Saturday 24 March 2018

JP Morgan to quadruple its European real estate holding

TROPHY: The One Hyde Park development in central London. JP Morgan is likely to focus its property investments on the UK and Spain
TROPHY: The One Hyde Park development in central London. JP Morgan is likely to focus its property investments on the UK and Spain

Dalia Fahmy

JPMorgan Chase’s asset management unit intends to quadruple its holdings of European commercial property in need of renovations or new tenants as well-occupied buildings in good condition become too expensive.

The company plans to raise its ownership of “opportunistic” properties in the region to about €4bn over three years, according to Peter Reilly, the company’s head of European real estate. During that time, the New York-based investor will acquire less lower-risk, or core, real estate.

“In the next three years our buying activity will probably be 80pc opportunistic, whereas through 2012 it was 80pc core,” Reilly said in an interview. “Our buy activity shifts as the capital market shifts.”

Investors like JPMorgan Asset Management, which holds about $63bn (€41bn) of real estate, rushed to the safety of Europe’s most stable income-producing properties after the financial crisis. Firms are now flocking to riskier office buildings, shops and warehouses as prices for the safest assets in Europe climb to their highest level since 2007.

Almost 60pc of investors were searching for riskier properties at the end of the first quarter, up from 47pc a year earlier, according to a study by London-based research firm Preqin. The proportion of buyers seeking the highest quality buildings with tenants in place dropped to 35pc from 56pc.

JPMorgan Asset Management owns about €3bn of core properties in Europe, including offices, shops and warehouses in the UK, France and Germany, Reilly said. The majority of its property holdings, about $45.5bn excluding real estate investment trusts, is in the US Europe is second at about $7.8bn and Asia trails with around $1.1bn.

Buying properties in need of investment to reach their earnings potential is easier now because banks are more willing to sell underperforming loans tied to real estate than they had been in the aftermath of the financial crisis, he said.

“Conversations with banks are more productive today than they were a couple of years ago,” when there was a big difference between asking prices and bids, Reilly said. “That should accelerate through 2015.”

Banks will sell loans with a face value of 83bn euros this year, 30pc more than in 2013, as they clean up their balance sheets to focus on new business, according to data compiled by PricewaterhouseCoopers.

The JPMorgan unit will focus on buying offices in large cities including Paris, Berlin, Hamburg, Munich, Frankfurt and the English cities of Birmingham and Manchester. High prices in London make it difficult to find profitable deals there, he said.

“We like troubled assets in really good markets,” he said. “So when you fix the asset, you’ve got a core property.”

JP Morgan’s strategy reflects the growing perception that investors now need to add value to commercial properties before they can be in a position to sell them on at a profit.

In Ireland in particular, investors have begun to take a view that properties need to be renovated or improved in some other way at this point in the market cycle.

While investment firms were able to make huge killings purely by buing and flipping assets over the last two to three years,, the market is now tightening noticeably.

That was illustrated last month by Kennedy Wilson managing director Fiona D’Silva. Kennedy Wilson has been one of the biggest buyers of commercial property in Ireland since the crash but speaking at a conference in London, Ms D’Silva said her firm were now looking further afield.

She said pricing was “moving ahead of itself” in Ireland and added that while the firm still planned to do deals here, it has now begun to focus on Spain and Italy’s real estate markets.

“We think it has been great in Ireland and see things still coming off banks’ [balance sheets] but pricing is moving ahead of itself a little bit so we are a little bit more cautious and looking more at opportunities outside Ireland and the UK to Italy and Spain,” she said. Ms D’Silva added that rents in Dublin especially were still climbing.

“We have been in Ireland for a while now and we are seeing a micro economic realignment for real estate there. In Dublin there has been an influx of corporates and young workers and seeing as nothing was built for the last seven years rents have gone higher,” she said.

Meanwhile in Japan,  Singapore’s sovereign wealth fund has backed out of buying a Tokyo property from Lone Star Funds.

GIC, which had entered exclusive negotiations with the US fund, withdrew from pursuing Meguro Gajoen, an office and banquet hall complex in Tokyo, because of a dispute between two other parties involving land included in the sale. Both GIC and Hudson Japan KK, a local unit of Lone Star, declined to comment.

GIC’s withdrawal comes after Dallas-based Lone Star renewed efforts earlier this year to sell the property by including the land in the offer amid rising interest from investors in Japan’s property market. Real estate investment in Tokyo, the world’s third-most active market after London and New York, rose by as much as 29pc to €9bn in the first quarter from a year earlier.

“Tokyo’s property market is recovering and investors, both domestic and foreign, will continue to have a lot of interest,” said Hideyuki Shinkai, an asset manager at Norinchukin Trust & Banking Co. in Tokyo.

“Gajoen would be among those that will continue to attract potential buyers,” he added.

Lone Star, which typically focuses on assets that have a real estate component, made its name buying distressed loan portfolios and lenders in Asia starting in the late 1990s, with investments ranging from golf courses in Japan to office towers in Seoul.

The firm also bought a host of bad loans from Wall Street banks during the 2008 crisis. The company has raised 12 private-equity funds with combined capital pledges of more than $45bn since 1995.

The minimum asking price for the property was 110bn yen in the first round.

The US fund has attempted to sell the property three times. (Bloomberg)

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