European property – reviled and ready for a revival

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European property market: business activity is slowly returning.

European property market: business activity is slowly returning.

Specialist global equity and income fund manager, PM CAPITAL, believe that the property sector in Europe, namely Ireland and Spain, offers an attractive investment.

John Whelan, Portfolio Manager at PM CAPITAL said, the European debt crisis triggered negative market sentiment and investors viewed the European market as toxic.

“When a collapse in bank lending caused prices to fall by 50 per cent, it gave us reason to investigate the sector further,” said Whelan. “We recently visited Dublin, Madrid and Barcelona, to take a closer look at a wide range of commercial and residential properties.”

“The fall in property values was virtually ubiquitous and it was evident that prime commercial and residential real estate had over-corrected,” Whelan said.

“Rents were at significant lows with yields at their highs, resulting in asset prices down between 40-70% from their peak values.”

“The opportunity was created by a growing supply/demand imbalance, due to new construction being virtually non-existent, as developers are either bankrupt or severely constrained by the banks.”

“Spanish and Irish economies have gone through painful adjustments however and we believe that consumer confidence and business activity is slowly returning.”

“When you contrast this to the Australian real estate market where prices are on their highs, rents are on their highs, demand is stagnant and supply is increasing, investment opportunities are obviously skewed overseas.”

PM CAPITAL has acquired stakes in several newly issued real estate companies, namely Hibernia, Kennedy Wilson Europe and LAR Espana, in late 2013 and early 2014 either through their IPO’s or shortly after listing.

These new real estate companies will concentrate on buying select European commercial real estate and residential property on 8-10 per cent yields with a focus on Irish, Spanish and regional UK properties.

They are structured as REIT’s, with a payout ratio close to 100%. Hence, over time shareholders should obtain a regular income stream and capital appreciation, given the underlying assets are trading well below their new build costs. “While mainstream investors look the other way, we view this as an appealing opportunity,”  Whelan said.

“This is similar to what we saw play out in Las Vegas three to four years ago, when deeply depressed markets and assets sold well below replacement cost.”

“We initially attracted criticism when we invested at the epicentre of the US housing loan crisis in Las Vegas in 2010, however the payoffs of these positions came into fruition when the Fund generated a 63% return in the year to June 2013, versus the index at 33%.

“As long term investors we once again expect this thesis to play out over a number of years. We anticipate these positions to recalibrate and our investors should stand to benefit over time.”

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