Credit availability is giving a boost to ‘old and rotted’ European buildings, an opportunity that Old Mutual European small-and mid-cap equities manager Ian Ormiston has been taking advantage of.
While construction levels remain fairly stagnant, the Citywire A-rated manager of the Old Mutual Europe (ex UK) Small Companies fund believes the current credit cycle will lead to a rise in the number of new projects across Europe.
‘[We’re holding] construction related companies. The reason being there are booms in Europe and we’re trying to capture some of them,’ Ormiston told Citywire Americas.
‘Overall construction is below the 2007, 2008 peak. What we’re trying to find is where the financing has started to recover - so where quantitative easing has worked and where we’ve got office buildings that are half-full or their last refurbishing cycle was 10 years ago.’
He said these buildings were ripe to be taken over, gutted and turned into more modern buildings.
‘This is one of the great things about Europe being old and rotted. It might look the same from the outside but it all needs to be improved. Is that driven by a growing economy? No. It’s driven by credit availability. So again it’s this misperception Europe is generally 30% below the peak, and we’ll never recover,’ he adds.
One name he is investing in is Dutch construction company VolkerWessels, which as of the end of August was the fund’s third top holding out of 53 names, accounting for 2.2% of the assets.
Another name Ormiston particularly likes is Swedish home improvement store chain Byggmax.
Byggmax had initially made its name in the expensive Swedish market 15 years ago as a place both builders and consumers could go for quality, cheap home improvement goods. The cheap prices were offset by the stores being ‘grungy buildings’, said the stock picker. However over the last few years the management had ‘confused the brand’ by making the stores nicer and acquiring two internet companies.
‘The opportunity now is they’ve hired a guy who is ex-Mackenzie and ex-H&M[…] and said “we’re going back to the grotty basic stores. We’re going to make smaller ones for smaller places, and we’re getting rid of the dot.com business because we don’t need it. We will grow by 10% a year.”’
Ormiston said his team strive to find names that have a ‘cellular vision’ that works in an imperfect market, especially as smaller companies tend to ignore economic and political noise.
Over the last five years ending in August, Ormiston has returned 139.2%, while the average Citywire tracked manager in the sector returned 90%.