Italian real estate funds in demand

When you bear in mind the state of the Italian economy, the growing financial crisis and the much talked about pension liability going forward, it is refreshing to see some positive headlines regarding the Italian property market. It seems that hedge funds have recently switched their focus towards a number of relatively obscure Italian real estate funds.

Many of these real estate funds were set up before the financial crisis and were on the whole ignored by analysts and investors. So, why are these relatively obscure Italian real estate funds now hot property?

Discount to assets

When we say relatively obscure real estate funds, let us be frank, these are still funds worth hundreds of millions of euros. They may be relatively obscure in the eyes of institutional investors, prior to the recent change in attitudes, but they do hold significant property assets in Italy and overseas. The shares are relatively illiquid, one other reason why institutional investors have steered clear, which means there are few “free-floating” shares around and very little trade.

As a consequence the underlying share price of many of these trusts has lost connection with the underlying value of the property assets held. Some of the real estate funds listed on the Italian stock market are trading at a discount of up to 50% on net assets. As many institutional investors, and hedge funds in particular, work on margins there is certainly more than enough to play with.

No debt and cash flow positive

It will come as no surprise to learn that a number of shareholders in these real estate funds are reluctant to tender their shares for sale to hedge funds and institutional investors. Many of the proposed takeovers are struggling to gain enough momentum and acceptance among shareholders to close the deal. Without looking into the Italian property market in great detail many might assume some of the property assets in question could be overvalued. However, many of these assets will not have been revalued for years and indeed recent sales have been thereabouts, give or take a few euros, the book value of the assets in question.

If you were an investor in one of these funds would you be keen to take the first offer on the table? Would you be willing to sell your shares at a significant discount to their net asset value? When you look at the information in black and white it is no surprise that investors are reluctant to sell their shares on the cheap.

Short to medium-term uncertainty

As we touched on above, the acquisition of these “undervalued” property funds is based upon margins. Hedge funds and institutional investors believe there is enough margin to pay above the current share price, liquidate assets (or use positive cash flow) and still make a significant profit. The only potential issue is the short to medium-term uncertainty surrounding the Italian economy and the fact that all property prices will be impacted to a certain extent if the economy weakens further. There is more than enough margin to protect existing shareholders but any drop in property values, or fall in demand for property, would give the hedge funds/institutional investors less margin to “play with”.

However, shareholders in these obscure real estate funds are likely to be the focus of attention for some time to come.

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