Keith Breslauer
Patron Capital
Having been through various changes, the real estate industry is susceptible to liquidity shortage in times of shock, says Keith Breslauer of Patron Capital

How has Patron Capital coped with things like the 2008 recession and the uncertainty around the EU Referendum?

I think the starting point is that we have never leveraged any of our businesses too much. The reason for that is that we have always been very fearful of debt, and particularly of not being able to firmly predict the outcome of an event while giving control to the banks; cure rights are extremely important for us.

Secondly, about half of our strategy has always been invested in companies that generate cash—corporate investments, backed by real estate, that have ongoing incoming cash.

Finally, we sold a lot of investments before the crisis and we didn’t invest too much in the boom, so we protected ourselves in that way.

However, one of our biggest challenges was when we made a lot of money in central Europe and then started investing in ground-up developments, so when the financial crisis happened, the duration on some of those was significantly extended.

Has the UK’s decision to exit the EU had an effect on Patron Capital? Will you retain your focus on the UK?

We moved our annual meeting for the day after the UK’s EU Referendum, as it was key to reflect on the referendum decision with our investors.

An important point to note is that over the past few years, the number one reason why the markets in Europe and the UK started to improve, following the 2008 financial crisis, was the return of liquidity to the market. Four or five years ago, people started again to borrow to buy assets, and that helped transaction activity and liquidity. Before Brexit, my concern was that something could happen to normal property transactions, such as an increase in taxation in real estate.

Taxation is that one thing that no one in the property industry can completely predict, and it has a huge impact on how institutions buy, particularly in the UK.

So, right after the Brexit result, the real issue we had to worry about was liquidity and the fact that there was no leadership at the time. We had no idea what was going on with monetary supply, taxation, the British currency and cross-border trade.

The Bank of England lowered rates and essentially supported the market. The government also reduced taxation, and the value of sterling dropped.

Currently, liquidity is being protected by the Bank of England, and while stability has been somewhat preserved, major challenges remain.

What kind of trends are you seeing in real estate funds in Europe? Which areas are performing well, or not so well?

Anything with an income is attractive; the thing about Europe is that there is trapped cash. Domestic institutions want domestic assets. There is a lot of cash in Spain, Germany and France, and domestic institutions are desperate for home assets with yields, which are very valuable at the moment.

Spain has demonstrated serious improvements but supply still remains. Germany is tight. The UK has limited supply, although questions remain regarding London. As levels of taxation have equalised across Europe, it will be very interesting to see how the market fares going forward.

There is still a big problem with distressed markets in Europe, with assets sitting in banks, and there is a real question mark on what will happen.

There is also an obvious question around Italy.

All of the distressed assets there have not yet been marked properly and everyone knows that, so we have to question why any investor with money would invest in Italy.

What about in the Asian market, how is that affecting the UK and Europe?

Some investors believe that because the sterling has been de-valued, those holding a lot of cash in Chinese currency and euro are coming to the UK market thinking that it will be cheap. But nothing is really cheap here.

What developments would you expect to see in real estate investment over the next couple of years?

I think that anything that can generate a good yield will continue, so that includes all activity on student housing, alongside any existing assets trading with an income.

The big issues now will be around the Italian reform referendum in November and the US Presidential election. Moody’s has already expressed concern that if Donald Trump becomes President of the US, funds rates could rise significantly, and the dollar could become stronger than the euro. The implication of this is that the euro will weaken and the export market in Europe will improve.

At any time of great shock we see the risk of a drop in liquidity. At the end of the day, my biggest fear in the real estate market is anything that will negatively affect liquidity.

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