It can be hard to look at a situation clearly when you are living through it. How do you know which band is heading for the rock-and-roll hall of fame and which will be a one-hit wonder whose fate is to be the answer in a pub quiz?
The same is true in business; hindsight may be 20/20, but in the here and now you need to find a way of knowing which risks are worth taking and which investments will be tantamount to catching a falling knife. This is the case in any market, but it is especially relevant in today’s environment of historic inflation, structural and cyclical changes and geopolitical uncertainty.
So, how does one develop this intuition and foresight? The answer is straightforward: experience. When trying to predict the future, one has to start with the past and study history.
Looking at the challenges and opportunities presented by today’s market as an investor, we can navigate the former while identifying the latter. Importantly, we believe there are plenty of the latter. In fact, as an investor with value-add and opportunistic expertise, we are probably looking at one of the three most attractive markets in Europe in the last 30 years.
There are a few reasons for this. For a start, a lot of people who thought the US was the perpetual land of opportunity and growth are now dealing with the significant shock of rapid increases in interest rates, much higher leverage and the fallout of the failure of Silicon Valley Bank. Europe is certainly not immune to economic issues – after all, it was only a week later that Credit Suisse was acquired by its previous rival, UBS – but it is not facing the same level of volatility or leverage as the US.
Next, Europe has a far greater supply/demand imbalance across most asset classes, driven by the imposition of stricter environmental regulations and considerations. This will require the ability to navigate the new environmental regulations across each sector and geography, but those with the right experience and teams will find themselves at a competitive advantage over other bidders.
Finally, if the era of ‘cheap money’ is over, then now is an exciting time for those with asset management skill and expertise. Management-light strategies may have worked when the borrowing cost/cap rate spread meant that value-add returns could be driven from a core investment thesis, but this kind of financial engineering is no longer an option. Instead, investors will want to speak with managers who fundamentally understand the real estate in their portfolios and know how to deliver value from it.
All of this provides a fertile field of opportunity for the smart investor. Those who sit on their hands or opt to ‘wait and see’? Well, they will be the people who decided to stay home rather than attend the gig that became the next big thing. Put simply, they will miss out.
Keith Breslauer is managing director of Patron Capital
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