The property investment arm of the global US-based insurer has bought into an eclectic array of property, and follows deals, not strategies
Anyone following the recent acquisitions of AIG could be forgiven for finding it difficult to find a common theme in them. In the past six months, the real estate arm of the US-based insurance firm bought a stake in a €1bn Dutch office portfolio, a 50% vacant property at Luxembourg airport and a gated community in Russia.
To Kevin Reid, managing director and head of European real estate at AIG Global Investment Group (AIGGIG), the acquisitions make sense. Reid is not the person to follow strategies of investing in particular countries because of the economic fundamentals. “The consistent theme is risk-adjusted returns,” explains Reid.
Consequently, Reid does not believe in opportunistic markets. He is more of a believer in opportunities in the market. In Western Europe, he still finds plenty of deals, although it is getting harder, he says, to generate opportunistic returns.
“People have been calling the end of the opportunistic cycle for years and years. But I don’t accept that it is ending,” says Reid. “You have to work hard and stay ahead of the curve.”
AIG will have a hard job to reduce the 50% vacancy in its 17,000m2 Luxembourg airport property, which it recently acquired for €60m. Citing a 5% vacancy rate for the whole market, Reid doesn’t expect the local operating partner to encounter great difficulties in filling up the space.
In the Netherlands, AIG will let domestic asset manager Breevast do the work although Reid insists that the Dutch portfolio assets are managed as a partnership. AIG provided most of the €108m in equity to acquire the €1bn portfolio of 99 offices. The investment is a bet on the recovery of the Dutch office market, which has struggled with high vacancy rates since the end of the dotcom boom in 2000. In the first quarter, Dutch GDP grew by 2.5% on an annualised basis, according to the Dutch Bureau of Statistics (CBS), below analysts’ expectations of 3%.
The €250m Russian gated community, which it bought from US-based property company Hines, is AIG’s second acquisition in the country. Reid says the residential assets there offer good opportunities for cashflow growth, pointing out that there is “exceptional demand” for such property. The investment provides Reid with extra security, because collected rents and debt are in dollars.
The fact that AIG knew it was dealing with a trusted name helped seal the deal. In Russia, it is hard to do deals without paying bribes. Many international firms work with local partners to let them do the dirty job while they can keep their hands clean. Reid is aware of the risks of investing in Russia.
“Russia is not a market for tourists,” says Reid. “It is important to know who your partners are and whom you are doing business with. We won’t compromise on our standards and we can be extremely particular about the people with whom we do business.” Reid also points out that AIG is a long-term investor in the Russian market and that the parent company sells insurance policies there.
Being part of a large insurance firm gives AIG a competitive advantage over other investors. AIG can take assets on balance sheet and later decide in which fund to put the assets (see panel opposite). In Europe, AIG has $3bn of assets.
“We’re managing different pockets of money,” says Reid. “We follow no pre-conceived notion about allocation.”
In the US, AIG has underwritten deals that involved the acquisition, reclamation and regeneration of contaminated land sites. Reid is about to close the first such deal in Europe, but he won’t reveal any further details. However, he singles out the UK as a country in which “the regeneration story has a long way to go.”
AIG balances standing property with developments. Together with UK-based Lincoln Property Company (see panel), AIG develops property, especially in Eastern Europe.
Reid joined AIG only 18 months ago from O’Connor Capital Partners, a private real estate investment firm. He had worked for O’Connor for six-and-a-half years in Europe when he succeeded Elizabeth McLoughlin at AIG.
Many employees left the firm when McLoughlin departed. When Reid arrived, he had to rebuild the team. He has hired 24 people since he took over, including new staff. He did not take people from his former employers, but people on the other side of the table in real estate deals he did for O’Connor. What Reid attracted to AIG was the company’s ability to finance the deals. “I’ve been in [deal] situations in which there was no capital,” says Reid.
Reid hasn’t radically altered McLoughlin’s course. The biggest change is the stronger move eastwards. McLoughlin had already recognised that the opportunities were in the east. During her tenure, however, AIG had invested 70% in Western European markets. Reid wants to achieve a balance of 50%. To Reid, further east means Russia and Turkey, where he foresees the biggest returns in the development of new offices and residential assets.
“The quality is not up to global standards,” he notes. “As the economies improve, people will first improve their houses.”
AIG has not invested much in Germany, Europe’s hottest markets. Last year, German real estate investment transaction volumes reached €69.7bn, according to Ernst & Young, which expect more than €70bn this year. AIG has a listed vehicle there, but has not bought any of the big portfolios that were put up for sale in recent years.
Reid acknowledges that German economy is doing better than two to three years ago, but points out that it is coming off a low base. AIG has looked at virtually all the big portfolios, but Reid has “not been able to make sense of the risk-adjusted returns.”
“We don’t want to be caught up in the frenzy because everybody is buying there,” he says.
