Copyright: David Lawson - Property Week Feb 2001
Eurotrotting is becoming commonplace among fund managers as the appeal of overseas real estate blossoms. The Prudential, Scottish Widows, Standard Life and Royal Bank of Scotland are all looking for investments. Then there are the Americans, of course: overfunded, overconfident and over here.
Lewis is no new age traveller, however. It has taken ten years to test the intricacies of a dozen airline timetables, during which he has built a property portfolio worth almost 930m Euro. Today SEPF is among the top shopping centre owners in Europe and rates that most rare of accolades, a ‘buy’ recommendation for its Amsterdam-listed shares.
ABN-Amro rates SEPF a ‘top pick’ estimating its shares are worth 13% more than their market price, and sees the company continuing to benefit from a buoyant retail market. Net income grew by 17% to almost 16m Euro in the six months to last December. Net assets rose 5% even after writing off the costs of a major reorganisation which has broken a long-standing partnership with blue-chip banking group Schroder. Lewis has swapped his 25% of a company owned with Schroder to manage SEPF assets for a 3% stake in the listed company. This will be renamed Eurocommercial Properties if a shareholders approve at a general meeting in April.
That link stretched back a long way. Lewis set up a management arm in Australia with Schroder during the Seventies, building a A$2bn quoted property fund. After deciding to come home, he set up a new company, choosing to float in Amsterdam rather than London because he wanted to explore the wider Continental market where he had already bought extensively for Australian clients. The Netherlands also offered the Holy Grail which has been pursued for so long and so unsuccessfully by UK funds: a tax-free listed status.
SEPF is the closest thing this side of the Atlantic to a real estate investment trust. It boasts the liquidity of a public company but pays no corporate income tax and investors can escape withholding taxes by taking dividends in shares. Yet despite the British links and a London office, it remains strangely distant from UK fund managers. Last year Equitable Life took a 41m Euro stake via a private placing used to help pay 155m Euro for Passage du Havre, a 20,000 sq metre Parisian shopping and office complex. But the holding is less than 10% and Dutch funds still control more than 75% of the shares.
Lewis says this may be partly because he has not courted Brits aggressively. Why should he when the Dutch are so keen? He refuses to issue paper just to tempt investors, nor will he buy merely provide a more impressive size. In fact, for the first two years after floating SEPF in 1990 he hardly put his hand in his pocket because the market was in decline.
‘It annoyed some investors but it was the right thing to do at the time,’ he says. Only in the mid-Nineties did SEPF really begin its spectacular growth as Lewis began to move heavily into shopping centres. ‘It became clear that they were the place to be because of the scarcity value,’ he says.
That term comes up time and again to justify why SEPF has moved out of other sectors so around 75% of the portfolio is now concentrated in retail centres. These are mainly in France and Italy but he is now moving northwards, with a foothold in Denmark and plans for buying in other parts of Scandinavia. Britain is out of the picture, however. Rents are too high compared with spending levels and earnings. The UK also compares poorly against the flexible, turnover-based leasing arrangements across the rest of Europe.
Detailed knowledge of factors like spending levels is vital. It can take two or three years of research before SEPF takes the plunge. This safety-first approach reflects the demand for long-term stability which is crucial to European funds. ‘They don’t like surprises,’ says Lewis.
It also stems from Schroder’s ethos, absorbed over many years of partnership. So why abandon association with such a blue-chip name? Partly peer-pressure, says Lewis. Other Dutch groups have moved towards integrated management, citing the saving in management fees. Another factor is that Schroder has sold its investment banking arm to Salomon, part of the Citibank conglomerate. The early appeal of tapping clients via 35 local banking offices has also diminished as SEPF reduced concentration to a handful of countries.
The strategy of safe, long-term investment continues, however, and could teach newcomers a few lessons. Being cautious does not mean being dull. Lewis caused ripples in the mid Nineties by discovering a whole new market in Italy, which now makes up almost half the retail portfolio. Others had shied away from what they saw as the black sheep of Europe, tainted by suspicions of double-dealing and opaque markets. Lewis shrugs off such fears.
‘We can get more information on retail space than in the UK,’ he says. The country has treasured its city centres and strictly controlled development. The retail licensing system offers a rich seam of information on supply levels, which is all stored for analysis in the company's files. These figures can be correlated with factors such as earnings per head of local population to spot likely growth areas.
He also dismisses worries about black markets and a toytown currency. ‘We have never had anything but straight – albeit hard - dealings,’ he says. And adoption of the Euro has brought international respectability to match a booming economy.
The common currency is a major reason for the recent frenetic interest in pan-European funds but Lewis warns newcomers not to bank on making a quick killing. Firstly, that would require a detailed knowledge of local markets that few possess – ‘perhaps only 20 people in the UK have this,’ he says.
A fundamental reason for SEPF's success has been the depth of knowledge and consistency of its management team, stresses Lewis. People like Tom Newton, Timothy Minns and economist Michele Schiavi have been with the company almost since the beginning. They have now been joined by an Italian team headed by Tim Santini and Valeria Di Nisio. Mills, who is spearheading the Scandinavian drive, also has an Italian link, as he acted for the vendor of SEPF's first Italian shopping centre. Then he was persuaded to put his mouth where the money was and joined SEPF.
Another limitation for short-life investors is that continental markets are not geared to this approach. Developers and funds are long-term players rather than quick-profit traders, says Lewis. Eurocommercial Properties’ long play will involve more of the same - finding shopping centres ripe for growth.
This might seem crazy in the US and UK, where retail investments are withering but Lewis points out that conditions are much different in mainland Europe. In Italy, for instance, customer spending is still rising and retailers are scrambling to expand. SEPF is planning extensions to its centres at Imola, Milan and Florence. Underlying growth shows up in the 13% rise in turnover at the 26,000 sq metre Carosello Centre in Milan last year compared with 10% across the whole portfolio.
‘A lot of older centres will need refurbishing and we will work our way south towards Rome,’ he says. The investment market is also in its infancy, so he will be looking to bring in local shareholders.
Turnover rose 18% at Passage du Havre last year, adding icing to what was already a sharp deal. This was a rare opportunity to buy a prime Paris pitch and now seems almost a steal at an initial net yield of just over 6%. Lewis admits it came his way partly because two other large French retail investments distracted the competition. He was also able to factor in savings flowing from reduction in management fees because of the split with Schroder.
Further opportunities to tap the French market are becoming scarce but while others have diverted attention to emerging markets like Spain, Lewis feels rents there are already a little too high. He is looking north for new opportunities.
Sweden might send shudders down the spine of most foreign investors because of the sheer scale of development and weak 6.5% prime net yields encouraged by a fragmented planning system. But rents are low in relation to turnover, running at 556 Euro/sq metre compared with 687 in France and a huge 2450 in the UK . This offers huge potential in the right locations.
He sees possibilities from cross-border movement among tenants. Danish and Swedish retailers are now treating the whole of Scandinavia as one market while the Italians are ripe for introduction to the well-heeled Swedes. Investors cannot weave these complex patterns from a distance, though.
‘There is no deep secret to this business. You just have to get out there and talk to investors, retailers and developers. It is pointless sweeping in like all-knowing demi-gods, expecting to make a quick killing,’ says Lewis in a barely veiled reference to investment funds looking for a five or seven-year turn. Then off he went to practice what he preaches. Tomorrow is Friday, so it must be France.