The real estate arm of Ares Management, the Los Angeles-based investment management business with $104 billion of assets on its books, remains in buying mode in Europe despite many of the region’s major markets reaching “advanced stages,” its global real estate head Bill Benjamin said in an exclusive interview with PERE.
London-based Benjamin was speaking amid a flurry of exits by the firm. A 1,550-unit residential portfolio in Denmark was sold to Nordics property company Heimstaden for €390 million late last month while PERE can reveal Ares has just sold the Kustermann Park office complex in Munich to a pan-Europe fund manager for €205 million and a 2,500 unit, residential-heavy portfolio of assets located across North Rhine Westphalia, Southern Lower Saxony, Bremen and Hamburg, to a residential property company for €130 million.
“Yes, the cycle is advanced, but we’re not calling the market.”
– Bill Benjamin
“I wouldn’t tell you we’re only selling,” Benjamin said. “We’re still able to find deals in the major markets. We’re not net sellers.” However, Benjamin added: “Clearly the mature, developed markets are in the advanced stages of cycles meaning there’s been a recovery for between five and eight years. That’s a fact.”
Nevertheless, he noted Ares’ sales in Denmark and Germany were executed with plenty of time left in the lives of the funds in which the assets were held. Kustermann Park, for instance, was only purchased two years ago. “The funds we’re investing from here have five to seven more years of life,” he said. “There was no pressure to sell.”
He also said that proceeds from the sales would be distributed back to Ares’ investors and not, as sometimes can be the case for funds which round-trip investments within investment periods, recycled into new investments. “Our disciplined view is the best thing you can do for investors is send the money back.”
He would not disclose returns from the sales, but confirmed the exits were “equal to or in excess of target” returns. Since its inception in 1995, Ares’ value-add and opportunistic funds in Europe have generated gross IRRs of 16 percent, according to the firm’s first-half earnings to June 30.
Benjamin said Ares currently had between €500-€600 million in available equity across two live funds, further making the need to recycle sale proceeds less important. One of these funds is Ares European Real Estate Fund (EF) IV, which closed on $1.3 billion, $300 million ahead of target. At June 30, $875 million of the fund had been invested and the vehicle was generating a 13 percent net IRR on a fair value basis against a 12-18 percent net return target and a 1.2x equity multiple, the firm said in its earnings.
The other was Ares Property Enhancement Partners II, which is meant to deliver to its investors a gross IRR of a slightly lower 11-14 percent.
In terms of future investments, Benjamin said logistics and residential properties in Germany and regional assets in the UK could feature. “We’re cautious as there’s been a run-up in prices,” he said. “But most have recovered to pre-2008 levels. And, I don’t see any external storm clouds; characteristics in major markets are favourable. There’s no building boom, real estate is still relatively cheap compared to liquid assets like stocks and bonds. Also, the cost of debt is cheap.”
“So, what could the storm clouds be? The weight of money will drive people to make imprudent deals and also a sharp rise in interest rates. The yield gap between unlevered yields and cost of debt is very wide and we could absorb some rate rise. But if it’s very steep, that would hurt capital values.”
“Yes, the cycle is advanced, but we’re not calling the market,” he said. Indeed, in the last few weeks Ares has picked up Zehlendorfer Welle, 269,100 square foot, mixed-use commercial property in Zehlendorf, a part of Berlin in a deal valued at €72.5 million from a private investor.