Taking the indirect route
Property investment may be about to go though another period of resurgence.
The real estate investment market is characterised by a growing demand for more specialised liquid products. Dan Policy of Morgan Stanley Asset Management in Amsterdam says that in recent times, “There's lot more institutional buying through the funds route rather than literally buying into bricks and mortar or directly through the stock market.”
One of the dominant trends globally is the transformation from privately held real estate assets to publicly traded real estate companies. European companies are just beginning to implement focused growth strategies like those recently seen in the US market. US property investment specialist Security Capital’s view of the European property market is that with increased economic integration, public real estate companies will likely benefit, because European markets have relatively limited supplies of real estate and high barriers of entry to the market. Combined with the fact that the industry is in the earlier stages of recovery, companies may be in a position to increase their cash flow growth.
Public property companies are also thinking more about how best to present themselves to the investment community. British Land recently held its first coordinated investor day, despite being a public company for 20 years and boasting a market cap of almost $5bn. In addition, the French commercial property company Kleppiere has translated its financial statements into English for the first time. And perhaps the strongest signal that companies recognise the need to market a more focused product was the decision of Dutch group Rodamco to split into four geographically defined companies.
Real Estate Investment Trusts (REITs) have helped provide greater visibility and liquidity to the real estate investor. Through the public REIT marketplace of over 200 real estate companies, investors can buy and sell interests in diversified of properties - as well as the management associated with them. Because REITs annually pay out almost all their taxable income, a significant component of total return reliably comes from dividends.
However the equity boom in the world’s major markets has not rubbed off on property. The asset class is hampered by the lack of a large enough base of natural, dedicated real estate investors. And the small minority that might now be looking for defensive vehicles may not be convinced that the real estate sector provides the protection it has promised.
Thus in the face of continued strong fundamentals, the market for public real estate securities has continued to decline. At this level, REITs are trading, on average, at a 10% discount to the liquidation value of their portfolios.
Fund managers in Europe offering institutional property funds include Morgan Stanley, ABN Amro, Henderson Investors and ING Fund Management. Forthcoming launches are expected from Argyle Property Asset Management and La Salle Investment Management, which is launching a REIT for European investments.
Hanover Property Unit Trust and Pan European Property Unit Trust are two unauthorised UK unit trust schemes available to UK exempt pension funds and charities. Hanover is an open-ended fund with $475m (E447m) of gross assets and a broad based portfolio of UK commercial property. There are 159 pension fund investors in Hanover. Strong emphasis is placed upon entrepreneurial investment, the active management of assets and the full exploitation of each property's performance potential. Notable properties within the portfolio include the Bedfont Lakes Estate at Heathrow, incorporating Lakeshore, a 13 acre site with consent for 310,000 sq.ft. of offices being developed by MYOPIC.
Pan European Property Unit Trust had gross assets of around $204m and is the only UK property unit trust specialising exclusively in the acquisition and active management of commercial property in Continental Europe. There are 17 pension fund investors in the Fund. Key properties within the portfolio include the Cossack Shopping Centre in Portugal, major office investments and retail warehouse assets in Spain and Belgium.
Morgan Stanley’s European Property Fund aims to gain exposure to European Real Estate in a cost-effective manner, earning comparable or superior returns to direct real estate investments, and to preserve capital in down markets. ING Real Estate Fund Management runs a variety of global property portfolios. Besides managing Winkelfonds Nederland, it runs ING Residential Fund USA, a housing fund primarily set up for institutional investors in the Netherlands.
The Glanmore Property fund, a Guernsey vehicle launched in 1997 by Cardales, part of the CGU group, offers another alternative to direct investment.
Director Martin Gordon says that this low risk and low admin pooled fund option is the best way to access the property sector for smaller institutional investors. As a fund with distributor status, it will distribute 85% of net income as a gross dividend, currently around 7%. Another advantage of the offshore vehicle is its ability to leverage the portfolio. This fund limits its gearing ratio for core lending to 1:1 equity to debt ratio.
It is clear that property markets in Europe have followed the trend of increasing liquidity and international capital flows. Morgan Stanley believes the scenario remains intact for an exciting European real estate securities market: “We believe the sector is in its growth phase and will feature a continuation of equity issuance and M&A activity in response to an increasing level of investor interest,” says Policy.
Julian Newiss of the Greenwich Group adds: “Broadly speaking, the current European real estate market can be categorised as stable, with growth having started in a number of countries. On the continent, Madrid and Barcelona are picking up while the recent influx of US and UK institutional money into Paris property has come at a time of recovery. Lisbon has done well and among a generally dull bunch of German cities, Munich is strong.”