NEWS ANALYSIS: Finding your angle

It will come as no surprise to readers of PERE that right now European real estate is attracting more interest from both domestic and international investors than any time since the global financial crisis (GFC). European Central Bank quantitative easing has pushed European government bond yields to record lows and equities remain volatile causing investors to flock to the ‘safe haven’ of core real estate.

Indeed, a recent report from global real estate service provider Cushman & Wakefield said commercial property investment volumes in the region have risen 23 percent to $274 billion over the past 12 months. Due to that swathe of capital, getting access to investable real estate is becoming tougher.
Pressure on the world’s largest pools of capital to allocate to real estate in this hyper-competitive environment is forcing these investors to take on more complexity in order to put sufficient money to work. In other words, these institutions need to find their angles.

A good example of this is German insurance giant Allianz’s September acquisition of a €1.85 billion portfolio of loans from Ireland’s National Asset Management Agency (NAMA). In a 50:50 joint venture with UK REIT Hammerson, the pair purchased the ‘Project Jewel’ portfolio of loans secured against retail assets in Dublin, including Dundrum Town Centre, a well-known shopping center in the city.

Opened in 2005, Dundrum, which has 1.5 million square feet of space and is considered by some as a super-prime European shopping center, has 120 shops, 38 restaurants, a 12-screen cinema and 3,400 car park spaces. It is located in the affluent southern Dublin catchment.

Annette Kröger, chief executive of Allianz Real Estate Germany, said the deal was a good way of getting access to the dynamic Irish market and buying core despite the transaction coming out of ‘Ireland’s Bad Bank.’

She said that Dundrum is a strongly performing shopping center, but agreed that the risk is clearly above the core profile.

On an analysts’ call Hammerson chief executive David Atkins said the buying of distressed debt is a “fairly well trodden path to acquiring real estate,” and used the example of the REIT’s recent acquisition of an IBRC loan interest in The Whitgift Centre in Croydon.

But, for Allianz, the particular risks inherent with the ‘Project Jewel’ portfolio stem from the number of differing underlying borrowers, with differing economic interests and potentially differing desired outcomes.
Additionally, the insurer faces the possibility of being next in a line of high profile, and well-publicized, court cases in Ireland where borrowers have taken to court and challenged the loan owners. The prime example is The Blackstone Group’s ‘Project Tower’ scenario which involved a legal tussle with Irish property entrepreneur Michael O’Flynn.

Yet, according to Kröger, taking on a little bit more risk and complexity is becoming par for the course as every core deal in this competitive climate needs a certain angle.

Competition is so fierce for European core right now that Kröger said only around 10 percent to 20 percent of deals that get sign off from the Allianz investment committee ever get completed, often due to being beaten on price by other institutional investors with a lower cost of capital.

Another route to core for these new risk-taking investors is through building your own supply. A scarcity of development starts in the post-GFC era has meant that the supply of core offices is increasingly in short supply and rent growth expectations are rising – especially for the better quality assets.

One example showcasing this theme is French insurer AXA’s March acquisition of 22 Bishopsgate in London, known as the Pinnacle.

The original Pinnacle development stalled in early 2012 when financing for the project dried up, but it is being resurrected by AXA in an all-equity transaction, reportedly valued at £220 million (€299 million; $338 million).

AXA will act as development and asset manager on behalf of the investors but has retained Lipton Rogers as its developer. The pair intend to develop a new landmark tower, designed by architects PLP.

And with investment into European real estate showing no signs of slowing down over the next year or two, even more investors will be forced to take on greater risk to get access to core. Savvy investors will need to find their angles.