Copyright: David Lawson Published in PropertyEU 2007
Hollywood heart throb Paul Newman was once asked whether he took advantage of adoring female fans. ‘Why go out for hamburger when there’s steak at home,’ he replied, referring to his wife Joan Woodward, another Oscar-winning legend. UK investors have long been as dismissive about overseas real estate. Why go abroad when sitting at home are juicy long leases, a mature, well organised market and stable economy?
But European hamburger has become more tempting as UK yields fall to around 4.5% and borrowing costs break 6.5%. British investors spent almost €11.8bn on European real estate during the first half of 2007, according the latest Capital Markets survey by international consultants Jones Lang LaSalle.
Big names such as SEGRO have followed pioneering entrepreneurs like Raven and REIT Asset Management, cutting some major deals over the last few months. But the major change has come from institutions and private equity funds, which have cast off lingering fears from disastrous ventures abroad 20 years ago.
Standard Life, Hermes and the Prudential have all set their sights on mainland Europe, and huge pots of cash accumulated by a range of managers are waiting in the wings. Unlisted funds accounted for more than a third of property investment across Europe in the first half of 2007, says JLL.
Nor will this tidal wave be blocked by the global ‘credit crunch’ according to the UK Association of Investment Companies. In fact, it could boost the flow. Demand for property will remain strong, says Michael Morris, director and manager of the ING UK Real Estate Income Trust. Tighter lending controls and negative yields will stifle UK trusts, adds Jason Baggaley, manager of Standard Life Investments Property Income. ‘But we can expect continued new issuance of companies investing in Continental Europe, where investor demand remains strong.’
European markets trail up to a year behind the UK, and rental growth prospects are mainly positive, so Europe is a key area for diversification, says Duncan Owen, manager of Invista Foundation Property. TR Property Investment Trust is confident enough to have created a new share class focused on smaller quoted property companies throughout Europe.
The ‘wall of money’ is rising almost weekly. AXA Real Estate Investment Managers has completed four funds with capacity to spend more than €2.5bn in which UK institutions are leading investors. UK developer Delancey has accumulated €1.5bn which could be geared up to €6bn for investment across Europe. Not all funds may be able to gear up to expectations, however, as banks clamp down.
The window of opportunity could also be limited in countries like Germany and France as yields harden. M&G recently launched a €380m European fund but Martin Moore, property chief of parent institution Prudential, expects a shift of balance out of western Europe to Asia.
There are also nagging doubts about whether managers will find outlets for all this cash. Peter Hobbs, head of global research at Deutsche Bank real estate arm RREEF, says only 15% of funds raised in 2006 have been invested. Nearly half the money accumulated in the last three years has still not been spent, he said at the launch of the Investment Property Databank European Property Index earlier this year.
So how do these funds expect to satisfy investors? Many are focusing on specific sectors and countries. AXA is targeting warehousing, Italian offices and leisure. Giant UK investor Morley will concentrate on the ‘golden triangle’ of the Czech Republic, Poland and Hungary, where yields are still attractive. Funds will also need to be more ‘entrepreneurial’, says Delancey chief Jamie Ritblat – in other words find property where value can be added rather than relying on a pure yield play.
Players and Targets
SEGRO, a familiar name in Europe under its previous Slough Estates label, invested £500m over the last couple of years and intends using £1bn from the sale of its US arm to continue expansion. It has opened a Milan office after buying a 71,000 sq m business park with 50,000 sq m of expansion space for €84.5m, an initial yield of around 7.4%. Other recent deals include a 50,000 sq m industrial portfolio near Lyon for €42.5m, a yield of 6.7%, and its largest-ever purchase in Europe, €197m for the KarstadtQuelle business park in Frankfurt. Spain and Romania are next on the list.
Another industrial property giant, PROLOGIS, has earmarked €600m of developments for its European private equity fund, while GAZELEY is tapping demand from UK investors to sell a €170m portfolio across Germany, Belgium and Italy.
HAMMERSON, also with long experience in mainland Europe, will reinvest in France its share of the €335m sale with partner AXA Real Estate Investment Managers of 9 Place Vendome, Paris, a net yield of less than 3.5%. The last German asset, Forum Steiglitz shopping centre, Berlin, is for sale at €150m - a yield of more than 5%.
As private companies with big reserves and cashflow, HERON International and GROSVENOR, are less vulnerable to financial hysteria and are continuing a long European campaign. Heron has unveiled plans for 40,000 sq m of retail and leisure near Lille, adding to similar centres in Spain and Sweden. Grosvenor has sold more than £200m of UK assets this year and now has almost £2bn of assets in Europe.
Institutions are still at an early stage in migration across the Channel but are starting to replace debt-backed investors.
STANDARD LIFE made its first foray into Sweden, buying 12 retail warehouses near Stockholm in two deals for €35.5m for its European Property Growth Fund.
PRUDENTIAL has brought shopping in Paris and Cannes into its new €380m M&G European Property Fund and interest is now focusing on how HERMES will spend around €1bn allocated by the BT Pension Scheme for European property.
They face stiff competition from big-spending private equity groups. Celebrity-backed AAIM paid around €1bn to an affiliate of French property fund manager Ixis AEW Europe for a 51-property German portfolio of Pratiker and Sinn Leffers fashion stores. These will go into the £2bn Symmetry Fund launched last year with Bank of Scotland, which also includes Budapest’s biggest shopping centre, the Arena Plaza, bought for €400m, and other centres in Germany and the Czech Republic worth €490m. The 20,000 sq m Lakeside Galleria a12,000 sq m Gniezno shopping centre in Poland have been sold to for €65m to help pay for a switch into Germany and new eastern European markets. AIM says since entering Poland in 2006 yields have fallen from 8.5% to 5.7%
Other recent deals include:
EVANS RANDALL has reached its target of €1bn of European property with the €175m acquisition of 58 German shops from private sellers, reflecting a 7.3% yield, and the €259m purchase of the Telekom Centre in Munich.
CIT GROUP bought the 13,000 sq m Euromarket Office Centre in Warsaw from Invesco Real Estate for more than €32m in its first central European deal.
CATALYST CAPITAL purchased the 22,000 sq m Der Clou shopping centre in Berlin from CGI for €70m. The passing rent is €4.37m a year.
KNIGHT FRANK RUTLEY bought an office and retail portfolio spread across Germany, France and the Netherlands at a gross initial yield of 6.79%. It also paid €111m for a Swedish portfolio.
ENSTAR CAPITAL is focusing on Germany. It has spent €25m on three properties including an 8,000 sq m shopping park near Leipzig at net initial yields of between 6.26% and 6.73%, taking its European portfolio to more than €200m.
TARGETFELLOW, another enthusiast for Germany, bought six properties totalling 18,000 sq m in Cologne for €25m from a private investor.
ABERDEEN PROPERTY INVESTORS purchased the 12,600 sq m Scheepjeshof shopping centre in Veenedaal, Netherlands, from ImmoPlus Beheer BV for €34m for its European Shopping Property Fund.
MATRIX European Real Estate Investment Trust bought 9,700 sq m of offices in two Montpellier buildings for €21m, the pre-let one at a 6.4% gross yield and an unfinished partner with a two-year rent guarantee at 6.8%. New equity raised in an oversubscribed London listing will go to £176.6m for the 63,000 sq m Vienna IZD Tower at a 5.7% yield.
NEW STAR International Property Fund is buying £121m of assets in countries including Germany and the Netherlands and lining up deals in France, Sweden, Denmark, Norway and central Europe.
CURO PROPERTIES paid €11.5m, reflecting a gross yield of 7.5%, for the 5,350 sq m Luka shopping centre and €5.8m for a 6,500 sq m distribution/office centre, both near Prague, showing yields of 7.5% and 8% respectively. It is also buying two properties near Budapest as part of a £60m investment plan for eastern Europe.
INVISTA European Real Estate Trust, which has concentrated on France and Germany to accumulate a €743m portfolio this year, is now looking at Italy, Scandinavia and the Netherlands, saying it is ‘not as huge fan’ of eastern Europe.