In the last month, three well-known real estate investment managers have launched multi-billion-euro European core funds.
AXA Investment Managers – Real Assets, the Paris-based investment arm of French insurer AXA, has initially raised over €500 million for its vehicle – AXA CoRE Europe – but aims to grow the fund to between €3 billion and €5 billion.
Hartford, Connecticut-based fund manager, Cornerstone Real Estate Advisers, is marketing its first fund in the region and is seeking to raise at least €1 billion in the initial close for an open-ended core vehicle.
And most recently, TH Real Estate, the London-based real estate asset management firm owned by US institution TIAA, has launched a European core open-ended fund with €200 million co-investment capital provided by its parent company. The firm is targeting an equity intake of €3 billion to €5 billion over a five year period.
It is of little surprise to see so many core fund strategies as European real estate markets are set to continue to benefit from their 'safe haven' status with investors. A slowdown in emerging markets, global monetary policy divergence and increasing political tension in the Middle East are just some of the factors driving capital into European core real estate.
Economic growth is also expected to accelerate modestly in a number of European countries, and so real estate stands to benefit from improving occupier markets, as well as the lack of quality supply and historically low government bond yields.
Yet, partly because of this influx of capital into the region, many core assets in Europe are currently being viewed as expensive. Prime office yields in key European markets currently range from 3.25 percent to 4.5 percent, which is on average 75 basis points lower than at the previous market peak in 2007, when yields ranged from 4 percent to 5.25 percent, according a report released last month by property services firm Colliers International.
But, these assets also are expected to trade at lower yields for some time to come. The underlying yield pressures for core real estate are different today than prior to the global financial crisis. In 2007, 10-year bond yields were about equal to prime office yields, but in early 2016, are on average 2.75 percent lower than prime office yields, the report added.
And with property services firm Cushman & Wakefield's latest The Great Wall of Money report anticipating record levels of new capital for investment in commercial real estate, access to the right product for will be key.
The rationale for core open ended funds is that they are the simplest way for investors to gain cost-effective exposure to real estate, with meaningful diversification. So, European real estate investment managers are obliging with products that previously did not exist in scale.
In the US, there is a much more mature core fund regime. The National Council of Real Estate Investment Fiduciaries (NCREIF) Funds Index – Open Ended Diversified Core Equity (ODCE) provides historical returns back to 1978 and today comprises 33 open ended commingled funds managed by a range of US based managers. To that extent, investors seeking core returns in the US have a range of options available to them.
But, before the advent of these new fund launches, the total INREV universe of private funds in Europe had a market cap of around €295 billion. Of that, only about €80 billion was in core open-ended funds, and the vast majority of these were the German open-ended funds which currently are undergoing liquidation. The availability of multi-billion-euro pan-European core funds did not really exist.
These fund managers will be hoping they are the answer that investors have been looking for and are able to take advantage of the ever-increasing demand for European core.