UK real estate giants eye European expansion

Copyright: David Lawson appeared Property Week Spring 1998

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Hammerson

Ron Spinney is a difficult man to pin down when he is on the move. Last month it was the torturous business of shifting home in London which kept him busy. But for five years the chief executive of Hammerson has rarely been in one place for long as he jetted around Europe reshaping the company's portfolio..

The grand plan he introduced after taking the reins at Hammerson is now coming to fruition, however. The company has a higher proportion of overseas property than any other major UK listed property firm and this is still being reshaped to give a heavier emphasis on Europe. The intention was to concentrate assets into larger lumps in growth sectors and markets where Hammerson could achieve critical mass.

That left the company with around 15% of its 2bn pound-plus portfolio in France, 6% in Germany and 1% in Spain by the end of last year. But the figures could alter as assets are upgraded.

'We are still looking at expansion in Europe,' says Spinney. 'The economic cycle lags behind that in the UK, and things are now looking more promising as vacancy rates fall.'

Rents and values are looking more healthy and will improve further as a clutch of schemes are going through major changes . In Paris, for instance, work has started on transforming the former Banque Indosuez building on Rue de Courcelles into more than 20,000 sq ft of offices. The building, bought for 43m pounds in 1996, is being redeveloped into modern space to match the prime location between the Arc de Triomphe and St Lazare Station.

The French capital is beginning to recover from a deep slump and is always short of big central buildings, so the scheme should mature with impeccable timing.

Hammerson has other major holdings in the city, including seven office blocks and a 10,000 sq m office and retail building on the prime Rue Haussman, but most market attention is focused on its shopping centres. These were a crucial part of the portfolio restructuring made by Spinney when he moved the balance of the portfolio more towards retail and switched out of Australia and into Europe.

At Troise Fontaines, a 60,000 sq m centre at Cergy-Pontoise, north-west of Paris, rents have been helped by a refurbishment completed in 1996. Hammerson paid 26.5m for the remaining interest in the centre a year ago and is now evaluating a 15,000 sq m extension.

On the other side of the capital, work is already under way on the 20,000 sq m Espace St Quentin, where a 2,500 sq m extension is planned around a new anchor store to supplement the centre.

A more recent acquisition, the 55,000 sq m Markisches Zentrum in Berlin, is being reshaped after receiving planning permission for refurbishment. The first phase involves adding 3,000 sq m of retail space - most of which is already let. Further work involves roofing over the centre and creating a mix of leisure uses, such as a multiplex cinema. The southern section of the centre will also be reconfigured.

Grosvenor Estate

The biggest problems with cross-border investment are haste and ignorance. Waves of investors have surged across Europe over the last couple of decades and then retreated because they rushed into unknown markets.

The Grosvenor Estate has been around too long to rush anything. It looked at Continental markets in the Eighties and recoiled, missing the big slump. Feelers went out again in the Nineties but it took until the summer of 1996 to decide on the right moves. When the timing is right, this venerable old concern moves quickly, however. In less than two years its exposure has leapt to around 1.7 billion pounds of property.

The approach has been unlike any other UK player. Instead of trying to outguess locals, Grosvenor has joined them. Equity stakes were taken in three leading groups in Portugal, France and Spain. Meanwhile, a partnership has been established with a leading Continental investor to create a trans-European portfolio.

Neil Jones, brought in from Healey & Baker to run the European operations from London and a new office in Paris, says this was not intended to exclude direct development and investment. 'We look at everything. It just happened that in the last 18 months, equity partnerships have been the best opportunities.'

Tradition has long been the trademark of Grosvenor Estate. The private company owned by the Duke of Westminster practically invented London's West End and has maintained ownership for centuries. But the group was happy to sell a substantial portfolio recently to plough into Grosvenor First European Property Investments (GFEPI), the holding company for these stakes.

The first move involved a pooling of three London office blocks with three Paris properties owned by Exor, a long-time business partner and part of the Agnelli Group, into a new company called European Prime Properties. This followed ten years of watching the Paris market wax and wane and is intended as a base to extend into office investments in other European capitals.

The next stage involved strategic equity stakes. The first was a 5% holding in Hermanos Revilla, a Spanish company which owns and manages around 105,000 sq m of offices and shopping in Madrid. The arrangement was made through the controlling shareholder, Fomento de Construcciones y Contratas, the largest listed construction group in Spain.

The two firms have similar profiles. Both are private, family concerns with high-quality city-centre portfolios. A place on the board also gives Grosvenor an opportunity to learn about a new market from the inside.

Societe Fonciere Lyonnaise, where Grosvenor has a 7.75% stake, also has a similarity, as it is one of France's longest established property companies. The 236,000 sq m portfolio is split almost equally between residential and commercial and is mostly in central Paris. This is also similar to Grosvenor's core London holdings.

Again, the partnership came via leading shareholders, in this case UK funds Commercial Union and Hermes, which both have strong links with Grosvenor.

Last year a 25% stake was announced with Sonae Investimentos, the largest shopping centre developer in Portugal, which has just floated on the Lisbon exchange. The choice revealed an adventurous confidence by Grosvenor, as Portugal was not seen as one of the core European markets.

Sonae, which intends expanding into Brazil, is another kindred spirit, as Grosvenor is a leading owner of UK shopping centres and has interests in 600,000 sq m of shopping in the US, Canada and Australia.

So for an overall cost of 120m pounds, Grosvenor has carved niches in several markets. Now the pendulum has swung in the other direction, with the sale of a 25 per cent stake in GFEPI to Paris Properties Private, an arm of the massive Singapore Investment Corporation (GIC).

Jones says this is breakthrough. 'GIC is an important global investor,' he says. 'It will give us additional scope to take advantage of new opportunities in Europe

Heron

One of the property industry's great survivors is blasting his way back to the top with a 500m pound pan-European development program. Gerald Ronson built Heron into one of Europe's biggest private development groups before collapsing under a mountain of debt in the slump. Now he is on the way to regaining that role.

He was kept on by the banks and the private investors who took over 80% of Heron because of his legendary development skills. Now Ronson is putting the knowledge gained from building in nine European capitals back to use - and as usual, he is not doing things by halves.

Work begins this year on a 175m pound chain of entertainment of leisure centres in Barcelona, Lille, Madrid and Stockholm. Another could follow in Paris. Not satisfied with this, Heron is looking for further sites in Germany, Switzerland, Scandinavia, Italy and Portugal. The schemes under way range from 20,000 sq m to 40,000 sq m, using a successful US formula yet to be seen in Europe.

This involves integrated centres anchored by an international multiplex operator. American Multi Cinemas has committed to Madrid and Stockholm. Themed restaurants, leisure retail, family entertainment and health will make up the remainder of the sites. Heron says it is working closely with international leisure groups on the centres.

Each will be tailored to different national cultures, drawing on the knowledge Heron acquired constructing more than 150 buildings across Europe over the last three decades.

'But this will not preclude expansion into other sectors,' says Peter Ferrari, executive director for acquisition and development. 'We are looking at most European capitals for prime central offices.

This has been Heron's proving ground over the years, through a development portfolio including Madrid, Barcelona, Lisbon, Geneva, Berlin and Brussels. In France alone, the company has built 120,000 sq m of commercial space, most of it in the Paris financial districts.

'Vacancy rates are falling and rents rising across Europe. The skill is to hit the cycle right so you don't have to overpay for sites,' says Ferrari. Heron has already done this in London where it has started speculative development including an 80m pound office block in the City and almost 200,000 sq ft of space in Holborn.

Retailing is also on the list. Last year the company spent 40m pounds on a 9,000 sq m retail investment on Rue de Passy, the prime Paris shopping street, via a loan from Depfa bank. This brought transactions in the first half of the last financial year alone to 600m pounds. Some 100m pounds of that was concentrated on 40,000 sq m of offices and shopping in Madrid, Barcelona and London. This program also includes more than 270 apartments in Madrid.

Construction finance came from Deutsche Pfandbrief und Hypothekenbank, UBK and Banco de Santander. But money is the last thing Ronson will be worrying about. He has at least 75m in in cash to blow on the leisure sites and can always call on some of the world's richest men, such as Microsoft's Bill Gates, who were happy to take over the banks' stake when Heron was having problems.

They recognized the value of Ronson as a bridge into the recovering European property market with a partner willing to put his own money on the line.

Rodamco

When Chris Bartram takes over as chairman of the Rodamco Europe management board this summer, the portfolio will look a lot different than when he joined the group from Jones Lang Wootton a few years ago.

In the last 18 months alone, emphasis has shifted considerably. Around 17.5% of the 5bn pounds of property assets owned or managed by the fund are now in the UK and 12.4% in France. Spain is also moving into favour, with around 4% of assets, while Germany is on the way down.

A big jump came with the takeover of CEGEP, making Rodamco the second largest shopping centre owner in France. 'We are now happy with what we have got and will be looking to raise the quality,' he says. 'The cashflow has been very stable over the last year but we are now working up asset management plans. Every centre has some angle to exploit'

This takes time, however, because of the split ownership rules in France, which require a lot of consultation. Meanwhile management board member Joost Bomhoff says the hunt will continue for more cyclical assets to build on this core portfolio.

The UK has also seen major activity. Some FLS775m was spent on one large portfolio and FLS64m on further individual buildings last year. Kinnaird Park in Glasgow was sold for FLS131m and further assets for FLS56m.

More cash is on its way, however, from Singapore Investment Corporation and Dutch pension fund KPN, which paid more than 30m pounds each for shares in Rodamco UK. Bartram now has around 100m pounds to spend on industrial and provincial office property, plus a possible dip into London's West End. Other shareholders in the 900m pound UK portfolio are ABP, Metaalnijverheid and Hoogovens.

Spain is also a favoured hunting ground, with shopping high on the menu. Rodamco now has six centres after the recent acquisition of Los Glorias in Madrid, which will top up assets in this sector acquired three years ago.

'We are expecting good growth as Spain integrates with the European Community and would aim for substantial exposure,' says Bomhoff, one of the the management board members in charge of operations on the Continent.

He points out that Rodamco has shown its enthusiasm by opening a local office. Acquisitions have also included two modern industrial buildings in Madrid, and the fund is also running its eyes over several office investments.

Germany is at the other end of the spectrum. The fund is gradually withdrawing to find better yields and escape the influence of over-renting. Frankfurt offices let at DM65/sq m a few years ago are now down to DM45.

Eastern Europe has been on the agenda for several years. 'We have done business in the Hungarian industrial market and we are looking at the Czech Republic and Poland,' says Bartram. But legal formalities still have to be clarified before further moves are likely.

Schroder International

Jeremy Lewis must be a favourite dinner guest for fashion victims. Trade discounts will be piling up as he becomes the largest retail landlord in northern Italy, world capital for designer labels.

A couple of months ago the manager of Schroders International Property scooped up his second shopping centre in the region - and is keen to get another. No other institutional investor has moved into this market - which bemuses Lewis, as the gap seems so obvious.

'Northern Italy has among the highest spending power per head in Europe and practically no shopping centres,' he says.

A contract to buy the Mantova centre in Lombardy for Lira32 billion followed within weeks of completion on the Lira62.5 billion deal for the Carosello in Carugate, Milan. Schroders also bought the hypermarket in this scheme last year for Lira73 billion.

The earlier deals have more than justified Lewis's pioneering moves. He bought at yields around 10%. These are now down to 8.5% and rental values have grown by 12.5%. The shopping spree has been fast and furious. Five years ago Schroders had no holdings in Italy; by last year they were up to 25% and now nudge a third of the fund.

This is part of a wholesale expansion in which overall property holdings have almost tripled to NLG617m. Lewis has been to the market twice to fund this growth through share issues. Last year's NLG150m has now been soaked up but there will be no further calls to back ambitions for further expanding the portfolio.

'We now have much lower gearing with net debt of NLG220m compared with shareholders' funds of NLG620m, so we can use debt instead,' says Lewis. That gives him about NLG500m for his shopping trips.

The 1.6m sq m of retail now makes up 63% of the portfolio compared with 54% five years ago, and will rise even more as Schroders targets other growth areas. Lewis makes no secret about the fact that he would like another centre in northern Italy before yields harden too far, but other countries are also on the agenda.

'Spain now looks more attractive,' he says. France, which already makes up a third of the portfolio, is also on the hitlist. But intentions are not always easy to carry through. A centre in one northern city was lined up to take NLG24.3m of last year's rights issue at a yield of 9.15% but fell through.

Another planned move which bit the dust involved 7,600 sq m adjoining office buildings in Amsterdam, lined up for almost NLG26m at a yield of 8.7%. Neither failure has put Lewis off, however. France is still ripe for investment - if you can get the figures to add up - and Amsterdam has the right balance of supply and demand for offices, he says.

Service centres in the Netherlands are begging for more space. The fund has recently paid NLG40m for two buildings and a site with a combined potential of 17,600 sq m in Utrecht. The 8% yield should rise another 1% once the third building is complete. Office vacancy rates in the area have fallen to 6% because of growth in the financial sector and lack of development.

One country off the agenda, however, is Germany. Lewis points out that the reduction from 22% to 4% of the portfolio reflects not just the low yields but the fund's preparation for European monetary union.

Schroders firmly believes that a single currency will arrive on time. 'This means investors no longer need to put resources in Germany just because it has a hard currency,' he says. The country will not lose out, however, because it has such a huge reservoir of resources from its own investors.

Slough Estates

It is more than 30 years since Slough Estates decided to test its skills in mainland Europe and there are still no signs of regret. While other UK investors came and went, the UK industrial giant quietly ticked along.

Almost 5.5m sq m have been developed in that time and more than a third retained as investments - a total of almost 100m pounds, or 6% of the total company portfolio.

The secret of longevity lies in a conservative approach: the company mainly sticks to what it knows best. Almost two-thirds of development is industry and distribution, which is not the most glamorous end of the market.

'We often get asked if we are still active,' says Slough director David Simons. 'You get used to not being noticed.'

That does not mean offices and shopping have been ignored. Marks & Spencer opened its first German outlet in a 9,000 sq m building pre-let to Ludwig Beck on Schildergasse, in Cologne. But this is overshadowed by schemes like Willich-Munchheide, west of Dusseldorf, where almost 11,000 sq m is almost fully let and Seiko has pre-let more than half the latest phase.

Other schemes are also going on around the city, and Simons is happy to keep keep churning them out despite near-stable rents of DM9.8/sq m/month. This is because Slough rarely, if ever, builds speculatively, relying on pre-lets or turnkey operations.

Germany is a hard master, with low yields and a land market tied up in private hands. 'But you can add an enormous amount of value through development,' says Simons. This is why Slough has held onto almost 30% of its buildings while pure investors are drifting away to other markets.

Belgium was the first country Slough cracked back in the Sixties and it continues to play a key role. 'Despite continuing high unemployment, things are looking better there. Rents may begin to harden soon, as allowances are already dwindling,' says Simons.

For the last decade the company has concentrated on sites east of Brussels, taking advantage of cheaper occupation costs and the nearby airport. Once outside the city, occupiers are not subject to heavy property taxes. This, along with a shortage of buildings with big floor plates, is drawing out financial companies and has encouraged Slough to begin its first spec scheme - a 5,000 sq m office block.

The location has attracted international companies looking for headquarters buildings. DHL took a massive 13,000 sq m block at Pegasus Park on a turnkey operation pre-sold to a pension fund. It spent BF120m on its own fitout.

The business park has a capacity for 110,000 sq m of development following acquisition last year of land from IBM and Goodyear. Rents in this area are around BFR6/sq m compared with BFR8/sq m in Brussels.

France has also been a rich market over the years, first through joint ventures with groups like Mackenzie Hill and now a series of projects around Paris. Simons points out that computer-driven logistics operations which guide international distributors will focus on the city because it is such a dominant market.

'There may be almost 5m sq m of vacant warehousing in France but is is either in the wrong place or not suitable for modern operations,' says Simons.

Slough has taken out options with four new towns - Marne la Valee, Melun Senart, Evry and Cergy Pontoise - covering a total of almost 20 hectares to create ultra-modern distribution centres.

Two others have already taken off. Sony Music took more than 17,000 sq m at Busy St Georges which was then sold to Societe Generale. Rank Video Services has committed to a six-year lease on more than 11,000 sq m of a centre under way at Evry, and taken an option to occupy the rest of the 17,400 sq m scheme by 1999.

The French market has probably bottomed, says Simons. 'It was dragged down by over-supply but a two-tier market will now develop between modern space and the rest.' That does not mean Slough will begin spec development, relying instead on the attraction of producing a distribution centre in a mere seven months.