With only pockets of competitively priced investment opportunities in the U.S., real estate investors are roaming Europe looking for bargains.
U.S. institutional investors are moving more capital across Europe than ever before.
For example, officials at the $187.4 billion California State Teachers' Retirement System are selling off domestic real estate in favor of properties in Europe. In May, the $34.3 billion Illinois Municipal Retirement Fund, Oak Brook, launched a search for a core open-end European real estate fund manager for a $100 million account.
The $14 billion New Mexico Public Employees Retirement Association invested up to $75 million in real estate debt fund DRC Capital European Real Estate Debt Fund III; while the $24 billion Texas Municipal Retirement System and $3.7 billion Houston Firefighters' Relief & Retirement Fund committed $100 million and $25 million, respectively, to Kildare European Partners II, an opportunistic real estate fund.
Europe also is a target of managers. The five largest real estate funds doing road shows — targeting a combined $17 billion — will have exposure in Europe, according to London-based alternative investment research firm Preqin. The five are Blackstone Real Estate Partners Europe V, focusing on Western Europe; Blackstone Real Estate Debt Strategies III, targeting Europe and North America; Oaktree Real Estate Opportunities Fund VII, a global fund; Colony Distressed Credit & Special Situations Fund IV, also investing in Western Europe; and Hermes Real Estate Senior Debt Fund, investing in the U.K.
Opportunistic managers were the first to invest in Europe to take advantage of distressed opportunities. Now, U.S. institutional investors are directing massive amounts of capital to Europe to take advantage of the region's anticipated recovery, said Sabina Kalyan, a managing director and head of European research in the London office of real estate manager CBRE Global Investors.
Real estate investors and managers think the U.S. market is overpriced and quantitative easing is coming to an end, which could lead to higher interest rates and cause the U.S. economy to slow. And that would be bad for real estate. Rents in hot markets such as New York and San Francisco are already starting to drop.
“The U.S. has had the best years of its cap rate compression behind it,” Ms. Kalyan said.
Europe is in the early stages of a classical economic recovery, so there is more opportunity for real estate investment growth, she added.