Underexposed

These days it sometimes seems you can't get away from real estate. Whether it's another TV show debating when the bubble will burst or an advertisement for classes promising to make you the next Donald Trump, property talk is ubiquitous.

Yet, despite this cultural bombardment, research has suggested that some investors have been a little slow in getting on message. A JP Morgan Asset Management report published last October suggested that the average European pension fund still has barely half the exposure to property it should have, with the average allocation of 6.5 percent well below the optimum level of 10 percent to 15 percent it suggests. (An earlier report from Richard Ellis found that Italian pensions were an exception, with average exposure of 20 percent a bit of overkill.)

In the past, some asset managers argued that their existing real estate allocations were understated due to valuation techniques. Contradicting that argument, Nick Tyrrell, the director of research and strategy for the European real estate team at JP Morgan, said that the survey's analysis proved the benefits of higher weightings to the sector regardless of valuation methods.

There are reasons to think that European pension funds are at last getting the message. The 2005 Pension Fund barometer, a survey of 200 funds carried out by Richard Davies Investors Relations on behalf of State Street and the UK's Financial News, recently found that most investors wanted to increase their exposure to the alternative assets segment including both property and private equity.

The survey noted that 35 percent of pension funds had substantial funding deficits, an increase from the prior year.

The research cited the disappointing returns in more traditional asset classes as the reason for this shift. While last year, pension funds were expecting returns of 12 percent on equities and 6.6 percent on bonds, for the next ten years they have dropped their expectations to 8.1 percent and 5.5 percent, respectively. Many pensions are hoping that the superior returns available in the alternative assets could help them make up the hole in their finances such decline leaves. The survey noted that 35 percent of pension funds had substantial funding deficits, an increase from the prior year.

But the net effect of a rush of money into property could well be that competition drives asset prices up—and yields down. Those superior returns they crave could be about to vanish, just as they reach for them.

FUNDS & INVESTORS

First fund from Speymill
Speymill Properties, the AIM-listed subsidiary of property contractors the Wigmore Group, has reportedly launched its first real estate fund. The firm has raised €100 million ($118 million) of equity out of a target of €125 million to invest in the German residential property market. With leverage, this will give the firm buying power of €500 million. The fund will be co-managed by Speymill and GOAL Services, a property management joint venture between Speymill and businessman Peter Lanz. Speymill reportedly plans to launch further funds in 2006, and has appointed former Morgan Stanley executive Bob McDonald as executive chair of its fund management division.

Parex backs Ukraine property fund
Following the news last month that NAI Pickard had launched the first property fund targeting the Ukraine, ParexAsset Management, the largest asset manager in the Baltic region, has closed the first retail fund focusing on the country. The Ukrainian Real Estate Fund, which will invest primarily in the Kiev region, has raised UAH 50 million (€8.4 million; $9.9 million). It has an investment threshold of UAH 1000, and commitments will be locked in for five years. Aia Klasheva, the director general of PAM Ukraine, said in a statement that the fund had been oversubscribed: “International investors recognize the strong potential of the Ukrainian market and the expertise of Parex in CIS markets. The level of demand and the scale of the opportunities mean that we are considering a second round of fundraising in spring 2006.”

PREF raises €214m for warehouses
British Land (BL), the London property giant, has raised €214 million ($251 million) of new equity for its European retail warehouse fund PREF. The fund has raised €90 million from the British Airways Pension Fund and Danish pension funds Kommunernes Pensionsforsikring A/S and PFA Pension Forsikring-sakieselskab. BL has also injected €124 million of its own equity into the fund, bringing its holding to €164 million and making it the largest investor. PREF was launched in March 2004 by Pillar Property, the fund manager that BL purchased earlier this year. With these latest investments the fund has more than €400 million of equity, giving it the capacity to invest €1 billion in European retail warehouse parks.

Axa to manage new London area office fund
Axa Real Estate Investment Management and IVG Asticus are teaming up to launch a £200 million (€293 million; $344 million) office fund for investment in offices in the London area. The Greater London Office Fund will focus on areas outside the city's main business districts and properties that require investment or refurbishment. It is targeting an IRR of 12 percent to 15 percent over its seven-year lifespan. The fund has already raised more than £50 million; the firms plan to market the fund to institutional investors over the next few weeks. Axa will be responsible for managing the fund, while IVG Asticus will provide asset management services.

Morgan Stanley targets German investors
Morgan Stanley is planning €2 billion ($2.4 billion) of property funds targeting German investors. Morgan StanleyReal Estate GmbH, the German KAG run by the bank, is launching a €1 billion fund with 50 percent leverage, which will target institutional investors. The fund will invest in office, logistics and retail assets split between Asia and Europe. Morgan Stanley said that the low correlation between the two regions should help it reduce risk. The group is also launching a global open-ended fund which will raise €1 billion of equity from German retail investors.

PEOPLE

ABN AMRO veteran McCarthy joins RREEF
RREEF, a unit of Deutsche Bank's real estate arm, has appointed John McCarthy as the new European head of its global infrastructure team. He will lead a London-based team responsible for acquisition, asset management, fundraising and client management; team members include Hamish McKenzie, a director responsible for acquisitions, and financial analyst Sundeep Vyas. McCarthy joins RREEF from ABN AMRO, where he was head of infrastructure finance for the last decade. RREEF Infrastructure invests in utilities, transport, forestry and social infrastructure, and is headquartered in New York. The group currently has approximately €700 million ($838 million) of assets under management.

Another appointment at Palmer Capital
Palmer Capital Partners, the property venture capital and financial services firm, has appointed Rupert Sheldon to oversee the Palmer Active Value Fund, which will invest in real estate start-up companies. He has also been appointed to the firm's board of directors. Sheldon joins the firm from a nine-year stint at Henderson Global Investors, where he was responsible for the £250 million (€370 million; $443 million) Henderson UK Property Fund. The Palmer Active Fund recently held an initial closing of £20 million, and hopes to triple that total in a second closing during the first quarter of next year. With leverage, the fund will have buying power of approximately £150 million.

Mallen departs Henderson
Steve Mallen, the head of property research at Henderson Global Investors, has resigned only a year after accepting the role. The move has been described as being reached “by mutual agreement”; it is not known what Mallen plans to do next. Mallen joined the firm early this year after a 16-year stint in the global research business and international consulting services at property consultancy Knight Frank. Henderson has said that it is looking into expanding its property research capabilities, and is recruiting more analysts. The research team now reports directly to Patrick Bushnell, the firm's European head of property investment.

Protego hires three
Protego Real Estate Investors, the UK commercial property investment manager, has made three further appointments to its investment team. Graham Barker joins as a director in the firm's asset management division, where he will be responsible for industrial property. He was previously operations director at UK property company Brixton. Mark Adams, a specialist real estate lawyer who most recently worked at Berwin Leighton Paisner, joins the firm as an associate director responsible for business and corporate development. And Matthew Callow, who left a role as a senior investment analyst at BW Investors Services, will take up a similar role with Protego. He previously spent five years in the specialist funds team at property investment research company IPD.

Jones Lang reorganizes UK team
Real estate services firm, Jones Lang Lasalle is reorganizing its capital markets team, according to Property Week. Julian Stocks, who is currently head of the real estate service company's London West End investment team, will become head of capital markets in England and join the English management committee at the start of next year. The current head of capital markets Andrew Hynard, who has been in the role for five years, is taking over the company's national investment team. He replaces Roualeyn Cumming-Bruce, who returns to client work in the investment market and capital markets group.