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  2. REAL ESTATE
February 22, 2021 12:00 AM

European managers key in on specialist strategies

Investors seeking yield also looking at sectors thriving in pandemic

Paulina Pielichata
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    Jonathan Doolan
    Photo: Peter Glass
    Jonathan L. Doolan said fees for core real estate have fallen ‘pretty meaningfully.’

    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.

    Bloomberg

    Construction cranes stand among building structures at the Tesla Inc. Gigafactory site in this aerial view in Gruenheide, Germany.

    2 acquisitions

    German money manager Union Investment is bolstering its €47 billion ($56.6 billion) real estate business in a similar way. The firm recently made two acquisitions, buying a 10% stake in private real estate debt manager aam2cred Debt Investments GmbH this month, and acquiring logistics firm Logistrial Real Estate AG in February 2020.

    Private debt real estate is a new capability for the firm.

    "We still haven't (got) any real estate private debt exposure. This is why we are engaged (with) that company now. It's our aim to offer products for institutional clients in this field in the near future," the firm's spokesman said.

    Union Investment will launch mezzanine and whole loan funds for institutional clients.

    Aam2cred Debt Investments will be responsible for the management of the credit portfolio and investment advice for the funds, while Union Investment will focus on overseeing relationship management, regulation, reporting and fund administration.

    The €800 million acquisition of Logistrial Real Estate formed part of Union's plans to double its €1.2 billion logistics portfolio and diversify its geographical exposure in Austria, France and the Netherlands.

    Sources said that managers are turning to acquisitions of real estate firms specializing in certain areas because deal origination has become much more challenging. Mergers are helping them gain needed expertise that would help them access better deals.

    Mr. Doolan thinks that the trend for managers to look for exclusive relationships with developers also will continue to grow as "illiquid businesses are really expensive and are expecting a massive premium."

    Bloomberg
    Construction cranes in Switzerland.
    Access limited

    David Jackson, fund manager of the €4.5 billion M&G European property strategy in London, said access to projects as well as deal origination has become constrained over the recent years as barriers to entry are higher in Europe than before. Firms including M&G, which acquired multiple logistics assets in 2020 in Sweden, are focusing on buying individual assets to boost their portfolios and partnering with specialist firms. Mr. Jackson also said that the strategy is currently growing exposure to European residential real estate to about 20% from next to zero. M&G plans to partner with developers, for example, to tap opportunities in the student accommodation space.

    "The first deal we have done with a particular partner has worked well and we may repeat that structure. The opportunities we are buying would be underdeveloped," he said, adding the firm is often funding developers to deliver the units. But that's a good way of originating deals, he added, because of the ability to form relationships with developers and build a pipeline in select countries.

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