Lone Star Funds first offered to buy London property developer Quintain Estates & Development for a 22 percent premium. With investors competing for real estate assets across Europe, hedge fund Elliott Associates was able to sway the private-equity firm to raise its bid.
Firms from Lone Star to Qatar Investment Authority and China Investment Corp. are increasing their real estate holdings as Europe’s economy recovers. For them bigger assets are preferable, with larger portfolios fetching higher prices. Lone Star succeeded with its bid for Quintain after boosting its offer to 32 percent above the share price before its approach was announced.
Investors and buyers are being drawn by returns that beat other assets as
record low-interest rates and a flood of cash from the European Central Bank bolsters economic growth. As demand grows so has the appetite for
larger transactions that offer the opportunity to lower costs.
“We are seeing bigger and bigger transactions as investors seek critical mass and economies of scale to maximize returns,” said Patricio Palomar, a director at broker CBRE Group Inc. “Low interest rates globally have meant that a wall of cash has accumulated and is waiting to enter the European market.”
Real estate funds with a fixed investment term had a record $72 billion to spend on European real estate at the end of September, a $16 billion increase from the end of 2014, according to alternative assets data provider Preqin. That’s pushing up values as buyers contend for the limited assets on the market.
“There is a premium for size and asset concentration,” said Mike Prew, an analyst at Jefferies Group LLC. “If you don’t deploy the cash quickly enough, it sits on your balance sheet and destroys returns.”
Vendors are trying to cobble together bundles of real estate because they can get higher prices than if the assets were sold individually, CBRE’s Palomar said.
“There is such demand for large-scale portfolios that sellers know they can ask for a premium when they are selling portfolios of high quality products in good locations,” he said.
The average property portfolio in Europe fetched 204.6 million euros ($228 million) in the first quarter, the most since at least 2006, according to data compiled by researcher Real Capital Analytics Inc. Investors bought 61.5 billion euros of portfolios in Europe in the first half, the most since 2007.
Buyers are being drawn by profit that beats other assets. Total return from commercial real estate, a combination of rental income and value gains, was 5.35 percent for Europe in the second quarter. Investors in the Stoxx Europe 600 Index lost 2.5 percent, including reinvested dividends, during the same period, while European investment-grade bonds fell 2.8 percent.
Major deals included Qatar Investment Authority’s takeover of London’s Canary Wharf financial district in a venture with Brookfield Property Partners. China Investment Corp. bought 10 shopping malls in France and Belgium with AEW Europe for 1.3 billion euros. Madrid-based Merlin Properties Socimi SA outbid Blackstone LP to buy Spanish office landlord Testa Inmuebles en Renta SA for 1.79 billion euros.
David and Goliath
“Bidding against Blackstone was a bit like David and Goliath but we literally became the largest Spanish real estate company overnight,” Merlin Chief Executive Officer Ismael Clemente said in a telephone interview. “It would have taken us a decade and cost us a lot more to have bought the same amount of assets individually in the market.”
The big winners from the surge in demand are shareholders in companies being bought, according to data compiled by Green Street Advisors. The premiums being paid are often so high that almost all of the cost savings resulting from an acquisition are being paid to the seller’s stock holders, Green Street said. Quintain investors, including those who accepted Lone Star’s lower initial bid, will get 10 pence a share more under the successful revised offer.