Business
Real estate
Distressed for how long?
The prospect of stagflation looms in Europe. Is the US property market a solid hedge for European investors? Text: Aaron Grunwald — Photo: Olivier Minaire
The US real estate market is a particularly attractive option for European investors, according to one Luxembourg investment manager. But the clock is ticking, as banks’ “willingness to let quality assets go for very attractive prices is more and more remote,” says Dr. Reinhard Krafft, director of Jupiter Group. In light of stagnant growth in the EU and rising inflation in the euro zone, the time is right “to move into other currencies, and into assets that will be protecting in times of inflation,” he says. Far from being concerned about the US dollar, he believes it is “stronger than ever as a reserve currency” and even sees it strengthening further. Krafft also discounts worries about the fundamental soundness of the US economy, citing models that show the US can substantially reduce its debt once economic growth hits three percent. Krafft is particularly keen on the retail shopping and office building segments, in cities where pre-crisis population growth was “ fundamentally sound.” For example, Phoenix has negative growth today, but Krafft expects three to four percent growth “when people start moving to warm climates again.” In contrast, he notes Atlanta already has huge industrial and office exposure, so its market is “more dependent on the overall business cycle.” Krafft founded Jupiter in early 2009 after serving as head of private banking at Sal. Oppenheim and a long tenure as chief investment officer at Dresdner
30 - delano - March 2011
REINHARD KRAFFT: 2011 is the year to buy distressed US real estate assets
Bank. Today Jupiter has a staff of about 30 in Luxembourg and at its two US partner offices. Krafft says his firm’s advantage is bringing solid operational infrastructure in the US to European middle market investors. “We want to act for our capital partners, our investors, as if we were Americans, on the turf, but obviously bring the European content into it.” He explains the typical European medium-sized capital partner would not have the local engineering and legal support needed to make savvy decisions. “The US is a very competitive market, especially in real estate, and you have to know how deals there are structured,” Krafft states. At the same time, the
American team benefits from the “much more long-term oriented perspective of European investors.” That means US managers can consider the returns on a property improvement in terms of years, instead of the next few quarters usually demanded by American investors. At the same time, the window is closing for finding exceptionally “great values,” Krafft reckons. Lenders have gotten better both in valuing distressed assets, and in improving foreclosed properties on their own, he explains. Likewise, large investment banks have started filling their portfolios with distressed assets. With competition fierce, he says, “2011 is the time to move.”