EUROPE ROUNDTABLE: More money, more problems

Participants in PERE’s annual European roundtable gathered on a rare sunny Friday afternoon in London, made only seasonal by the bitter winds that swept through the capital. The weather in fact proved to be the perfect analogy for the participants’ current outlook on European real estate – plenty to be positive about but beware the risks ahead.

The common theme that ran throughout the roundtable discussion was the so-called ‘wall of money’ that has flooded the region over the past year or two.

Europe dominated private real estate fundraising for 2014, raising a total of $40.3 billion, which represents a growth of 82 percent from 2013, according to research from PERE’s Research & Analytics division. While Europe showed a growth in fundraising from the previous year, nearly every other region faced a decrease in capital. North America which is typically the more dominate regions saw a decline of 19 percent while and Asia-Pacific saw a 27 percent drop respectively.

So, great news for those out on the fundraising trail and looking to exit legacy assets as more buyers enter the continent. Recent data from property services firm DTZ suggest that the 2015 commercial investment volumes are forecast to stop short of the all-time 2007 record at approximately €210 billion, but significantly higher than 2014’s €175 billion.

The four roundtable participants in the PERE European roundtable: Mikkel Bulow-Lensby, chief executive of Denmark-based fund manager Nordic Real Estate Partners (NREP); Mike Clarke, head of investor services EMEA for Los Angeles-based real estate investment management firm CBRE Global Investors; Paul Hampton, partner at London-based real estate manager Rockspring Property Investment Managers; and Jonathan Harris, senior managing director and head of advisory for the EMEA region at Macquarie Capital, say the surge of capital would cause problems for some, and in unexpected ways.

“What keeps me up at night?” says NREP’s Bulow-Lensby. “How to attract and retain the best talent.”

The sentiment was echoed by Harris who says that the biggest challenge is that as businesses grow, maintaining the quality of the people is getting tougher. “It is a high touch business and having the right people with the right skill sets is hard and has got harder, no question,” he says. “We don’t hire too many people that are say in the second half of their career. We tend to grow our own and there is a battle for talent from graduate level up.”

Hampton then took the point a step further and singled out executives who focus on asset management, and the need to keep them incentivized. “When you have on the ground teams who know their local markets, speak the local language and understand how to deliver a business plan – and it’s those guys who are so important in helping to differentiate us from our peer group – retaining that talent is naturally a key objective for our business.”

Somewhat mischievously, Harris says that some fund managers who have been dormant and unable to raise capital through the downturn are now back and looking to hoover up talent in order to deploy their newly-raised capital. CBRE GI’s Clarke agrees with Harris and adds that a lot of American managers are coming into Europe trying to recruit talent. “You get waves like the last cycle where people enter markets and try and build up their teams.”

Hampton has a warning though for anyone who truly thinks the grass is always greener. “It is easy to forget that teams were hired and fired in a short space of time, particularly the non-European groups were guilty of that. I hope our staff and respective organizations remember that.”

“It is pretty universal what makes people stay or not. Do they feel that they can grow and make a difference and are they fairly treated?” adds Bulow-Lensby.

Opportunity knocks

The large amounts of equity looking to be deployed in the European private real estate markets also raise questions about investment strategy among the roundtable participants. In terms of strategy, opportunistic was the most popular for European fundraising in 2014, raising $11.3 billion. Debt and value-add funds came in second ($10 billion) and third ($8.4 billion) respectively, according to PERE’s Research & Analytics division. Geographically, Europe raised the most capital for opportunistic funds, with an aggregate size of $11.5 billion. This is a substantial boost from the previous year, when European opportunistic funds raised $5.4 billion, an increase of 113 percent. The largest opportunistic fund to close was the Blackstone Real Estate Partners Europe IV which raised $8.7 billion between two tranches.

But, when questioned about whether or not too much capital had been raised for value-add and opportunistic funds the participants take exception to the categorization of those strategies.

“People used to really just think about core and opportunistic when boxing real estate. Value add was everything else and people didn’t really know what it meant. What we try to do is value add, and for me that is just intuitively the most interesting space to be in because value add to me just means buying cash flow that you can improve. Core means you are buying cash flow you can’t do much about, opportunistic means you are buying problems you are trying to fix,” says Bulow-Lensby.

Rockspring’s Hampton agrees and says that he hates the idea of trying to categorize value add.

“Strategy categorization is a dangerous game. It is entirely possible to have two similar returning ‘value add’ funds pursuing completely different strategies and taking on completely different types of risk. I think for this reason, increasingly investors are placing far more importance on the underlying activities of the funds they consider, the investment guidelines and how value will actually be generated. The crisis period we have been through of course means there is naturally more focus on historic performance, on what that manager has actually done and how they have tried to extract value and deliver the strategy that they have been employed to execute.”

And because of the diversity in regards to strategy, Macquarie’s Harris does not believe that the opportunistic and value add sectors are too hot. But just because there are a wide range of strategies that fall under the value add and opportunistic umbrellas that does not mean that investors are letting their fund managers be indiscriminate.

“We are not seeing a huge amount of extra leeway being given by investors. A lot of investors have got longer memories this time round than they did the last time and remember regulations have tightened up a lot and the investors are working within a box,” says CBRE GI’s Clarke. “Whether it be Solvency II for insurers or regulations at the country level for pension funds they are constrained more than they have been historically so that has created some discipline. There is still a desire from a majority of investors to have a degree of control.”

“A lot of investors are placing a lot more importance on the strategies, the investment guidelines and how they want value delivered,” adds Hampton. “The crisis periods we have been through over the past few year’s means there is more focus on the manager, what that manager is actually doing and how they are trying to extract value and deliver the strategy they are being employed to execute.”

Risky business

But before the capital allocators start to put their cash to work there are a myriad of geopolitical issues that the continent faces, and fund managers must address. Though these risk factors cannot always be planned for, the participants say.

Clarke says that he was surprised that in the immediate aftermath of the Charlie Hebdo event in Paris, after a number of CBRE GI’s investor services professionals from around the world got together, Clarke’s US colleagues already had a number of investors concerned about whether or not it was right to go and do due diligence in Europe. “We must all be aware of the impact of news headlines, it’s a CNN factor. We were all horrified by the Paris terrorist attacks. While it had limited impact on local investors, some investors from further afield expressed concerns and whether it should impact their investment intentions for the region,” says Clarke.

More predictable events such as the upcoming general elections in the UK and Spain also represent risks, but the participants say that these events should not move the needle significantly for fund managers.

“I think that the overall political headwinds in Europe from east to west are pretty significant at present and together they represent probably the single biggest threat to market confidence across Europe right now,” says Hampton.

Political change here in Europe is a significant factor and the roundtablers think that in the run up to elections a number of people do ‘press pause’, but then in the aftermath they press play again. “For what its worth although there is obviously a risk of change in Spain and the UK I think that respective of change the markets will continue to pick up pace after the elections.”

“London is a big international market and so although people who are close to getting deals done may pause immediately before the election it will not impact pricing,” adds Clarke.

Although of concern for Hampton is the amalgamation more across continental Europe and the radicalization of governments, or at least radical political groups gaining in popularity.

For Harris the big thing is tax. “We all know it, property is a sitting duck in a world of fiscal headwinds for governments, whether it is very visible or less so, taxes are going to go up.”

“It doesn’t matter whether it is residential or commercial, it feel like it is only going one way. How much will it erode returns I don’t know, but directionally it is only going up.”

Big deal

Yet, in spite of the political and tax uncertainty, especially in some of the major European economies, the roundtable says that it expects much of the same in terms of which jurisdictions the money flows to.

Recent figures from research firm Real Capital Analytics say that €273 billion of transactions in Europe occurred in 2014. €88 billion was transacted in the UK, €57 billion in Germany, €33 billion in France, €27 billion in the Nordics, €15 billion in the Benelux region, €15 billion in Central and Eastern Europe (CEE) and the rest was notably smaller.

“In the next 12 months I would expect to see more capital targeting peripheral Europe as some of the higher returning strategies are forced to take on greater risk to hit their returns,” opines Hampton.

“I think there are still a lot of folk who will be happy with the 4 to 6 percent net return from real estate and if they can get that from say the UK or Germany, then I think we will continue to see capital target those markets. Equally, we are seeing demand from investors looking to complement their core and opportunistic investments with a more core plus or value added approach – especially where performance is derived primarily from income based active management strategies.”

Hampton adds: “We may well be looking back on increased investment volumes this time next year, but I think it will be interesting to consider the types of deals that have been done and whether or not managers have indeed been forced to take excessive risk in order to get capital deployed. I also think that whilst equity interest in Europe has been stealing the headlines over the last year or so, it will also be interesting to look back on how the banking markets have evolved – leverage is attractive in Europe right now compared with say the US and there is certainly an improved appetite from banks to do business with trusted clients.”

CBRE GI’s Clarke agrees that opportunistic fund money will be put to work in “the peripheries” but the core money will continue to focus on the main western markets. However, Clarke adds that CEE will see a slight increase in capital, but will not see larger investments being made until there is some resolution on the ongoing crisis political instability in the Ukraine. “I suspect there will be a reluctance for a large proportion of capital to go there. There may be higher returns to be made there but it is more the perception of the financial and regulatory risks that is causing people to avoid the region.”

But, that is not the whole story as it is a lack of available investable assets outside the three major European economies causing the dearth of transactions in the peripheral regions, as opposed to overlying risk factors, says Harris. “The volume in the periphery of Europe where the opportunistic funds are focusing, is likely to remain small relative to the core of Europe. To be fair to them they are looking at hundreds of deals but they might only do three. They are kicking the tires but actually the interesting and investable part of these countries is relatively modest.”

While there is a lack of opportunities for real estate fund managers working at the upper echelons of the risk curve the roundtable participants agreed that Europe would be home to some very big deals in 2015.

“We will be looking back on these large transactions, as more equity needs to be put to work in the next few years and the dearth of opportunities available will mean it will have to go in fairly large lumps.” says Harris. “The pressure on managers to deploy multiple capital will be intense and I think we will see a lot of portfolio transactions, multi sector, ABC grade, locations and countries.”

Obviously these bigger ticket purchases will come with their own inherent hazards and when asked what PERE’s roundtable discussion will be about next year the participants all responded with one word, risk.

“We may well be discussing more deals next year but with regards to the risk and whether or not firms have taken excessive risk to get that capital deployed,” says Hampton. “I think some managers will be under pressure to put capital to work and in turn investors are getting more anxious about the investment guidelines are and what the restrictions are, so it will be about how the capital is deployed over the year and whether or not that looks sensible or whether they are pushing the leveraging. Equity has been stealing the headlines over the last year but slowly but surely the leverage markets are really starting to gather more momentum.”

European fund managers have 12 months to show that they are investing wisely.


Mikkel Bulow Lensby
Chief executive officer
Nordic Real Estate Partners
Mikkel Bulow-Lensby is the founder and chief executive of Nordic Real Estate Partners, a Denmark-based private equity real estate fund manager. Bulow-Lensby has previous experience with investment banking and corporate strategy at Goldman Sachs, FXLine, and Egmont Group.

Mike Clarke
Head of investor services EMEA
CBRE Global Investors
Clarke is responsible for investor relations, equity raising, targeting of new investors and supporting in the EMEA region for the Los Angeles-based real estate investment management giant, CBRE Global Investors. Clarke has 26 years’ experience in global real estate having previously worked at Mesirow Financial, and at Schroders where he was instrumental in growing assets under management from £160 million to over £8 billion through the development of a multi-product real estate strategy.

Paul Hampton
Rockspring Property Investment Managers
Paul joined Rockspring in 1998 and has been a Partner at the firm since 2006. He is responsible for fund management with a particular focus on Rockspring’s European Funds. He was instrumental in the launch of Rockspring’s German Retail Box Fund in 2005 and has been involved in all five of Rockspring’s successful TransEuropean funds, most recently TransEuropean V which raised €350 million ($515 million; €484 million) in 2012.

Jonathan Harris
Senior managing director
Macquarie Capital
Based in London, Harris leads the European arm of a global real estate advisory team that has raised $40 billion in equity commitments for a range of real estate transactions and funds since 2003. Having joined Macquarie Capital in 1996, he has led mergers and acquisitions, restructurings and capital raising assignments valued at more than £14 billion ($20.6 billion; €19.4 billion) across public and private markets in Europe and Australia.

London calling
According to the roundtable the UK capital is still firmly on the radar of the biggest pools of capital

Over the past 12 months the European real estate sector has been awash with large and interesting deals, but the roundtable participants all picked London-based transactions as their most salient investments of 2014.

“The Gherkin was absolutely fascinating because of the nature of the capital that came in, Brazilian, at £1,300 per foot ($1,900; €1,800 per foot) so it was a big price. That took a number of people by surprise and Brazilian private capital at that price as very notable,” says CBRE GI’s Clarke.

He says that deals, like the Brazilian conglomerate Safra Group’s acquisition of 30 St Mary Axe, known colloquially as the Gherkin, for a sum reported to be more than £700 million, are becoming more likely as there is a large number of big global sources of capital out there at the moment. That is because they are looking for uber prime or iconic buildings and not necessarily for getting the best risk-adjusted returns in the market.

Hampton agrees and adds that deals such as this are a reaffirmation of the enduring appeal of London, despite it looking like a very expensive city to invest. He pointed to the National Pension Service of Korea’s (NPS), Korea’s preeminent state investor, sale of the HSBC Tower in London to the Qatar Investment Authority (QIA) as another example.

“For me those transactions are interesting because the investor felt that London is a market that represented liquidity, not just in terms of exit but in terms of the occupier base and as an attraction for them to put their money to work.”

The roundtable also mentioned Toronto and New York-based asset manager Brookfield Asset Management and Qatar’s sovereign wealth fund, Qatar Investment Authority (QIA), which together are taking over Canary Wharf’s owner, London-listed property developer Songbird Estates, after Songbird’s board recommended its minority shareholders accept an improved £2.6 billion (€3.5 billion; $4 billion) offer.

“I think that a lot of the headlines when we had more activity from the sovereign wealth end of the market in the UK in the aftermath of 2008 was that these guys are going to be buying up the best real estate they can and never selling, and that is a huge issue in terms of future liquidity in the core market,” says Hampton. “I think that perception was understandable, and I do think most sovereign wealth funds have that mentality, but I also think that it illustrates that you shouldn’t tar everyone with the same brush, different people have different outlooks.”

Spotlight on the Nordics
The big debate centered on the vast amounts of available capital fund managers have at their disposal in 2015, and NREP’s Bulow-Lensby explains how it impacts region specific investment managers

The Nordic region saw $27.2 billion of real estate transactions last year, a 13 percent increase from 2013. And with even more fund managers in the market country and regionally focused have a reason to be nervous, explains Bulow-Lensby.

“When you have the people on the ground that actually understands a particular segment you are focusing on and you feel you have an edge compared to the rest of the market. But, the worry I have is that capital which is much more financially orientated will come to the market and even though we feel we have an edge they can go in and just pay something that we can’t. Even though we feel we can get more value from the property. The combination of the debt and equity markets can create a fear for us.”

For Bulow-Lensby and his firm, which closed on its hard cap of €400 million for its value-added NREP Nordic Strategies Fund having only launched it last year with an initial target of €325 million, the fear can also come from outside the more traditional real estate investors.

He says that hedge funds have invested in Denmark because they think the currency is going to increase, and think real estate is the best way to get access to the opportunity. “We have the luxury to not consider whether or not we think it is attractive to invest in the Nordics, we only have to consider how to make the best possible investments in the Nordics,” he adds.

“Even with that luxury we still have to consider that there will be all this money coming into Denmark because of the currency situation.”