European money managers running real estate businesses in Europe are adding new expertise and working hard to source more attractive deals to keep fee income at the same level, industry sources said.
That's because European institutional investors have been turning to more specialist real estate strategies — which were a smaller part of portfolios in the past — to combat the low-interest-rate environment. At the same time, the outbreak of the coronavirus pandemic in 2020 has paved the way for strategies such as logistics real estate and residential real estate to come to the spotlight as traditional sectors were disrupted.
In 2020, residential real estate and industrial/logistics real estate strategies constituted 15.5% of real estate institutional vehicles each, up from 8.9% and 13.1% in 2017, according to the European Association for Investors in Non-Listed Real Estate Vehicles.
INREV data also showed that fees that managers charged for industrial/logistics strategies increased to 1.23% on a net asset value basis in 2020 from 1.07% in 2018. Similarly, residential real estate fees saw an uptick to 0.78% in 2020 from 0.6% in 2018. On the other hand, fees in retail real estate and office dropped in 2020 compared with 2018 to 1.07% from 1.45% and to 0.77% from 1.52%, respectively.
To keep up with the pace of these changes, European money managers have had to increase the breadth of their capabilities.
Across core real estate, which investors often use as a replacement for fixed income, "fees have been coming down pretty meaningfully," said Jonathan L. Doolan, principal and head of Casey Quirk's Europe, Middle East and Africa practice within Deloitte Consulting LLP in Frankfurt. "Where you see much more resilience from (a) fee perspective is oriented around opportunistic or value-add (real estate)," he added. "The overall core opportunity is becoming more of a scale game than perhaps historically (it has been)," lending itself to mergers of real estate businesses, he said.
INREV data showed that core real estate fees fell to 1.06% in 2020 from 1.12% in 2018 on an NAV basis. By comparison, managers charge 1.88% for value-added investments compared with 1.93% in 2018.
Managers are having to think how to sustain the return target that was sold to investors a few years ago, he said. "A lot of the trades are crowded. The actual terms of what managers end up with may not be what they were three, four or five years ago, he said, adding that managers are moving into adjacents that don't fit perfectly with what they have done historically but that the risk-return profile of these investments does look similar.
"Teams are looking aggressively at new skill sets in different countries," he said. "Without that expertise, businesses can't be scalable," he added.
And some large European managers with significant real estate businesses in Europe such as Aberdeen Standard Investments Ltd. and Union Investment Holding AG have recognized they are having to make changes.
In December, Edinburgh-headquartered Aberdeen Standard Investments agreed to acquire a 60% stake in U.K. logistics real estate manager Tritax Management LLP in an effort to bolster its own logistics capability. "We are buying a (business) that will take us forward," Neil Slater, global head of real estate and deputy head of private markets at Aberdeen Standard, said in a telephone interview.
"We will find that the flows will increase because it's a very successful business and it will enable us (together) to source and originate more assets for clients," he added.
Aberdeen Standard's logistics investments now are about 12% of its £37 billion ($50.8 billion) real estate business, which is largely focused on the U.K. and Europe.
Tritax has £5 billion in assets under management. Mr. Slater noted that real estate has been changing structurally because of technology advancements in supply chain management — with the COVID-19 pandemic accelerating this change.
"I wanted to ensure that we remain at the forefront of the structural shift that is happening. We already have a footing in this area (but) I wanted us to have greater depth and expertise," he said.
"Tritax will continue to manage their funds," Mr. Slater confirmed. The two firms will work together on new funds, he added.
Mr. Slater said that operational and investment management aspects of real estate are becoming more connected. "The purchase of Tritax is a way to modernize our real estate business," he said. "This gives us scale in logistics and it makes us a key player in the U.K. And together it makes us a key player in Europe," he said.
