Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
If you’re in real estate investing you can’t help hearing how prices have risen and how good deals are harder and harder to find in this market. Just go to any REIA meeting and a topic of conversation pretty much always drifts to how and where people are finding deals that make sense.
Even though it seems that the market may be cooling a bit, deals are still hard to find.
I read an article recently that talked about this. Their point was, that because of strong U.S. dollar, many investors are now looking to Europe to find deals because the dollar continues to strengthen against the euro.
This strategy isn’t for everyone obviously, but if you have the means and the desire, it just may be for you.
The author wrote that:
“U.S. investors are buying European property at a record pace as the dollar’s eight-month rally and struggling economies on the continent make offices, shops and warehouses cheap.”
And that:
“U.S. spending on European real estate last year was just short of the 2007 peak, and that the record may be broken this year after a strong first quarter.”
It quoted Richard Divall, head of cross-border capital markets at broker Colliers International, as saying:
“With the U.S. markets becoming increasingly expensive and with the currency advantage we are starting to see, the U.S. institutions are making a big push for Europe, because Europe is the region of the world that still has distress.”
Currency War
The U.S. currency has jumped amid speculation that the Federal Reserve is moving toward raising interest rates this year as the economy surges. Meanwhile, stagnation and the prospect of deflation in Europe is prompting European Central Bank President Mario Draghi to implement a 1.1 trillion-euro quantitative-easing program to stimulate growth. The dollar gained 26% against the euro in the past 12 months.
It also quoted Jenny Buck, head of property and alternative investments at supermarket operator Tesco PLCs pension fund, who said:
“We’re about to come into a real currency war. We in Europe will see an increasing wall of money coming in which probably means that current peaks may well continue for longer than they would have otherwise.”
U.S. investment in European commercial property climbed 90% last year to 41.2 billion euros ($45.3 billion), just shy of the 2007 peak of 41.5 billion euros, RCA said. Another 8.9 billion euros has been spent this year through March 25th, with a further 3.3 billion under contract.
Record Pace
Europe’s recovery will probably strengthen this year, leading to job growth and higher domestic demand for real estate, according to a report by Deutsche Asset & Wealth Management. Overall, investment in European property climbed 12% to 160 billion euros last year, according to the report.
Even with increased competition for assets, European commercial properties will remain attractive to foreign buyers this year, according to investors.
Pierre Vaquier, chief executive officer of Axa Real Estate says that “I don’t see the trend stopping. All of the countries that are dollar dominated should continue to deploy in Europe.”
Record-low returns from fixed-income investments have spurred money managers to buy real estate in search for higher returns. Institutional investors will increase their real estate spending by $52.5 billion this year, with Europe a key target.
Expensive U.S.
Commercial property values in the U.S. reached a record high in January as investors competed to buy the best quality buildings, according to a value-weighted composite index compiled by research firm CoStar Group Inc.
Returns across offices, shops and warehouses are set to average about 10% annually for two years, Deutsche Asset & Wealth Management said. Europe’s main banks hold 236.5 billion euros of soured loans and assets linked to non-residential real estate, the ECB said in October.
James Meagher, a director at Knight Frank LLP noted the extent of the problem in Europe:
“When we placed 12 Dublin bank branches leased to AIB Plc on the market in December, the quoted price was the equivalent of about $60 million. Now it’s closer to $52.5 million.”
Shopping Spree
The European unit of New York-based Northstar Realty Finance Corp. owns or is under contract to buy $2 billion of commercial real estate in the region, it said in February. The company plans to spin off the business into a publicly-traded real estate investment trust.
Blackstone Group LP, the world’s largest private-equity investor in real estate, agreed to buy an office building this week in the City of London financial district for 268.4 million pounds.
The euro bounced back slightly against the dollar in March, adding to unpredictable movements since the Fed surprised investors by indicating it is in no rush to raise rates.
“Europe is getting very interesting from a currency valuation point of view; nobody wants to catch a falling knife,” said Scott Brown, president and CEO of Cornerstone Real Estate Advisers, which plans to expand its European assets by up to $1 billion in 2015.
“Are you better off going in before the bottom than after the bottom?”
What Do You Think?
How do you feel about this U.S. versus Europe talk? Share in the comments below.
Dennis Fassett
earned a BS in Economics and followed that up with an MBA in finance. After working and corporate finance and banking for several years, he started buying single family houses, and quickly built a very nice portfolio of cash flowing rentals. When the credit markets started to dry up and he couldn’t get any additional single family mortgages he shifted his focus to apartment buildings. He now has over $3 million in rental real estate. He manages most of it his self and still has a day job. Dennis has even created his own Private Equity fund to buy apartment buildings.