Published on 19/09/2008

Combine the ongoing trouble in the credit markets with a period of rising inflation as a backdrop and the UK, and many European economies would appear to be entering a period of slow economic growth.

Combine the ongoing trouble in the credit markets with a period of rising inflation as a backdrop and the UK, and many European economies would appear to be entering a period of slow economic growth.

Commercial and residential transaction volumes are falling, prompted by deterioration in access to debt financing. Until banks restructure balance sheets, there is little sign that the deal flows will pick up.

Many retail fund managers, because of investor redemptions, are being forced into sales at a time when cap rates have risen by circa 100 basis points and capital values have seen a 15-20 per cent reduction, following a five year overheated phase.

A major property investment management client of Moore Stephens, with funds possessing a European investment mandate has for the first time in 3-4 years started to invest in the UK again.

The UK market is providing some of the better income and growth value in Europe. In their opinion prices will continue to drift down, at which point, the yield and return profiles become ‘quite compelling’. One note of caution – careful buying and tough negotiations are still critical!

With a prevalent difficulty to price as a result of the lack of deal flow, many private equity houses and managers are preparing to step in when the market has bottomed out. Funds are being launched to invest in distressed property, equities and even property related debt from the banks themselves, all providing equity like returns. To quote another property fund client that recently concluded the purchase of a €300m loan portfolio from a major European Bank, “We don’t have distressed assets, we don’t have distressed loans, just a distressed lender!”

What are the current strategies?

Seasoned investors are building up cash reserves and equity backers to move swiftly into the market when the opportunity arrives - but nobody is quite sure when this will be!

Value add opportunities will always present themselves and with the current inefficiencies in the market, pricing errors, particularly with portfolio acquisitions, may present themselves to those experienced investors who have a thorough knowledge of their markets but remember the need for tough negotiation.

In essence the bargain hunters are coming out again!

Adrian Moll,
Jersey, Channel Islands
adrian.moll@moorestephens-jersey.com