The shape of pooled market place
This overview of collective property investment vehicles in Europe is based on a sample of 171 vehicles with a combined value of €90bn. While recognising that the coverage of the continental European property vehicles is not complete, the 85 vehicles included in this analysis have a gross asset value of €64bn and in many respects are representative of the broader population. The UK limited partnership sample in the comprises over €20bn of property held in 85 partnerships, estimated to represent 88% of the estimated value of limited partnerships in the UK.
There was a surge in growth of pooled property vehicles in Europe during the late 1990s with an average of 10 new vehicles created each year. Over 50 vehicles were launched in the period 1998-2001 which currently account for 40% of the sample value. Diversified and office specialist funds were particularly popular for new investment during this four-year period, while retail and industrial focused funds were introduced.
The favoured countries for investment by managers are Germany and the Netherlands, followed by France and the UK. The pan-European vehicles, those with investments in more than one country and with less than 75% of gross asset value invested in a single country, account for the largest proportion of property value. Within this group there is particular concentration of investment in France and Germany, each accounting for a quarter of investment. A further 17% of pan-European fund value is in the UK, 11% in the Netherlands and 13% collectively in Spain, Portugal and Italy.
National or single country vehicles are also popular representing 39% of value in the survey. Within this category, Germany and the Netherlands dominate where pooled investment vehicles have been part of the mainstream investment market for a longer period than in southern Europe. The global funds, those with some investment outside of Europe, hold 10% of the property in the survey.
Based on actual property investments, rather than intended target sector allocations, office weighting at 57% of vehicle value is the dominant sector across the vehicles in the survey. Retails are the second most popular sector where 16% of vehicle value is invested. A smaller 11% and 8% of value is held respectively in residential and industrial properties. The remaining 8% is held in leisure and mixed-use properties. The dominance of office value stems from the high number of specialist office vehicles. There is almost an equal proportion of specialist office funds (32 vehicles worth €25bn) as diversified funds (36 vehicles worth €27bn). Within the diversified funds, office properties account for over half of the total value. Retail, industrial and residential specialist funds are less represented.
The continental European property vehicles are aimed at both retail and institutional investors. The pie chart reveals how the vehicles are an important feature of the investment market for private investors wishing to invest indirectly in property in continental Europe. Overall retail, or private investors hold property with a combined value of €31bn, equivalent to just under half of the value of the property held by the vehicles in the sample. Institutional investors account for 39% of investment value in the vehicles, of which the majority is held by pension funds. A mixture of advisers, banks and foundations, who are often sponsors of the vehicles, own 10% of value. Property companies hold the remaining 2%.
Although the law that allowed the formation of limited partnerships was passed in 1907, it was not until the second half of the 1990s that these vehicles gained popularity as a collective approach to property investment. Property Vehicles Databank (see table) estimates there are 120 such partnerships in place in the UK with a combined gross asset value of more than €26.7bn, a rise of more than tenfold in the number of vehicles compared with just five years ago. Estimates indicate limited partnerships accounted for 6% of the overall property investment market in 2002, a year in which 14 new vehicles were launched with a combined value of €4.5bn
Recent trends specific to UK limited partnerships include increased weightings for leisure and residential funds, with investors no doubt seeking to tap into specialist management skills in areas that were previously considered inaccessible. In addition, diversified vehicles accounted for a rising share of the total market at 14% in 2002.
In terms of recent performance, the 35 limited partnerships measured by IPD collectively out-performed the IPD Universe in 2002, returning 10.0%, compared with 9.6% on direct property overall. However, when the impact of gearing, cash and vehicle level costs are taken into account, investor returns from UK limited partnerships are estimated at 12.6%. The falling cost of debt has encouraged gearing and, spread across all the limited partnerships, including those with no borrowings, gearing alone has added 1.1 percentage points to performance on average over the last four years. Last year saw substantial profits from the wind-up of funds.
This article draws on data presented in two publications by ABN AMRO and IPD – the Directory of UK Property Vehicles (published in June) and the forthcoming Directory of European Property Vehicles. The information is based on questionnaires received directly from the managers and general partners of vehicles and not on press reports or secondary sources, and forms the basis of the Property Vehicles Databank, a new joint initiative from Investment Property Databank and Oxford Property Consultants.
Catriona Allen and Andy Schofield are with IPD Research in London