In a report entitled “The Pensions Crisis and the European Property Market”, London-based commercial real estate advisor Richard Ellis (CBRE) concludes that the annual investment needed to fund future pensions in Europe is between €150 billion and €300 billion, or about 1.5 percent to 3 percent of total European GDP.
To help address the shortfall – caused by declining birth rates and increased life expectancy – CBRE says pension funds' real estate allocation should be increased to between ten percent and 15 percent of their portfolios, compared with a current European average of 6.5 percent. This would translate into an additional €24 billion per year being ploughed into the European real estate market.
Report author Michael Haddock says this is likely to bring mixed blessings for real estate opportunity funds. On the one hand, he estimates that around 40 percent of this fresh capital (around €10 billion) is likely to be invested indirectly. A stronger demand than supply of real estate will push even the larger pensions into investment areas where they are not sufficiently comfortable to invest on a direct basis. Smaller pensions, meanwhile, “don't have the clout to invest directly themselves but do want to increase their real estate exposure”. This means real estate GPs on the fundraising trail could benefit from increased appetite for the asset class amongst all different sizes of institutional investor.
“The increase in capital will definitely be sustantial enough to have an impact on pricing.”
One less desirable corollary will be greater competition for deals from pensions investing directly. “In a cash-rich environment, returns are likely to be lower,” says Haddock. “The increase in capital will definitely be substantial enough to have an impact on pricing.”
But the report also notes that not everyone will rush into already crowded areas, predicting instead a substantial increase in investment in so-called “secondary sectors” such as leisure property and care homes as well as an expansion in the number of locations in which investment takes place. “The principal beneficiaries will be those markets and sectors that until now have been underexploited by major investors,” says the report.
One thing is clear: the European commercial property landscape may never look quite the same in the wake of the forecast tsunami of pension money.
FUNDS & INVESTORS
Aberdeen holds second close on fund of funds
Aberdeen Indirect Property Partners, the pan European fund of funds, has held a second closing on €202.5 million ($246 million) following an additional capital raise of €44 million. The fund, which was launched in February, is aiming to raise between €300 million and €400 million by its final close. It has invested a total of €75.5 million in three property funds, and is aiming to invest in between five and 12 more. The fund will mainly commit to core-plus funds and hopes to achieve an annual return of 10 percent to 14 percent.
Terrace Hill develops fund
AIM-listed developer Terrace Hill is reported to be in talks to set up a development fund. Managing Director Philip Leech told Property Week that the firm was aiming to raise £50 million ($87 million; €72 million) of equity from institutional investors by the autumn; a further £50 million of debt financing will bring the fund's firepower up to £100 million. The firm intends to put some of its existing developments into the fund as well as to make new investments with development angles.
Insight to invest up to €2bn
Insight Investments is planning to invest €600 million ($724 million) in commercial real estate in continental Europe, and hopes to eventually raise this figure to €2 billion. It is understood that the firm plans to use some money from its balance sheet, as well as raising third party funds. The firm's first pan-European property fund will be based in Luxembourg and will be open to external investors by early 2007. Insight Investment is the asset manager of the UK-based bank HBOS.
Property still tops the charts
Alternative investments are the most popular asset class among pension funds and real estate is the most popular alternative asset, according to a survey by consultancy Watson Wyatt and Global Investor magazine. The survey found that, globally, pension funds have invested $62 billion (€51 billion) in alternative asset funds, of which around 49 percent is in property, 38 percent is in private equity and 13 percent is in funds of hedge funds. However, funds of hedge funds saw the largest inflow in 2004, accounting for around half of all new money put into alternative assets last year. “Pension funds continue to reduce their reliance on equities as they find suitable alternative sources of risk,” said Roger Urwin, global head of investment consulting at Watson Wyatt. “The message of diversification is definitely getting through.” The survey was based on responses from 125 firms involved in property, hedge funds, private equity and commodities.
Morley given multi-manager mandate
The UK's Environmental Agency Pension Fund has appointed Morley Fund Management to manage its £60 million ($104 million; €86 million) property mandate. Morley will invest the mandate in a portfolio of indirect UK property funds. Phil Ellis, the Head of Institutional Property at Morley, will act as lead fund manager for the mandate and will invest it in a portfolio of indirect UK property funds. The Environmental Agency Pension fund manages over £1.1 billion in assets. This is its first allocation to property.
New hire for Doughty
Doughty Hanson Real Estate, the property arm of the UK-based private equity firm, has announced the appointment of Douglas Edwards as a principal and member of its management committee. The 45-year old was formerly a director and principal at AXA REIM's real estate private equity fund, and has also worked as a director of Rodamco's RoProperty Venture Capital, as well as UBS in London and New York. In his new role he will be based in London and will work closely with the head of Doughty Hanson Real Estate, John Howard, in investing Doughty Hanson & Co European Real Estate Fund II. This is the firm's second senior appointment this year, following the announcement in March that Lahlou Khélifi was to develop its investment strategy in France.
Vreeker moves to Global Property Research
Jeroen Vreeker has left his role as an analyst at Dutch merchant bank Kempen & Co to join Global Property Research (GPR). In his new role he will be responsible for marketing GPR's index products and liaising with clients. He will continue to be based in Amsterdam. Prior to taking up his role in Kempen's property research arm, Vreeker worked at the Euronext-listed financial services group Dexia Securities. Global Property Research provides benchmarks and information on property companies for financial institutions. It also produces weekly and monthly property reports.
Halbertsma to head Rabobank real estate
Rabobank Groep, the Dutch financial services firm, has appointed Tjalling Halbertsma to head its newly merged real estate division. Halbertsma, who takes up his new role on October 1st, has previously worked at companies including Fortis and ABN AMRO. He is also a prominent figure in Dutch politics, having chaired the opposition Labour party in Amsterdam. Rabobank's main real estate units, the lender and developer Rabo Vastgoed and FHG Bank, a former Hypo Real Estate unit, currently operate as independent companies. In 2004 they generated a combined operating profit of €85 million ($109.6 million).
Winfield to head industrial at JLL
Cushman & Wakefield Healey & Baker has hired Peter Winfield, the former director of industrial investment at Jones Lang LaSalle, to head its industrial capital markets division. Winfield, who joins the real estate consultancy and investment firm as a partner, will help to expand the firm's investments in the industrial, warehouse and logistics sector. He was with Jones Lang LaSalle, the real estate services and investment firm, for 17 years, and has been a keen advocate of the UK's growing sale and leaseback market. This is Cushman & Wakefield's second senior appointment in recent months, and follows the promotion of Michael Rhydderch to head of pan-European investment.
Hunter heads east
Mark Hunter, the managing director of Edinburgh-based Hunter Property Fund Management, has announced that his firm is to launch a new €100 million (£67 million) fund to enable high net worth individuals to access the central European commercial property market. The St. Wenceslas Property Fund will be a closed-ended property unit trust and will focus on the Czech Republic and Slovakia. It aims to deliver a return of 15 percent over the fund's eight-year life. Mark Hunter founded Hunter Property Fund Management in 1999. Its previous funds, which include a £30 million core fund and a £120 million retail fund, have all focused exclusively on the UK.