In three apparently disparate European real estate markets, there actually exist essential common factors that drive investment opportunity. A potential investor must consider these essential factors, not only in each market individually, but in the context of other markets in order to accurately identify risk and return. As asset yield compresses in certain markets, savvy investors may arbitrage market misconceptions to discover alternative markets with less or comparable risk and yet, better asset yield.
In June 2014, Richards Kibbe & Orbe gathered a multi-disciplinary panel of experts to discuss the full commercial and risk spectrum of real estate investment in three European countries: Spain, Poland, and Hungary. The panel discussion was hosted by Richards Kibbe & Orbe LLP
Set forth below are three key investment considerations from these markets.
All panellists concurred that there is no single real estate market in their respective countries or regions. Markets divide along geographical lines, with primary, secondary and tertiary locations, and along asset lines of retail/commercial real estate and residential real estate, with further distinctions between office buildings, shopping centres, and logistics warehouses for the former and multi-family housing and student housing for the latter. As well, markets divide along investor risk profile and appetite with a distinction between prime asset investors and distressed asset investors. In Spain, it was noted by Jeffrey Sujar Blanco, MD of real estate consultancy Hill International, “Madrid and Barcelona continue to be the main focus of interest…although there exist attractive opportunities in retail in secondary cities and in residential and hospitality along the coastline”. Speakers from Poland and Hungary emphasised the regional distinction between the north and south of Central and Eastern Europe. Poland is enjoying a record year of real estate investment in 2013 and a further positive outlook for 2014, while Hungary continues to struggle with the interconnected challenges of limited availability of financing, investors, and quality assets. Pawel Halwa, Warsaw Managing Partner of law firm Schoenherr, observed that Warsaw, Poland’s capital “is experiencing a yield flattening and high competition for best assets, while Polish secondary cities Krakow, Poznan, Wroclaw and Lodz continue to offer competitive yield and a resulting increase in investor interest”. Similarly, Hungary’s capital Budapest remains buoyant relative to the rest of Hungary”, stated Szabolcs Mestyan, Partner of law firm Lakatos, Köves and Partners.
Active Asset Management
All speakers stressed the importance of active asset management. The availability and implementation of proper asset management was cited as having particular importance to distressed real estate investors. The speakers observed that post financial crisis, European banks have come under increasing regulatory and political pressure to deleverage, to rationalise their balance sheets, and to dispose of non-performing and non-core assets. With banks in Spain and Hungary having reported non-performing loan ratios nearing 20% (which ratio is widely considered to be conservatively inaccurate) and the results of the European Central Bank’s Asset Quality Review stress test of 124 of Europe’s systemic banking groups due to be released on October 2014 prior to the November 2014 assumption by the European Central Bank of supervisory oversight of European Union banks, European banks shortly will be forced to disgorge entire portfolios of under-performing and non-performing loans secured by real estate. With the other speakers, Eric Assimakopoulos, Founding Partner of Revetas Capital Advisors, expressed concern that in Central and Eastern Europe there is limited experience of servicing single real estate assets and virtually no experience of servicing large portfolios of real estate assets. Pavel Brezina, Head of Workout Strategies & NPL Sales of Erste Group Immorent, stated that he found it “difficult in Central and Eastern Europe to contract western standard services for a reasonable price”. With the exception of the ground breaking recent sale of a Romanian EUR 495 million non-performing loan portfolio, banks in Central and Eastern Europe have generally retained and self-serviced their non-performing loans. Such servicing, as noted by the speakers, has historically consisted of provisioning and straight line depreciation. With substantial portfolios expected to come to market, the quality of asset management must shift from passive to active. Speakers characterised an active asset manager as one being familiar with the unique attributes of each asset in the context of its respective market. Active asset managers must be prepared, as necessary, to invest in the capex of the real estate, reposition the real estate, complete development of the real estate, and manage the real estate until any price dislocation that occurs following a portfolio sale is absorbed by the market.
The speakers also dispelled certain misconceptions about risk profile across the three real estate markets. Viewed as amongst the riskiest of Western European markets, Spain nevertheless is commonly perceived to be a less risky market than the Central and Eastern European markets of Poland and Hungary. Certainly, as the speakers observed, Spain has been quicker than Hungary to implement legislation and infrastructure, such as the bad bank SAREB, to support efficient asset resolution and liquidity in the real estate market. However, both the panel and the audience were interested to learn that Spain in some respects actually presents greater legal risk than either Hungary or Poland. While Spain, Hungary and Poland have relatively transparent and established legal systems, Spain suffers from a notoriously slow judicial process. An enforcement of remedies through foreclosure on a mortgage may be concluded in 3-6 months in Hungary and Poland, whereas such foreclosure process can exceed several years in Spain if the debtor files for insolvency.
Europe continues to demonstrate abundant opportunity and diversity within country-specific real estate markets, as well as diversity within primary and secondary city markets within individual countries. Macro-economic trends within Europe explain some but not all of the variation and the European real estate markets continue to provide abundant opportunities for the well-prepared investor willing to look beyond common misconceptions and discover the essential common factors that drive investment opportunity.
Copyright Denise R Hamer 2014 – Partner, Richards Kibbe & Orbe LLP