An impending "meltdown" in the European commercial property market could force a swathe of smaller managers out of the business, it is feared. A combination of a nascent "freeze" in fundraising amid the deepening crisis in the eurozone, an expected pullback in bank debt financing and a backlash against poorly performing funds will sound the death knell for many boutiques, according to Jos Short, executive chairman of Internos Real Investors.
"Many fund management organisations have been disbanded, taken over or cut down in size. We have yet to see the worst of it. The next two years will bring an industry shakeout – 'meltdown' could be appropriate," said Mr Short.
"Given the conditions of the coming 24 months or so, given also the weakened condition of many real estate fund managers, it is inevitable that many will not survive in their present form," he added. "Those that grow will almost certainly not do so initially by launching numbers of profitable new funds but by absorbing the responsibilities of those that fail."
There has been a wave of consolidation in the sector already this year, with the likes of ING Real Estate Management, First Atlantic Real Estate, Evli Bank, Prima, Atrium Asset Management and JER Partners all disappearing as stand- alone European property managers. Some expect the trend to continue.
"We have seen a lot of the smaller boutique managers struggle to raise capital over the last 12 months and some of them have folded. There are certainly a number of boutique managers who will suffer," said Simon Mallinson, European research director at Invesco Real Estate.
Danny McHugh, head of continental European real estate at Standard Life Investments, foresaw a "flight to quality". "There are some boutique managers who raised a lot of money last time that the likes of pension funds may be less willing to put new money with."
According to Mr Short, as few as 10 of the 100 real estate funds that have tried to raise money this year have managed to reach first close, with the capital raising environment having "gone very dark" since August as the unfolding eurozone crisis has virtually ended any interest outside its Franco-German core.
At the same time debt financing is expected to become more scarce. To date banks have been circumspect in cutting lending to the sector, but Mr Short believed this would soon change given an impending "tsunami" of maturing loans and the sovereign debt crisis.
"European banks will face massive new write-offs and will call in every maturing loan they can. We may have to say goodbye forever to 'amend, extend and pretend'," he said, meaning "life support" for funds "may be summarily switched off".
Mr Mallinson said: "Managers have been looking for this great flow of distressed assets from banks. I think 2012 might be the year it will start to happen."
Mr Short added that "disappointment and disillusion" with the performance of property funds was leading many large investors, such as sovereign wealth funds, to instead look to build their own investment capability or invest via joint ventures or club deals.
But Pawan Malik, managing director of Navigant, a US advisory firm, said although banks were pulling back amid the crisis, there were a lot of funds that had raised capital in the past two years that were ready to pounce on attractive opportunities.
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