Like many investors, Taurus Investment Holdings is taking it slow in Europe because of market volatility and repricing.
“We are being very cautious everywhere,” Taurus CEO and managing partner Peter Merrigan said in an interview. “We are doing some industrial and office developments in Germany but yields are very tight, and the exit yield has become quite challenging.”
In August, Taurus announced an expansion of its United Kingdom activities by incorporating its U.K. arm with commercial real estate investor Nick Jacobs as a partner. Jacobs remains CEO of London-based Rowan Strategic Asset Management, but has been enlisted to expand Taurus RE Investments Ltd. across the United Kingdom.
Seven weeks later, a U.K. government minibudget full of unfunded tax cuts preceded an economic tailspin. While almost all the announced plans have now been reversed, the economy hasn't recovered.
Merrigan jokes that “U.K. politicians make U.S. politicians look boring."
On a more serious note, he said he believes the minibudget was a “short-term” drama.
“There are definitely headwinds in the U.K.,” Merrigan said. “There is high inflation, a lot of turbulence from conflicting government policies and energy problems.”
They won’t be the first headwinds he has experienced during his 25 years at the helm of the 45-year-old Boston-based private equity firm. In that time, he has overseen the acquisition and development of more than 69 million square feet of commercial space valued at more than $10 billion.
In the long term, Merrigan expects returns to stabilize and interest rates to move down again.
“Not to where they were last year but definitely below where they are now,” he said. “The tightening of the cycle will come to an end in the next six months. There will be significant overreach and they [the central banks] will have to stimulate demand and that will involve cutting rates again.”
Taurus is active in areas where Merrigan sees dislocation, such as multifamily and energy efficient offices.
In the U.K., it has begun with the acquisition of an environmental, social and corporate governance-focused office development in Parsons Green in London.
Together with W.RE, the London-based real estate developer and asset management firm, Taurus expects to reduce carbon emissions by nearly 50% from the baseline project. The development team also is aiming for a net-zero carbon construction target. The building will target an "Excellent" Building Research Establishment Environmental Assessment Method, or BREEAM, rating and a rating of A through Energy Performance Certificates.
“The requirements for EPC ratings on some commercial facilities in London will cause a disconnect between supply and demand,” said Merrigan.
The company is going ahead with built-to-rent projects because of the country’s housing shortage. Taurus is targeting the middle market, where, according to Merrigan, half the population would be able to qualify to live.
Despite higher interest rates, Taurus still expects to hit opportunistic-type returns between 15% and 20% gross by deploying capital in various ways, from preferred equity to development investments.
Leverage is still important, but “generally I start to see more cash orientation," Merrigan said. “Where there is little cashflow we take a longer view towards value creation to get to higher returns.”