TH Real Estate’s newly appointed head of real estate talks to EG as he looks to apply the lessons learned during the downturn to help grow the company’s reach
Mike Sales is a man well used to the rollercoaster ups and downs of the real estate cycle – he even did his dissertation on theme parks.
The newly appointed head of real estate at TH Real Estate took on his previous role at the firm as managing director, Europe, just as things began to turn in 2007, adapting to the job at a time when the market was on its knees.
Eight years later Sales has once again taken on a new position at a time when things are starting to feel a little uncomfortable again – turmoil in China, the threat of interest rate rises and murmurings of a more “risk-off” attitude among investors. But Sales is not flustered. “You learn a lot more in difficult markets, as you understand the potential risks inherent in the property sector,” he says.
In his eyes, investors are more prudent than in the heady days of the last boom.
“We had 12 years of almost uninterrupted growth in the property market, if you take away the dotcom crash, there were some people who had not experienced a property downturn and what the implications of that were,” he says.
“The property investment sector is far more sophisticated now, lessons have been learned on the debt side to avoid recapitalisation and the sale of assets like we did in 2007-2008. We have become a more risk-averse industry.”
As head of real estate, taking over from veteran James Darkins, who retires at the end of the year, Sales will need to harness all of those lessons learned. He now controls $28.3bn (£18.6bn) of real estate globally, is responsible for maintaining and winning enviable mandates from the world’s largest pension funds, leads a team of 279 and oversees a €3bn (£2.2bn) development pipeline.
He will also lead the company through the latest chapter of its history, under the 100% ownership of pensions giant TIAA-CREF, which took control of the company in April.
Sales will not oversee the US operation, however, which is fronted by senior managing director, chief investment officer of global real estate for TIAA-CREF and head of Americas for TH Real Estate, Phil McAndrews.
Long-term trends
Sales has been eager in recent years to follow “mega-trends” so as to not get caught out by market cycles.
The theory goes, he says, that if you are investing through market cycles then you cannot just hit the exit button at the top of the cycle – you have to move into markets that will show growth over the long term.
The fund manager has built its strategies around these, with vehicles including its $332.8m German logistics fund and a Chinese outlet malls venture, Silk Road.
“The logistics market has been well championed and what is interesting is that trend has been picked up by the market and acted upon in a very short period of time – you have seen cap rates down 250 basis points in a relatively short period of time for the property market,” says Sales. “The key is growth markets and any further advancements in the click and collect model, which may lend itself to different locations from the viewpoint of the retailers or distributors.”
He adds: “China is a market where we are working with [Italian real estate company] RDM in the designer outlet mall sector, we have seen really strong performance as a result of demographic changes and it is a strategy we are committed to growing. The Silk Road jv has just opened the Florentia Village Designer Outlet Mall in Guangzhou, with further outlets in Shanghai and Jingjinji.”
Sales has every confidence in the Chinese venture despite ongoing concerns over the country’s economic instability. The company has an office in Singapore and is looking to increase its presence in Asia, which Sales says the company may do through buying another business.
“There is clearly a Chinese economic issue at the moment and we are aware of how that may have a knock-on impact on the global economy and subsequently rental growth, but we still believe in China as a growth market. The market is difficult to predict at the moment and we are therefore happy with our current strategy,” he says.
Investment strategies
A crucial part of Sales’ new job is being the main point of interaction between the company and its owner.
The relationship was already established when the buyout completed – TIAA having bought its initial 60% 12 months earlier – but there are still some integration tasks.
“In terms of TIAA-CREF buying 100% of the TH Real Estate platform, that is now done and we are an independent subsidiary. We are still assessing ways to best leverage the synergies across the Europe, Asia Pacific and US platforms, and that will be a priority project over the coming months,” Sales says.
TIAA-CREF has $86bn of real estate assets under management globally, including the $28bn that TH Real Estate manages for TIAA and others.
There are plans to “better integrate the whole platform over time, creating a uniform business, under which all assets will be managed” – a process in which Sales will be at the forefront.
“The TIAA-CREF general account is an important client, but one of many key clients for our business. It wants global diversification and long-term growth and certainty of cash flow, which makes Europe a target market for the continued accumulating of high quality real estate,” Sales explains.
TH Real Estate is able to attract some of the mandates it manages in part by putting in co-investment contributed by its parent.
This was borne out last month when TIAA-CREF founded a €2.2bn (£1.6bn) joint venture with Swedish pension funds AP1 and AP2, which saw them jointly contribute a pool of office assets across Europe which they will look to double over five years. It will be managed by TH Real Estate.
“There is a mandate to go out and spend if we find value but they have to be the right assets. We are happy to consider moving up the risk curve when the return premiums justify it,” Sales says.
Perhaps the most high-profile name associated with investing with TH Real Estate is AustralianSuper, the A$84bn (£38.7bn) superannuation fund for which it invests in UK retail and offices. Most recently it bought a 25% stake in King’s Cross Central for more than £200m.
“They are after the big dominant schemes, whether that be in retail or in the office sector, that are capable of being added to extended and improved over a long duration,” Sales says.
European commitment
Like many large institutional investors, Sales would like to see TH Real Estate make a move into the private rented sector, attracted by its prospective long and stable income streams.
“I think we would like to make a commitment to the European PRS market over time. If you follow the demographic trends, that’s an area of the market we need to be in as a business,” he says.
“We are likely to start in the UK but would want to expand in Europe over time. In PRS the rules and regulations in different countries are very different so any thought of a pan-European fund would need further consideration.”
Also on the agenda is the addition of a pan-European, core open-ended fund – a model common in the US but one that many European fund managers have struggled to establish because of the multitude of jurisdictions involved and lack of high quality product of scale.
“If you are going to build a fund like that you have to start with capital and property and you have to start at a reasonable size. The European open-ended market is relatively immature compared with the US, which we believe offers a long-term growth opportunity for our clients and our business,” Sales says.
With the backing of TIAA-CREF these prospective new products are eminently more deliverable. Wherever real estate is on its rollercoaster ride, Sales is strapped in and ready for the thrill.
CV: Mike Sales
Age: 51
Favourite film: Field of Dreams
Favourite book: This is your Life by John O’Farrell
Favourite holiday destination: Aldeburgh, Suffolk
Football team: Crystal Palace
Career
1994 Henderson Global Investors, UK property investment manager moving up to head of TH Real Estate under new TIAA-CREF ownership
1989 Morgan Grenfell Laurie, development surveyor moving up to head of UK investment agency
Education
Middlesex Business School, BA (Hons) business studies
Reading University, MPhil land management
Associate of the Royal Institution of Chartered Surveyors
david.hatcher@estatesgazette.com
