Gordon Gekko is moving to Italy
The blood is in the Italian streets already
Market imperfections can make investing fun. Despite the “robotization” of trade in recent years, there are still gaps and imperfections in the markets caused by human psychology and error, which can lead to superior gains to those on the “right side” of the trade. Italy may be one of the best places to look for such opportunities. If Gordon Gekko was real, he would have moved to Italy. There is certainly blood in the streets already (at least for some assets). Lack of financial records in English language, little or no analyst coverage mixed with investor worries about the Italian economy have driven the value of some securities a bit too low. A good indication that this is happening could be when hedge funds and PE houses begin to launch takeover bids.
Earlier this year, Luxembourg subsidiary of the large fund Elliott Associates (founded by Paul Singer), launched several takeover bids on four Italian real estate closed-end funds listed on Borsa Italiana – the Italian stock exchange (Elliott is not alone – Fortress and TPG followed suit later in the year). Of the four targets Polis (under the management of Polis sgr), Immobiliare dinamico (managed by Bnp Paribas), Mediolanum Real Estate fund of Mediolanum sgr and Alpha Immobiliare (managed by Idea Fimit sgr) have all largely deterred the bids, even if the offers were in some instances 40% in excess of the closing quota market price. Lethargic response of the Italian quotaholders may be explained by a lack of interest in the financial markets. Or, instead it could be that the Italian investors are remarkably stoic about their country’s troublesome period. In fact, there are good reasons for why they would not want to sell.
Most of these Italian real estate funds seem to operate “under the radar” of foreign investors. Since their first market offering, they have been trading at a discount or sub-par levels to their Net Asset Values, even if some of them recently managed to sell their properties at a gain or with only a slight discount to the book value notwithstanding the market conditions. QF Amundi Europa RE, for example, has managed to earn a gain of more than 8% on its disposals over the course of its operating history, which seems like more than a decent performance, given that most of the fund’s active years fall within the post-crisis period. This should also be a good indication that the fund’s properties are worth at least the NAV, i.e. the value on their books. Despite this, the fund is trading at a discount of 40% to its NAV.
Whatever the political or wider economical situation in Italy is, their price should not depend too much on this. The fund QF Amundi, for example, owns real estate in more stable European markets, including Paris and London. Some of them (for example Unicredit Immobiliare Uno) often own prime properties in Rome and Milan. They are like call options on Italian real estate. It is still before referendum, as this article comes to press, yet should the situation in Italy deteriorate further, these funds should actually offer a limited downside, because they are owned by passive investors – lethargic Italian savers, who are not trading actively are the best bet that there won’t be a sudden sell-off. Should the situation remain the same or improve, these funds could offer an interesting returns for a number of reasons.
1. Moves of the giants like Elliott and Fortress should trigger higher market attention, which should in turn make the funds more liquid. Although that these funds have withstood some recent tender offers, they may eventually change their owners in a piecemeal fashion. For example, after its unsuccessful takeover bid, Elliott began to build up its position in Mediolanum Re by buying shares on the secondary market. This, of course, should drive the price of the funds up over time.
2. Despite the current market environment, most of these real estate funds remain unleveraged. Once sophisticated investors like hedge funds take them over, they will be managed differently and the higher leverage should bring them savings both in terms of tax shelter and a (much) lower cost of capital. Indeed, these funds have one trait in common. They all give generous cash paybacks to their shareholders.
3. If Brexit can be expected to cause the prices of London properties to go down, investors will start to look for alternatives and this should also drive up the interest in Italian properties and land.
4. Many of these funds have been launched in the years just before the crisis and are slowly nearing their maturity. Whatever course of action will the quotaholders choose on maturity, it will certainly bring the price of the fund closer to the market value.
The things can still get much worse before they get better. Maybe the blood is still not in the streets for the wider Italian assets at the we print this article. Yet these funds may be the best bet on the upside. Limited downside and long (albeit if slow) upside. Indeed, positive surprises may also occur, if US hedge funds decide to come back and launch further takeover bids.