The UK-based investment manager has its eye on Italian property as it moves its property investment focus from the UK to Europe
This summer, Henderson Global Investors announced that it would push further into Continental Europe because of falling returns in the UK.
Since then, it has gone on to launch a new platform in Italy, Henderson Global Investors SGR. It has also launched an Italian retail fund and plans are already in the pipeline for a second Italian vehicle.
Henderson Global Investors SGR was set up to provide Italian property funds to institutional investors across Europe. An SGR (Societa di Gestione del Risparmio) is the legal structure for the management company of closed-ended funds in Italy.
The retail fund, Fondo Azzurro, is now raising capital and is expected to raise between €300m and €400m. It will have gearing of 45% to 50%, and aims to raise more equity in the future.
James Darkins, managing director of property at Henderson, is particularly bullish on the Italian market and believes that there is significant scope for rental growth in the retail market.
“We are planning to launch more funds in Italy in the future, which is why we have built the platform there,” he said.
UK-based Henderson Global Investors provides a range of investment products and services to institutions and individuals in Asia, Europe and North America. It manages £61.9bn (€91bn) as at 31 December 2006, across all asset classes including equities, fixed income, private equity and property. At the end of 2006, Henderson had more than €11.9bn of property funds managed across Europe run out of offices in Paris, Milan, Frankfurt and Vienna.
Henderson’s property investments are divided into three categories Jersey property unit trusts investing in the UK Luxembourg SCPs, such as the Herald Fund, for international investors into European markets and Warburg- Henderson KAG, a joint venture between private German bank MM Warburg & Co and Henderson Global Investors, aimed chiefly at German and Austrian investors.
Despite having announced a push into Europe, Henderson says that, except for the second Italian fund, no further fund launches are on the table. Darkins says that the push into Continental Europe is focused on existing mandates.
“We have committed capital to a number of our funds and we are continuing to invest that into Europe, instead of into the UK, which is what we might have done before.
“There is still a lot of capital to invest for the KAG funds and the UK market is unlikely to produce opportunities for those funds at the moment. They are pan-European funds and do include the UK, but there are better opportunities in Europe. We are wary of the UK market at the moment. It is fully priced and we think a minor correction is taking place,” he says.
Since its launch in 2001, KAG has launched nine pan-European property funds managing €2bn in property assets across Europe on behalf of 60 German and international institutional investors.
Patrick Bushnell, who is Henderson’s director of property for Europe, adds that the move into European assets was also prompted by investor demand.
“Our UK clients are interested in continental Europe and most of the monies we have been raising during the past two years has been for continental investments. A lot of UK investors are looking more into Europe instead of the UK and we have seen pension funds diversifying into Europe,” he says.
UK investors are the largest contributors to Henderson’s property vehicles, followed by German, Dutch and Scandinavian investors.
Henderson’s activity in continental Europe this year also included the launch of a German shopping centre fund in a joint venture with Management für Immobilien (mfi), a German shopping centre development and management company.
The fund is managed by Henderson, while mfi manages the shopping centres and carries out refurbishments. It is looking to raise a total of €1bn of equity with an initial target of €200m at first closing. With gearing, the joint venture partners expect the fund to grow to more than €2bn in total gross asset value.
German retail property has attracted many investors who believe that the country’s economy will improve. Economists predict GDP growth of 2-2.5% this year.
In order to overcome rising prices and falling yields, the shopping centre fund, which has a target IRR of 7.5%, can invest up to 40% in developments, including 10% in land.
In November last year Henderson opened an office in Madrid. As yet, only Henderson’s Horizon range of equity and bond funds are run from this office. However, Darkins says that the next step could be to expand operations there to include property.
Henderson also runs a fund of funds investing across Europe: an open-ended vehicle that is not geared and has €600m in equity.
“Funds of funds give us access to other companies with whom we may want to do joint ventures in the future. I also believe that we will move to a point in time where there won’t be end dates on a lot of these funds, and there will be a larger mix of open and closed-ended funds,” Bushnell says.
The group also run an open-ended fund of funds, called Pagoda, that invests in Asia. Despite being open-ended, the fund has limits: investors are able to redeem only up to 20% a year.
“Open-ended funds can exist only within some limits because you need some mechanism for controlling the liquidity,” Darkins says.
Although some people compare open-ended property funds to REITs, Darkins believes that the returns of REITs are more likely to follow equity markets because REITs are listed investments. “Most investors would consider REIT investments part of their equity portfolio and not property. I would be delighted if governments across Europe created private REITs, because it would create a more level playing field,” he says.
Global economies and the property world took a serious knock in recent weeks with concerns over the so-called “credit crunch”, but, surprisingly, Darkins remains fairly optimistic.
“For core and core-plus investors, now is not a bad time to be in the market. However, where we sit today, it is hard to say what effect this will all have on the economy. And it is the economy that drives real estate,” he says.
Moreover, he believes that the market’s current volatility could provide opportunities for the group.
“I don’t think we will see fire sales as a result of market volatility. However, because our clients are core or core-plus investors, this presents us with opportunities in that if some investors are unable to get funding for the properties, it will take some of the aggressive capital out of the market and bring prices down,” he says.
Henderson property funds typically maintain a leverage of 50%. But, Darkins says, some will have no leverage and some may have as much as 70%.
“We are in the process of obtaining finance across the board, and though we are not having problems obtaining finance, bankers are warning us that we will have to pay more for it,” he says.
