”


While caution and desperation are taking traditional lenders out of the property game, their departure is an opportunity for cash-rich private equity groups, some of whom may emerge stronger from the current recession.


Jones Lang LaSalle says that over €50bn in equity capital will target European commercial real estate in 2009. This is barely a fifth of the 2006 peak of more than €242bn, and well below the €100bn-€200bn annual range since the market recovered from 9/11. Then again, the past five years constitute an exceptional and unsustainable period in European real estate, or at least it looks so from the post-crunch perspective of 2009. 


What money there is will be searching for bargains in markets like London, Paris and Madrid where prices have already fallen. Horrell says: “We think 2009 will be the year when the market begins to clear and some opportunities will be too good to miss.” 


Discipline and patience are key; returns in the Eurozone, measured in aggregate, are expected to be around zero this year, according to UBS global asset management. Price falls in the UK, Spain, Ireland and Italy are expected to spread into central and eastern markets. 


Gunnar Herm, head of European real estate research for UBS, agrees: “Well-thought-out, tentative steps back into the market in 2009 are likely to be rewarded but strong stock selection skills will be in focus.”


The best equipped to exploit this high-risk environment are strong private equity companies, some of whom raised and preserved large amounts of cash while the sun was still shining in 2007-8. Private Equity Intelligence, which tracks real estate private equity funds, reckons that approximately 100 privately funded real estate funds amassed around €100bn to deploy globally this year, with perhaps half going to European property. The sum is scarcely down on the 2007 figure and highlights the relative strength of the sector. 


The US-based Association of Foreign Investors in Real Estate — which comprises inward investors to the US and US firms investing outside the States — expects lenders to boost investment by 54% globally. In its new year members’ survey, respondents named their domestic market the most stable and secure, with Germany and Switzerland second. Washington, DC topped the city list, followed by London, while the UK rose from ninth to fourth as best for capital appreciation.


Those with funds ready to pounce on European properties and mortgages come with proven real estate expertise; a willingness to broker debt-buying; and complex financial instruments at the ready. Plus, they have the fortitude for real estate purchases at precisely the moment the banks are quitting. 

Six to watch in Europe in 2009

Jonathan Gray & 
Chad Pike 

Senior managing directors/co-heads, based, respectively, in London and New York
Blackstone

It’s hard to argue with a business that raised €3.5bn at a time when liquidity has left the market. This US colossus is using debt purchase as one of its core strategies and continues to be linked with the loan books at crunch-hit Icelandic Kaupthing and Lehman Brothers. Chad Pike is charged with day-to-day management of the group’s investment activities in Europe and Asia, while Jonathan Gray has led the privatisation of 11 public real estate companies valued at more than €75bn including Wyndham International and Hilton Hotels. As the banks sell off debt, Blackstone is expected to become one of the biggest buyers in 2009.


Bill Benjamin

Managing partner, Europe, London office
AREA Property Partners

Backed by major US pension and employee investments, AREA Property Partners (formerly Apollo) sold a €1.05bn European fund in 2008, giving it €4.25bn of firepower. It bought half of Capital & Regional’s German operation in October and is circling Lehman Brothers’ €990m portfolio of British sub-prime mortgages, which is expected to sell at less than 50c in the euro. But AREA is really expected to get busy in Europe when yields in mature markets hit 7% or above. At the helm, Harvard-educated Bill Benjamin built AREA’s cross-border investment portfolio. In 1995, the 44-year-old was one of the first to spot lucrative opportunities in Europe, including recent openings in Turkey and Ukraine.

Guillaume Poitrinal 

Chairman and CEO, Paris office

Unibail-Rodamco

French firm Unibail and Dutch Rodamco were already big players in Europe’s commercial real estate markets before merging in June 2007. Since then, the company has been rebalancing its €26.1bn European portfolio, selling €741m of Dutch high-street property and buying retail centres in Austria and Spain. It now owns more than 100 shopping centres in 13 European countries. Poitrinal, 41, joined Unibail in 1995 and has headed the company since the merger. A graduate from HEC, he’s looking to grow the firm’s reputation as a powerhouse.


Mark Hutchinson
President, 
Paris and Tokyo offices

GE Real Estate International

GE Real Estate is one of the world’s top commercial real estate companies with more than €54bn in assets and a presence in 31 countries. In the wake of the banking collapse the company has made a speciality of buying pan-European loan books, pumping about €4bn into the market as grateful bankers rebalance their asset portfolios. Loan books from Bradford & Bingley, Capmark Europe and Credit Suisse have all been taken over in little under a year. Hutchinson, appointed president of GE Real Estate International last year, aims to leverage GE’s track record to gain a greater share of the commercial real estate business in both Europe and Asia and GE is on the prowl for more debt buys in 2009.

Thibault de Valence

Executive managing director, Paris office

CBRE Investors

Established in 1972, CBRE Investors has €23.1bn in assets under management, with the UK the hub of its European operations. A penchant for long-term relationships (some investors have been with the company for its 27 years), means CBRE Investors has developed a strategy to match long-term, sustainable growth objectives. That more cautious approach looks ideal in a market where quick profits are no longer the driving force and backers are more willing to invest longer term. De Valence is president and co-founder of CBRE Investors in continental Europe. Since September 2000, his Paris-based team has invested more than €1.1bn in the hospitality, residential, retail and office sectors. Since 2003, de Valence has run the Strategic Partners Europe Funds I, II and III with investments of more than €2bn in western Europe. 


Eric Sasson
Managing director, Paris office

Carlyle Group

If real estate investment is out of favour then clearly someone forgot to tell Carlyle Group. The giant American private equity house raised €2.55bn with its third European-focused fund in the middle of last year — an unprecedented achievement in a dire market — and has set about spending that money pretty quickly. The previous two funds have resulted in €2.1bn of investment since Carlyle began targeting Europe in 2001 and the current fund is bigger than the first two combined. Sasson, managing director and head of Carlyle’s European real estate operations, has acted fast: in the autumn he fired the first shots as he oversaw the acquisition of major retail and office schemes in the UK, Germany and Italy.