Real estate fund managers face a Catch-22 situation when it comes to raising their funds. Limited partners want to understand the kind of deals a GP will be targeting with their fund before committing capital but in today’s global property markets that is easier said than done.
With property transactions down more than 80 percent peak to trough, and down two-thirds between 2007 and 2009, many fund managers are still sitting on the sidelines waiting for the opportunity to invest their equity. Indeed, real estate consultant The Townsend Group estimates there is $80 billion of uninvested capital sat in more than 400 closed-ended real estate funds. However, some deals are getting done.
According to real estate data provider Real Capital Analytics, global property transactions increased 33 percent in the second quarter of 2010, compared to one year earlier, with sales totaling $230.9 billion and more than 5,600 properties trading hands.
The second quarter figures represented a general slowing from increases of 138 percent and 91 percent in the prior two quarters, but were still a positive sign for most investors as cap rates started to compress from their troughs, and in some countries, such as Hong Kong, even start approaching their peak levels. Working with RCA, PERE examines some of the deal highlights of 2010 and some of the trends that have emerged to date.
PORTFOLIO INVESTMENTS
In trying to clear balance sheets, lenders and institutions are selling portfolios of real estate
After falling sharply in 2009, investor interest in portfolio acquisitions is experiencing a comeback across all three global zones and in most property types. So far this year, closed global portfolio transactions have accounted for 25 percent of all investments – and at $44.3 billion are on track to easily surpass the $49.2 billion in 2009 deals.
The trend may be accelerating, with $9.2 billion in deals going into contract in July and August, bringing total portfolio deals currently awaiting closing to $14.2 billion. This includes a nearly $2 billion, 32 million-square-foot ING Industrial Fund portfolio that went into contract in Canada to investment firm KingSett Capital in a joint venture with Alberta Investment Management Corporation (AIMCo), the C$69 billion umbrella group of Canadian pensions, endowments and government funds.
Public companies and pension funds are leading the charge in every zone, not only because they have access to liquidity but also because they face keen pressures to judiciously deploy amassed capital.
However, the renewed enthusiasm for portfolios has not translated to entity-level deals, although there are intimations that M&A will pick up, especially among public companies. So far in 2010, less than $1.1 billion in entity-level deals have been announced, hardly a third of the $3.3 billion in such transactions in 2009 and a shadow of the $20.5 billion recorded in 2008.
When it comes to portfolio trades, the change has been most dramatic in Asia Pacific, where $9.3 billion in total sales year-to-date have comprised 20 percent of all activity, while 2009’s $5.3 billion in trades accounted for just 9 percent of all investment activity.
In the Americas, portfolio sales this year of $11.9 billion have also surpassed the $11.7 billion for all of last year, and account for almost a quarter of all transactions. The proportion of portfolio activity in EMEA has historically been higher than in other global zones, and this year’s 30 percent is no different; however, the zone’s portfolio investment total of $23 billion still lags last year’s $31.6 billion by almost a third.
Just two deals accounted for a third of the voluminous Asia Pacific activity, and the largest of these – the second largest global deal completed this year – was a $2.2 billion mixed portfolio of apartments, hotels and development-rights acquired in China by Singapore-based public company CapitaLand.
Troubled borrowers – and lenders – pressured to bring properties to market have also been responsible for major portfolio dispositions. iStar Financial’s sale of a mixed portfolio of office and industrial assets to Dividend Capital Trust has been the largest deal this year in the Americas. And, when it closes, Banco Santander’s deal for the UK branch portfolio of Royal Bank of Scotland, at $2.6 billion, will be the year’s second largest transaction.
Although not considered sale transactions unless a majority interest is conveyed, portfolio recapitalisations have also been part of the deal mix in 2010. In June, Tishman Speyer and partner SITQ recapitalised 28 offices in Washington DC, known as the CarrAmerica portfolio, investing $700 million of equity to pay down $600 million of debt secured against the properties and fund working capital for the buildings.
It all points to the likelihood that portfolio sales will continue to grow through the remainder of 2010 as lenders try to clear balance sheets and become more aware of growing demand. Investors seeking to deploy larger amounts of the capital that has been held off the market will also find portfolios increasingly alluring.
AMERICAS DEALS
As property transactions calmed in Europe and Asia in the second quarter, transactions in the Americas accelerated. Office deals in top-tier cities were among the winners
Several quarters after transactions and prices started to improve in the worlds’ other major economies, the US finally saw a spike in volume and fall in cap rates across all property types in the second quarter.
While nowhere near the explosion of deals and plummet in yields experienced in the UK in the final three months of 2009, the US is clearly playing catch up and the momentum is strong. Combined with positive trends reported in Canada and Brazil, the Americas outperformed Europe, the Middle East and Asia Pacific in both increases to volume and improvement in prices in the first half of 2010.
Transaction activity rose 21 percent from the first to second quarter, with sales of significant properties totalling $22.1 billion, the highest since the third quarter of 2008 equating to a 83 percent year-on-year gain, also the highest achieved since 2008. The results pushed total volume during the first six months of this year to $39.7 billion, up by 83 percent from the same period in 2009, although the number of properties trading increased by a more moderate 12 percent indicating an increase in average transaction size, another signal of an improving marketplace.
Office properties accounted for $14.1 billion of transactions in the Americas for the first half of the year, nearly double last year’s levels. However, hotels posted the greatest increase in transactions, rising 169 percent to $3.4 billion. The apartment sector and, surprisingly, land also experienced strong increases in sales in the first half of 2010 while increases in the industrial and retail sectors trailed the overall market.
Cap rates on closed deals have fallen from a high of 8.8 percent in the fourth quarter of 2009 to 8 percent at mid-year. The rise in sales year-to-date was primarily driven by top-tier US metropolitan areas, including New York, Washington DC and San Francisco. [See American idol chart, below]
Transatlantic tastes
Cross-border transactions, particularly with German open-ended funds, have been a prominent feature in prime US cities
German open-ended funds have been active cross-border buyers of US real estate in the wake of the crisis – not least Deka Immobilien. In September, the fund acquired another office propertyin a top-tier city, buying 19 West 44th Street in Midtown Manhattan for $123.2 million from REIT SL Green. SL Green originally acquired the building in 2004 for $67 million. The property is 99 percent leased, SL Green said in a statement at the time.
In August alone, Deka bought offices in Barcelona, Paris and London spending a total of $439.4 million. According to RCA, the fund acquired 14 Pier Walk in London for $152.3 million shortly followed by the Opera Gramont property in Paris for $97.9 million and the Avienda Diagonal 640 in Barcelona for $189.2 million.
In the 12 months to the first half of 2010, Deka has deployed more than $2 billion of capital on commercial real estate, matched only by Union Investment Real Estate, which acquired more than $2.5 billion. Since 2007, the two open-ended funds have bought more than $7.8 billion and $7.9 billion of property, respectively.
SL Green will continue to manage 19 West 44th Street with Andrew Mathias, chief investment officer, saying the deal was a “positive step toward what we hope will be a full recovery of the Manhattan office market, which we believe is occurring more quickly than in any other major US city”.
EUROPEAN DEALS
Property transactions in Europe, the Middle East and Africa have slowed slightly in the second quarter,
but markets continue to improve
Despite renewed macroeconomic concerns that emerged with the sovereign debt crisis, investment trends in the European property markets continued to improve in the second quarter, albeit at a slightly slower pace.
Throughout Europe, Middle East and Africa (EMEA) transaction volume totalled $31.3 billion in the second quarter, nearly identical to that recorded in the first three months of 2010. Prices generally improved with yields continuing to fall, but also at a more moderate pace. Through the first half of 2010, more than 2,530 significant properties worth some $62.6 billion traded in EMEA, a 41 percent rise in dollar volume and 35 percent by property count above the same period in 2009.
While transaction activity in EMEA has risen well off the bottom, it is also important to keep in mind just how deep that bottom was: the $62.6 billion of sales recorded in the second quarter of 2010 equals just 29 percent of sales during the first half of 2007.
In the second quarter, portfolio transactions accounted for more than a third of volume and nearly two-thirds of all properties sold, another sign that the credit markets are easing and investors are willing to make larger bets. Two of the largest transactions this year involved portfolios of industrial property and several large multifamily portfolios sold in France, Germany, Sweden and the UK. These deals helped the apartment and industrial sectors post the largest gains in transactions in the first half of the year. In a first, more apartment properties changed hands in EMEA in the second quarter than in the Americas.
Berlin’s play station
The Korean sovereign wealth fund continued to shop for prime office properties in Western Europe, snapping up the Sony Center from MSREF
In May, the National Pension Service of Korea closed on its purchase of the Sony Center, a large office-led property in Berlin, from a consortium led by Morgan Stanley Real Estate Investing. The deal was valued at €570 million and was just one highlight in NPS’ acquisition spree of prime, core properties in developed markets in Europe.
In November last year, NPS bought the London headquarters of HSBC in Canary Wharf in a sale and leaseback deal worth £772.5 million deal. In Berlin, the $200 billion Korean sovereign wealth fund partnered with Houston-based developer-cum-fund manager Hines.
It is a further example of the sovereign wealth fund teaming up with joint venture partners on bespoke investments. In London, NPS has awarded London-based firm Rockspring Property Investment Managers on a separate account basis to source investments. MSREI sold the asset on behalf of its Morgan Stanley Real Estate Fund VI.
Suburban shopping
A Meyer Bergman deal for a stake in the Bentall Centre shopping centre in a London surburb indicates rising values
Meyer Bergman acquired a 50 percent stake in the Bentall Centre shopping centre near London for £130 million (€143 million; $196 million) in March. The firm, which is chaired by Ton Meijer, the founder of Dutch shopping centre developer MAB Group, bought the centre from UK insurer Aviva. The stake was reportedly put up for sale in 2007.
At the end of last year Meyer Bergman was said to have been close to completing a deal for the retail asset in Kingston-upon-Thames for £105 million, suggesting values rebounded in the intervening period.
Markus Meijer, chief executive of Meyer Bergman, said it was a rare opportunity to acquire an interest in a prime retail asset in one of the most affluent suburbs of London. “We believe that despite the increases in value seen in the last quarter of 2009 and early 2010, the UK retail market still offers good value.”
Meyer Bergman has made one other acquisition for its incoming maiden fund – a shopping centre in Kiev.
ASIA DEALS
Transaction activity fell dramatically in the second quarter of 2010, but still represented an almost doubling of deal flow
Commercial property transaction activity slowed throughout the Asia Pacific zone in the second quarter, with total volume dropping to $44.1 billion – almost 50 percent below the $84.5 billion recorded in the first quarter of 2010.
Despite the sharp reduction in transactions, volume for the quarter was still 10 percent higher than year-earlier levels and combined with the strong first quarter results, the $128.6 billion of sales at the mid-year point in 2010 is nearly double that of the same period in 2009. The 1,688 significant commercial property sales throughout the Asia Pacific region in the first half of 2010 represent a smaller 34 percent increase from a year ago, but reflect an increase in the average size of each transaction, to almost $75 million.
For the first half of the year, every property type, and all but a few countries, posted year-on-year increases in transactions.
Singapore and Hong Kong were the stand-out markets, with sales up 500 percent and 310 percent, respectively, compared to the first half of 2009. Among the property types, hotels and land posted the largest increases in sales volume, followed by retail properties. The apartment sector also posted a healthy increase in volume and showed the biggest gain in the number of properties sold because of several portfolio transactions in Japan.
Some of the largest deals of 2010 though were the land rights in China, including the acquisition of a 50 percent stake in the Tokyo Shiodome Building by Mori Trust Holdings, which valued the property at nearly $2.4 billion. CapitaLand also acquired the development firm, Orient Overseas Development, for $2.2 billion.
Beware of dragons
ARA bought a Kuala Lumpur office and retail development from a London-listed developer, which blamed soft markets for its losses on the scheme
In July, Singapore-based private equity real estate fund and REIT manager ARA Asset Management completed a RM333 million (€78 million; $104 million) investment in Kuala Lumpar on behalf of its $1 billion ARA Asia Dragon Fund.
ARA, part of the Hong Kong-based conglomerate the Cheung Kong Group, purchased the 20-storey 1 Mont’ Kiara retail and office development in Malaysia’s capital from London-listed real estate developer Aseana Properties and MCDF Investment, a private equity fund managed by CapitaLand Financial, in a deal expected to complete before the end of 2010.
The building sold to ARA forms one part of the development, other parts of which have been sold to individual buyers, Aseana said in a statement. Blaming “soft” market conditions, the company said it expected to make a loss of $4 million in total on the development scheme based on an estimated total development cost of RM529 million.
Singapore sling
In taking a stake in the Fairmont hotel group, Qatari Diar took over the iconic Raffles Hotel in Singapore for a reported $275 million
The real estate arm of the Qatar sovereign wealth fund, Qatari Diar, acquired a 40 percent stake in the hotel group Fairmont Raffles in April in a deal believed to be valued at $847 million. The deal also allowed Qatari Diar to take over the iconic Singapore hotel, Raffles, for a reported $275 million.
The hotel was originally acquired as part of a $5.5 billion take-private of the Fairmont Raffles group by Colony Capital and Prince Alwaleed bin Talal’s investment firm, Kingdom Holding Company, in 2006. The terms of the Raffles’ sale reportedly included a long-term management contract allowing Fairmont Raffles to continue to run the Singapore hotel for the foreseeable future.
The 123-year-old Raffles Hotel had secretly been put up for sale roughly a year ago by Prince Alwaleed, the Saudi billionaire. In May 2008, Colony Capital reportedly agreed to sell the hotel to a consortium led by former Credit Suisse banker Mark Pawley for $650 million, but that deal fell through the following month.
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