AEW Europe's Silver Lining
Amidst Credit Market Turmoil

Real-estate investment manager Curzon/AEW Europe is betting on silver linings. Rather than fretting over the current turmoil in the U.S. housing and global credit markets, the investment manager is embracing the uncertain climate as an opportunity, says Ric Lewis, senior managing director and chief investment officer of AEW Europe.

"Turmoil can play to your advantage -- but you need to know what you like," says Mr. Lewis, who is based in London.

Unrest in the European market is on the rise. This week the shock waves emanating from the subprime mortgage crunch in the U.S. rippled out to the United Kingdom, where Northern Rock PLC became the latest casualty of the global credit squeeze, plunging Britain into a deep banking crisis. Hundreds of panicky account holders have rushed to grab their savings from Northern Rock in the past few days, a move which prompted shares in the lender to plunge 35% Monday. However, following a pledge by Chancellor of the Exchequer Alistair Darling to guarantee savings at the country-s fifth-largest mortgage lender, shares closed up 8% to 306 pence ($6.11) yesterday.

AEW Group, a subsidiary of Boston-based Natixis Global Asset Management, has about €30.7 billion ($42.57 billion) of real-estate assets under management globally. About half of these assets are in Europe, with the rest in the U.S. The firm has less than 1% of its portfolio in Asia.

Mr. Lewis, 44 years old, is spearheading the company-s international investment drive. Here are excerpts from a recent interview:

The Wall Street Journal: In the current uncertain climate, where do you see the best real-estate investment opportunities in Europe?

Mr. Lewis: I think that once Germany settles down from the perception of it being the phoenix of Europe to just being a large economy that is starting to grow again, it will offer real value across the board for real estate.

Also, there are a lot of public issuances where companies need capital or a partner going forward -- I think that is going to be a real opportunity across Europe, especially in markets with strong economies, such as France.

WSJ: As many European property yields are below the cost of borrowing, do you now expect yields to rise? If so, what would this mean for the market?

Mr. Lewis: Yes. There are particularly difficult markets at the moment where yields have to go up. If you look at markets like Ireland, the U.K., and Spain, household debt accounts for over 70% of [gross domestic product]. Also, in the U.K. and Ireland, around 70% of mortgages are financed with floating-rate debt, so the sensitivity of the marketplace to a one percentage point change in interest rates is very significant.

It looks like it-s shutting down in the U.S. and it-s slowing down in Europe. I think the real-estate deal volume in Europe in the second half of this year will be significantly smaller than in the second half last year. [European commercial real-estate deals in the second half of 2006 totaled €133.3 billion, according to real-estate advisory firm Cushman & Wakefield Inc.]

WSJ: As banks tighten their credit lines, are there any signs that financing problems are hobbling existing real-estate projects in Europe?

Mr. Lewis: Yes, definitely. Some transactions have broken off or have had to be repriced. As a result, many transactions are taking longer. We-re seeing that people are now putting more equity in. In particular, large high-profile residential developments are suffering. Even in emerging markets like Turkey and Russia, in the long term, I think financing issues will also pose a problem.

WSJ: Do you think there will just be a brief liquidity squeeze in Europe or is the impact likely to be further-reaching?

Mr. Lewis: In the subprime market, the tightening of credit lines is the first shudder to the system. It forces the banks to look at -- and recognize -- the financing excesses of the last several years. At the moment, there are a lot of banks looking to sell things to each other, such as asset-backed securities, but when they look across the aisle they don-t know anymore whether the other institution is still a competent counterparty. There-s a real game of chicken going on. There is a huge amount of unsyndicated mortgage and commercial real-estate loans on banks- books -- probably in excess of €600 billion globally -- that banks bought to sell on but they just can-t sell them. In the next couple of weeks, banks are going to state their earnings -- I think it-s going to be a real shock to the system.

WSJ: A lot of property stocks across Europe are down by around 15% to 20% in the year to date. Are there any signs that this could ricochet out to nonlisted bricks and mortar, resulting in a price correction?

Mr. Lewis: I think almost certainly it will have to. There are fewer bidders on deals at the moment, which is a sign to me that the euphoria has calmed down, suggesting weakness on the sell side.

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