Europe best for real estate secondaries

As Landmark closes its $1.6bn real estate secondaries fund, sister publication PERE's Thomas Duffell looks at whether there's enough deal flow for the demand and the best place to find it.

One of the standout stories of last month was Landmark Partners’ latest real estate secondaries fund close. The Simsbury, Connecticut-based private equity and real estate secondaries firm, closed Landmark Real Estate Fund VII on $1.6 billion smashing its $1 billion target. 

Yet, despite being the second largest real estate secondaries fund ever raised, Landmark far from monopolises the market. Zug, Switzerland-based private markets manager Partners Group closed on nearly $2 billion for investment in real estate secondaries back in October. Add to that global asset manager Aberdeen Asset Management, which announced its debut real estate secondaries fund in July, which was oversubscribed and closed at its hard cap of €300 million.

So, with record amounts of capital targeting real estate secondaries an obvious question is, will there be enough deal flow to sustain demand? 

‘Yes’ came the reply from multiple industry sources. And further, all agreed that Europe would be the best place to find it.

Fabian Neuenschwander, vice-president, RE secondaries at Partners Group told sister publication PERE that Europe was the most exciting of the regions at the moment, and where his firm had been most active recently. 

Back in February, Partners invested €233 million in two prime Milanese office properties via a secondaries sale. The firm also made a secondaries purchase of a property fund in Switzerland in December, acquiring a portfolio of 14 Swiss properties owned by real estate fund Helvetica I Swiss Real Estate Danmark. The firm also acquired interests in a €300 million tail-end Nordic real estate portfolio last September.

Landmark too has already committed $552 million across 11 transactions from LREF VII capital, most recently, the firm upped its stake in the Europa Capital’s Europa Funds II and III. Landmark acquired the stakes in the London-based real estate fund manager’s pan-European fund series from Southern Methodist University’s $1 billion endowment.

The appeal of Europe is that the deals are a little bit smaller and better priced than other regions, say sources. They add that in the US there are larger portfolio deals out there, but they are typically brokered which also attracts non-traditional secondaries players causing the pricing to become far less attractive.

Add to this that more and more European investors are looking at the secondaries market as a viable liquidity option, which is helping deal flow. Sources say that secondaries trades are no longer just for investors looking to cut their losses and get out of fund positions anymore, but rather as a way to restructure portfolios. 

Today’s favorable real estate market conditions in Europe are also attracting even more players on the sale side. As the market improves discounts get reduced and opportunist sellers will be looking to take advantage of the mass of capital chasing secondaries deals and cash out while discounts are reduced yet liquidity is available.

Michael McKell, head of real estate secondaries at broker Tullett Prebon Alternative Investments, says he transacted in Europe last month where the investor’s holding traded at a premium to its current valuation. McKell continues to see strong premiums for core funds whilst pricing within the opportunistic fund space is on the rise towards NAV. He says the issue many of today’s sellers had a few years ago was that the discounts on offer were substantial making it difficult for investors to get that pricing past their committees and boards. But, while the market is in a positive mindset it may be an ideal opportunity to capture the upward trend and sell.

Macro factors too have helped European secondaries because there is enormous interest from investors, mainly, US-based, in euro-denominated funds. Some secondaries players with a view on currency see secondary transactions for euro-denominated funds as bargain-priced given the sharp fall in the euro this year.

Earlier this year, Landmark estimated that secondaries transactions last year totaled approximately $4.8 billion – a $1.1 billion rise on the $3.7 billion recorded in 2013 and the sixth consecutive record year. The firm also did not find any indication that volume would taper off in 2015. Expect Europe to play a big part in real estate secondaries’ next banner year.