EURO NEWS: Carlyle’s expanded focus

Robert Hodges, managing director of European real estate at The Carlyle Group, has played no small part in helping the firm bounce back from a quiet 2009.

Having invested very little two years ago on behalf of its Carlyle Europe Real Estate Partners III fund, Carlyle returned to front-line action in 2010 with a flurry of deals, particularly in the UK, where Hodges is head of acquisitions. The run the firm has enjoyed in the UK has helped push its third fund, which raised €2.2 billion in 2008, towards an invested capital level of 70 percent-plus, as well as helping Hodges win Europe Industry Figure of the Year in the 2010 Global PERE Awards.

In an interview, Hodges said the remaining €500 million or so left in the fund would get deployed over the next 12 to 18 months, if not sooner.

The Carlyle Group’s core strategy has been about developing or repositioning single-asset offices in Western Europe, especially in the UK and France, where the firm continues to find opportunity. However, the European real estate arm of the Washington, DC-based firm is widening its investment markets to other counties in Europe.

In Sweden, Hodges said the firm is close to completing a deal to buy two shopping centres one hour outside Stockholm from the UK’s Boultbee Land, and it is in advanced due diligence on two sites in Italy, as well as one in Germany.

“2010 was a year when we saw a lot of opportunities and deployed a lot of capital in the UK and France,” Hodges said. “We carry on seeing great opportunity in those markets, but what has changed is that we see a dynamic market and opportunities in the Nordics, German and Italy.”

There also is a second trend to note. In the UK, Carlyle has begun expanding into alternative property types beyond its core business of central London offices, and Hodges said the firm intends to continue expanding its niche strategies.

Indeed, Carlyle has a desire to expand its student housing platform from 2,200 beds in the development pipeline by another 1,000 beds within the next 12 months. It also is going to build upon the success of its Chelsea residential property by expanding further into central London residential development. Finally, it is seeking to “add on” strategic parcels of land to the portfolio it inherited through its 2010 investment in The Fairfield Partnership.

The widening into alternative property types was both a conscious strategic decision to diversify its office bias and be opportunistic at the same time, acknowledged Hodges. The linked reason was that having capital is a major advantage in niche strategies, but it is not so much of an advantage in central London offices, where there was a “tonne of other organisations” to compete with.

That is not to say Carlyle is shunning central London offices either. Its answer to the competition is to now tend towards larger, more complex situations. For example, it currently is bidding to buy land from oil giant Shell to develop a major site next to Shell’s London’s headquarters on the south bank of the River Thames and is a contender to take on a major development in New Covent Garden.

As a result, Hodges noted that Fund III is likely to perform “pretty well” overall. While part of the fund was invested before September 2008, a larger portion was invested in the wake of the global financial crisis. In addition, even the assets it acquired before Lehman Brothers’ demise are fundamentally good assets and still are expected to make a return despite “losing two years to a dire market”, he said.

Something that the market is unlikely to see from Carlyle anytime soon, however, are “heavily distressed” deals emanating from banks as vendors. Hodges acknowledged that there is only so much one team can do, therefore he doesn’t think banks will become a main source of deals for Carlyle in the UK.

Carlyle’s UK deal book
PERE takes a brief look at some of Carlyle’s most notable investments in the UK last year

The White Tower transaction: Carlyle paid £671 million to purchase six London office assets that formed part of the former White Tower portfolio, which made headlines in 2009 as one of the UK’s standout CMBS deals gone wrong.

Chelsea residential: Carlyle made its first investment in the UK residential market with the £40 million purchase of a development site in London’s upmarket Chelsea area through a joint venture with luxury residential developer Athos Group.

Fairfield Partnership: Carlyle made its first strategic land investment, buying an 80 percent stake in The Fairfield Partnership, which owns several sites totaling more than 1,400 acres.

Student accommodation: Carlyle entered the British student housing sector through a joint venture with Generation Estates, following the launch of a similar initiative in Amsterdam and the Benelux region with City Living in October 2009.