JP Morgan Cazenove hosted two property tours in London and their (biggest ever) annual conference. JPM notes in a recent report that optimism is no longer confined to core markets, and across Europe both occupational and investor sentiment is the most bullish in years. This note summarizes the conference highlights. Why the interest to our readers? Although Seth Klarman did not speak, Tom Blumenthal, Partner & Co-Head of Private Investments for The Baupost Group, did.  Tom Blumenthal oversees private investments in debt, equity and real estate, and is a member of Baupost’s Management Committee. Although readers might prefer to hear from Seth, below are some notes from the panel discussion via JP Morgan Cazenove Conference January 14th 2014 (Note: JPM does not note which speakers made which comments, but we do know that Baupost is bullish on European RE).

Seth Klarman Baupost Group

 

Regarding European RE, JPM notes that 1) total return expectations from CEOs and investors seem optimistic to us; 2) however, a wave of capital is bearing down on European property in 2014; and 3) London offices are in delivery phase, next comes derisking.

Panel 1: Winning trends for 2014

British Land, Chris Grigg, Chief Executive Officer
Deutsche Annington, Rolf Buch, Chief Executive Officer
SEGRO, David Sleath – Chief Executive Officer
Thames River Capital LLC, Marcus Phayre-Mudge, Fund Manager
The Baupost Group, Tom Blumenthal, Partner & Co-Head of Private Investments
Moderated by: Robert Fowlds, Head of UK Real Estate Investment Banking Team

On where to find opportunities

UK Retail is seeing definite increased demand for stores across the UK. Tenants have increased clarity on their expansion plans. Remain cautious on secondary “not seeing any recovery.”

German residential will see rents increase over the rate of inflation, which remains low. Despite expectations for shrinking populations, recent data showed its actually growing due to immigration combined with household demand derived from smaller household sizes could help rental growth further.

Selected European industrial and logistics markets are seeing the best environment in four years, with upside risk to GDP. The best markets are seeing a shortage of space due to lack of development, which remains low.

The internet is a driver of massive change in logistics. Opportunities exist on the edge of major conurbations, targeting the last leg of delivery.

The last 25 years has seen warehouse space in London fall by 40%….

On the UK, very positive, I would say the most positive for a few years”

Areas of low liquidity represent opportunities for investors with long term capital.

Deleveraging provides the entry opportunity.

On capital flows for 2014

There is a wave of private capital targeting European real estate.

Direct investment by overseas investors into the UK will increase in 2014, and will spread into the regions.

There is a ‘bun fight’ for direct real estate in the UK.

On REITS and the European listed property market

There is an opportunity to meet the demand for real estate exposure in a liquid, transparent form.

The growth enjoyed by the US market over the last decade makes the level of progress in Europe “heartbreaking.”

Moving forward, we need to trust management, ensure alignment of interests and encourage lean, efficient cost structures.

On the risks ahead

Bond yields and US tapering will ¡§impact property values more than anything else.

Debt markets remain complacent. It is possible to cheaply lock in low interest rates for a long period.

Long term economic recovery is the main focus. Cautious around central bank measures, especially the Bank of England with the unemployment target.

“Very concerned about an increase in bond yields without growth.”