ABP’s adventures in Europe
Not only has the euro arrived but the Americans have also landed in the European property market.
Peter Wittendorp, fund manager for Dutch pension fund giant ABP’s Amsterdam-based European real estate portfolio, with assets of around Dfl20bn (e90bn), says this has led to changes both in the market and how the fund approaches its property investment.
“The euro has slowly but surely increased our real estate focus on Continental Europe, and in the UK to a certain extent, but in a different manner.”
He notes that the majority of the fund’s recent activities have been concentrated in the southern part of Europe – France, Italy and Spain – but there is also an increasing shift towards a pan-European approach.
Wittendorp adds: “In France recently, we were able to talk a banking group partly out of a very diversified property company, and we are closing shortly on a pan-European industrial scheme. We are also looking at a spin-off transaction in Italy via a formerly state-owned company that wanted to divest itself of its property portfolio.
And he says ABP is now also looking closely at the German market where there is an improvement in property fundamentals that have led to a new growth market after after a period of prolonged depression.
He adds: “There are a number of signs of life in German corporate restructuring, and the government is getting rid of some of its property exposure, offering a great number of opportunities that we are seeking to capitalise on via German property players with established platforms.”
Wittendorp says the property portfolio diversification around Europe and globally has been gradual and very much in line with the switch within the fund three to four years ago to indirect investment through listed or private property companies. At the end of 1998, the fund still had 62% of its property portfolio in the Netherlands with the rest of Europe representing 10%, North America 26% and Asia and Australia comprising 1% each.
The funds’ investments do not have any particular focus on cities or regions for the real estate investment, just what ABP believes is in the market that meets its portfolio benchmark requirements.
“Our minimal hurdle before engagement is 500 basis points or the equivalent of that over a 10-year Treasury in the country of investment. We believe the indirect investment style gives us good investment diversification and exposure to domestic management teams that know what they are doing.”
He also points out that as in the European fixed-income market, property yields are coming closer together, despite discrepancies in some countries and cities, thus encouraging diversification.
Previously, the fund was heavily in-vested in the Dutch market and in re-cent years ABP has built up a substantial portfolio in the US market place via its New York office. Wittendorp says: “We like the US real estate structure, and the Reits investor -friendly tax transparent structure definitely helps. We are growing the portfolio slowly but gradually, although there is not much available capital in the US, which doesn’t help. However, the lack of property opportunities means trade terms are good.
“The large US investment houses perceive that the property market is very stable at present and if you compare real estate companies to S&P 500 companies you see the latter have a much higher growth potential.”
ABP takes a more specialist tack for UK property investment, says Wittendorp, adding: “The emphasis in the UK market is on public-to-private property transactions. The emerging players in the UK are publicly quoted opportunity funds – the more high- octane property funds. The UK market, although prominent, is not exactly tax friendly from an investor perspective,” he adds.
Looking ahead, Wittendorp says ABP is coming up to a transitional period in its Dutch real estate holdings. He explains: “If we get the green light next year, we will begin to list our retail and office subsidiaries from the former ABP real estate department. With this will come a huge redemption of our Dutch exposure, which will need to be reinvested according to the asset classes decided on by ABP’s overall investment committee.”
However, he says, the overall property allocation at ABP is unlikely to change much, and the low European bond yields are likely to be reflected in raised equity levels.
Wittendorp points out that the flipside to the widening of the euroland property market has been increased demand from investors for open-ended real estate investment funds, creating the problem of being able to invest substantially in Europe.
The arrival of the US property companies and investors into Europe has also changed the market variables, he says. “There has been an increase in transparency prompted by greater disclosure of information and the emergence of better organised property companies.
“The Americans have landed, and the understanding has struck the market that just creating a beautiful portfolio doesn’t create added value. The only downside, to a minor extent, is that the marketing is becoming so slick that you wonder if there is the substance to match.”
With the market shifting, Wittendorp comments, property companies are becoming more cost aware and conscious that for success, results must be much better than their peer group.
“Planning restrictions are also still out there and you can’t just build on every free acre, so market supply is limited. This means investors like us are looking at more corporate opportunities such as portfolio acquisitions and mergers and acquisitions.”
Consequently, Wittendorp envisages a great deal of rationalisation and consolidation in the property market. He says: “In five years, we will probably be looking at between 20 and 25 truly large cap property companies with a pan-European, regional or product focus.