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CHICAGO-US buyers looking for a better distress market than the bifurcation at home should still wait a couple years before looking across the pond, according to investment experts. While the alleged return-on-investment numbers are tempting, the uncertainty in the various Euro Zone countries still makes the risk still too hot.

As detailed at the CRE Finance Council conference held in Washington, DC last month, there’s still too much of a pricing gap that must be overcome in Europe, and banks there are still working to unload their bad loans, with about 2.2 trillion non-core and non-performing assets. Still, the US interest has started, says Steve Collins, head of the international capital group at locally based Jones Lang LaSalle. He tells GlobeSt.com that the big private equity firms, such as Fortress, Blackstone and Colony, are looking in Europe.

However, just as in the US, the junk has to pass through Europe first, and nobody’s looking for junk. “I think the bigger firms are playing the time game, we’re just not going to see the prime juicy stuff” he says. “I think we’re about 18-24 months away from bigger and better properties, but for now it’s going to be just large chunks of distress.”

Europe is now where the US was in 2009, says David Tobin, principal and co-founder of New York City-based Mission Capital Advisors. “Germany and England are equivalent to how New York City and Washington, DC were then, and then you have Spain, Italy and Greece, they’re kind of like Florida, Arizona and Vegas, which in 2009 still had a ways to go down,” he tells GlobeSt.com.

The slower response is part of the problem, Tobin says. Banks in the US didn’t let prices get as low, by selling assets here or there at minor discounts, and now able to use that pricing level for larger portfolios. Europe banks did the opposite, Tobin says, trying to unload large portfolios at larger losses, and now asset value is worse across the board. “Besides, there’s just not that many large buyers out there looking to purchase a billion dollars worth of distress, they can’t write that big of a check.”

The size of portfolios being sold by European banks has been a deal-breaker in a number of offers, including the second-quarter failure of the deal for Morgan Stanley to buy a $3.7 billion portfolio of distress from Madrid-based Banco Santander. The pricing gap hurt the deal, and that was even after the portfolio was shrunk to $860 million. The Spanish bank was trying to sell more than 1,000 bad loans and assets.

John Lyons, president and CEO of Savills LLC, tells GlobeSt.com that the strong countries like Germany and France that had benefitted before the downturn, through trading with the less economically vibrant Euro Zone countries, now no longer have that level of income. “It’s a Catch-22, their biggest customers are the rest of the Euro Zone,” he says.

The United States and the United Kingdom are starting to pull out of the dive, albeit slowly. Cities such as Paris, Frankfurt and London are extremely attractive to investors as core European markets. “London has been absolutely inundated with capital to acquire Class A office and every country, including US investors, are looking to London as a safe haven,” Lyons says. However, the other economies are not only stagnant, they’re regressing, he says. “The story just doesn’t yet have a clear direction on how the European Union will right itself.”

One option for the Euro Zone is the creation of unified banking system, similar to the US Federal Reserve, Lyons says. A banking union has been proposed for the region, and European leaders recently agreed to move toward a single supervisory group, but the issue of how the 17 countries would be able to weave in the additional regulation, while also staying transparent, assures that the effort will take at least a few years.

“Creating such a banking system would bring a much greater degree of unity to the Euro Zone,” Lyons says. “Until then, unless you can find best-in-class product with strong, long-term credit tenants, I think you have to be very cautious as an investor in what you are looking to acquire in the distressed markets.”

Instead, this is the time to scout opportunities, to underwrite assets to get a sense of the quality, the security of the leases and the tenant commitment, track the asset and then wait for the bottom before you buy. “You need to be fully immersed in the investigative side, so as the Euro Zone starts to stabilize, you can then pull the trigger,” Lyons says.

Instant Insights /

Euro Zone Distress: Time to Look, Not Buy

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