November 9, 2015
Interviewed by: Privcap
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A 1,000-foot View of Europe’s Core Markets

There have been challenges for private equity real estate investors in Europe, but JPMorgan Asset Management managing director Joe Valente tells PrivcapRE what the tone of the market is, where the prime cities and areas for investment on the continent are, and why real estate is an appealing alternative to poorly performing fixed income investments.

There have been challenges for private equity real estate investors in Europe, but JPMorgan Asset Management managing director Joe Valente tells PrivcapRE what the tone of the market is, where the prime cities and areas for investment on the continent are, and why real estate is an appealing alternative to poorly performing fixed income investments.

A 1,000-foot View of Europe’s Core Markets
With Joe Valente of JP Morgan Asset Management

David Snow, PrivcapRE: Today, we’re joined by Joe Valente of JP Morgan Asset Management. Joe, you are the head of research and strategy for the European real estate group. Welcome to Privcap. Thanks for being here.

Joe Valente, JP Morgan Asset Management: Thank you very much. Good to be here.

Snow: Why don’t we start at a 1,000-foot level? Walk us through some of the most important developments you’ve seen in the European market.

Valente: It’s certainly a market full of effervescence at this point in time. I think if we actually…the market has evolved over the course of the last five years, really post-Lehman. Europe has been the world’s most unstable region—politically, financially, economically. Yet the region has attracted a considerable amount of capital looking to invest in real estate, which may appear something of a paradox.

What we have is all sorts of capital active in a market, not looking to buy into Europe or the idea of Europe. They’re looking to buy into London. They’re looking to buy into Paris and Munich and one or two other German markets. That tended to be the way the market developed over the course of those five years.

Snow: You mentioned investor interest in going to some of the 24-hour cities like London, Munich and other large, important cities. Maybe roll back the clock three, three-and-a-half years ago. What was investor sentiment like and how has it changed?

Valente: I can tell you exactly because, three-and-a-half or four years ago, I spent the best part of three weeks…crisscrossing the U.S., talking to an awful lot of investors—public, private, foundations, endowments, you name it—about the opportunities we saw in the European market. And the level of interest at that point was basically, well, let’s not overestimate it—it was zero. Europe was in the “too difficult” bucket. U.S. investors were having a great time in the U.S. market. Returns were very good.

Today, it’s not possible to walk the streets of London or Paris or Munich without actually bumping into another U.S. investor looking to deploy capital. Some of it is being deployed at the prime end of the market where I think it’s questionable in terms of a risk-adjusted return but nevertheless understandable. But, some of it, because U.S. investors have been in the European market for some considerable time and they’re much more comfortable with the differences in markets across Europe, they are becoming a bit more widespread.

Snow: Talk about where you see the most attractive opportunities in a risk-return adjusted basis. Is it looking for those second-tier cities, where perhaps there’s more value?

Valente: I think…certain capital values in central London, for example, are now well past what they were back in 2006 or 2007. And clearly there’s an element of risk there because new supply is coming through and that’s going to impact on income and income growth.

Having said that, I think if we don’t use this or the U.S. lens, or UK lens, if you like, and [we] have a look at this issue in terms of an Asian investor—a Taiwanese insurance company that is used to property or a cap rate of 2%—then, clearly, 3.5% or 4% in central London is a very good deal.

Snow: To what extent is JP Morgan Real Estate for Europe interested in Eastern or Southern Europe?

Valente: We certainly haven’t excluded any part of Europe. I think that’s important from a strategic point of view. There are all sorts of issues here why we haven’t invested in Southern Europe as yet. I think partly it’s a question of returns. If we are in a position to generate good returns in core European markets without taking macro risk in Southern Europe, that’s exactly what we will continue to do because that’s the sensible thing to do.

[In] Europe, at the moment, no investor will be rewarded for taking macro risk.

Snow: How much time are you spending looking at property types that are not residential, not office? For example, looking at logistics or industrial deals, looking at hospitality deals—are those interesting in various parts of Europe?

Valente: The European market is somewhat different from the U.S. market in as much as most offices, retail, logistics are deemed institutional. If you look at a typical institutional portfolio in the U.S., it’ll have 10% or 15% in apartments and residential generally. In Europe, by and large, that’s down to 1%. Now, that varies around Europe. Clearly, in Germany, residential plays an important part. In the UK, [it’s] less so.

Snow: Those asset types that are institutional or are deemed institutional; for example, logistics—is that an interesting opportunity right now?

Valente: It’s very attractive because it tends to generate the highest income returns. And if there’s one thing the world is short of at the moment, it’s income. Everyone is chasing income and there’s an awful lot of fixed-income capital gravitating to real estate as an alternative to poorly-performing bonds.

Snow: This is a broad question, but how do you account for the much-discussed phenomenon in many parts of Europe of slowing population growth and aging population [in] places like Italy and elsewhere? How do you invest for the long term when you don’t have those demographic forces that are usually favorable elsewhere?

Valente: It’s a real issue, which I’m not convinced Europe has woken up to as yet. I think that if we actually look at most European countries, most have not only stable populations, but they have declining populations. And I would include Germany. That’s one of the reasons why I keep saying, “Don’t take a macro position on Europe,” because there are major differences.

If we actually look at Germany, there are markets within Germany that have very high rates of population growth—Berlin, Munich, Frankfort, Hamburg. Those are the markets you focus on, because those are the markets where the young kids have decided they want to go and live in.

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