by Holly Smith
When a wealthy blue-blooded family looks for investment partners, blue-chip institutions are an obvious choice.
Over the past 12 years the Grosvenor Estate has been discreetly assembling real estate partnerships with top-grade institutional investors world-wide. This “small club of investors”, as the managers call it, now has property assets worth about £900m spread throughout Canada, the US and Australia.
The ultimate head of this enterprise, Gerald Cavendish Grosvenor, the Duke of Westminster, is, of course, no stranger to property. His family’s holdings date back to Norman times, and the centuries of property ownership have helped to create a family fortune estimated by Forbes magazine to be £1.6bn.
Among the 24 groups which have joined the Grosvenor partnerships are insurance companies, private investors, and pension funds including: Scottish Amicable Life Assurance Society of Melbourne, Tandem Computers of Cupertino, California, Meiji Mutual Life of Tokyo, and the Teachers Insurance & Annuity Association of New York.
UK partners include the pension funds of Reed International, Grand Metropolitan, the British Broadcasting Corporation and Rolls-Royce.
The partnerships are formed within the family’s Vancouver-based Grosvenor International Holdings, an associate of its London parent, Grosvenor Estate Holdings.
The Vancouver operations date from 1953, when the trustees of the Grosvenor Estate acquired Annacis Island, a 1,200-acre parcel about 15 miles from downtown Vancouver.
By the early 1970s the Estate had interests valued at about £14m in Canada. In 1972 the trustees decided to consolidate their overseas interests, forming Grosvenor International Holdings, an international real estate company. Vancouver was selected as its headquarters.
According to GIH’s chief executive, Daryl Delmotte, the company began seeking outside investors in 1976. At the time, buildings in Los Angeles and San Francisco were going for less than their replacement cost, but GIH did not have the funds to make the big investments it wanted.
The solution was to tap sources back home. Says Delmotte: “It made sense to come to the UK where the Grosvenor Estate was well known. Also, we could translate the property terms for the UK investors.” GIH was able to show British fund managers and other investors that North American properties were often yielding 2% more than UK properties, and that the acquisitions could be financed with 30-year fixed-interest mortgages.
GIH buys its buildings through partnership arrangements. For example, GIH will team up with four investors, then recommend purchases to the group. If all five partners agree on the property, it is bought, with GIH normally contributing 10% of the price. The four investors put up the remainder, but do not have to contribute equal amounts.
The property (usually from three to seven buildings are purchased per partnership) is bought for cash or cash plus the assumption of the mortgage, and the subsequent revenue and costs are shared out pro rata. Property management is generally contracted out to a local firm.
Delmotte believes that GIH is probably unique in the property investment world. “We’re not aware of any other company which offers international property asset management combined with co-investment as a principal. There are, of course, many companies which offer asset management services on a domestic basis in the countries in which we operate, but very few co-invest and generally not side-by-side with cash.”
Most of the partnerships are closed-end funds lasting 10 years. If one partner wants to leave after 10 years but the others want to stay, the remaining partners can either buy out the leaver or sell one of the buildings and pay the departing member with the proceeds.
According to Delmotte, the first partnership recently came up for renewal, and all four members — GIH, and the pension funds for British Rail, the BBC and Boots — voted to keep it going.
The BBC Pension Trust has £100m invested in eight GIH partnerships. Paul Hughes, its chief executive, says that overall the return has been “very good”, although he declines to give exact figures. The return has been “excellent” in the US and “adequate” in Canada.
In Australia, he says, it is too early to tell as the investments are very recent ones.
It was the Grosvenor Estate’s reputation and extensive experience that led the fund to join the partnerships, plus the breadth it offered, says Hughes.
“Investing with a number of partners gives us a greater spread of properties than we could have if we went in alone.”
Over the last four years GIH has bought £320m worth of property, an average of £80m pa. The company invests at a steady rate, so far as market conditions will allow. The total assets currently managed by GIH amount to £963m, of which £260m is owned by GIH itself. Most of the £260m is invested in the property “clubs” and the balance in other bricks and mortar.
Major properties held by GIH partnerships include 1701 Pennsylvania Avenue, a 12-storey, 187,000-sq ft office building just a block from the White House in Washington DC; Grosvenor Center, a 620,000-sq ft office and retail project in Honolulu; and 50% of 444 Flower Street, Los Angeles, a 48-storey office building with 890,941 sq ft lettable space in the centre of the city’s financial district.
“Our general philosophy is to go for the prime property, which we regard in North American terms as regional shopping centres and well-located downtown central business district office property,” says Delmotte. “We have limited investment in industrial property, and we don’t touch residential property.”
In all, the partnerships and joint ventures hold more than 39 properties concentrated in British Columbia, California, and New South Wales, Australia. About 62% are office buildings, and 38% retail units or shopping malls.
Delmonte declines to discuss the precise returns earned by these properties, except to say that the performance “would rank in the upper quartile if compared against domestic property asset managers”. None of GIH’s partnerships have lost money, he says.
One factor that has helped to ensure good performance is the low proportion of properties in energy states. GIH had a Houston office building, but sold it in 1982. The company has not forsaken the energy belt entirely, however; it bought Town East Mall in Dallas, a 96-acre, 193-store mall, in 1986, and this has remained profitable, Delmotte says.
Regional shopping centres, especially those with about 1m sq ft of space, are currently on GIH’s wanted list. “We’re looking for regional shopping centres and office buildings in the central business locations for over $50m,” Delmotte says. “We like the US market — Washington DC, Boston, Los Angeles and San Francisco … we wouldn’t buy in Houston at the present time, and we’d look cautiously in areas like Dallas and Denver.”
In Australia, GIH is interested in Sydney, Melbourne and Brisbane, and especially in shopping centres. In Canada, Toronto is a good investment area, but very expensive right now, says Delmotte. As for Vancouver: “We think it has a tremendous long-term future.”
While GIH currently operates only in North America, Canada and Australia (it has offices in Vancouver, San Francisco, Honolulu, Sydney and Washington DC), it plans to expand its operations to South East Asia in the next few years. “We think the Pacific Basin will see amazing economic activity over the next decade.”
According to Delmotte, GIH’s international operation gives it a better chance of comparing returns and spotting bargains. As an example, he cites shopping centres in the US selling on yields of 5.5% to 6.5%, while in Australia the yield range is 7% to 8%. “We think this may be an opportunity,” he notes.
He also feels that world-wide experience helps in choosing the right location. “It’s an instinctive sense of being able to walk into any city and know where the right corner is, which you just get from walking the cities of the world. Our real estate people really have that sense.”
Apart from its initial investment, the Grosvenor Estate has not put substantial sums into its international offshoot — GIH is growing off its own profits.
It is also expanding geographically. A year ago, GIH gathered in European investors by forming a Luxemburg-based company, International Freehold Properties.
Here, GIH’s primary investment partners are the Bank in Liechtenstein AG (owned by The Prince of Liechtenstein Foundation); Etablissement Wildec (a Liechtenstein company which is owned by a family trust and which holds a substantial amount of UK property) and IFINT SA (an international company controlled by IFI, Italy’s largest holding company). Other investors are LE Lundbergforetagen AB, a Swedish holding company, and Dipl-Kfm Axel-Peter Weigand of West Germany, managing director of Oberland Glas AG and a major shareholder in that company.
Each investor puts a $10m equity stake in International Freehold Properties. The company plans to build up a portfolio of properties and then offer its shares to the public. “It relates to unitisation,” says Delmotte. “It will enable a large number of investors to participate, and will offer liquidity.”
The man in the street should be able to buy shares in IFP within two to four years, according to the prospectus.
