New survey entrants, and growth from regulars fuelled by another year of outperformance for property assets, are revealed in this year’s EuroProperty/INREV fund managers’ survey
The European property fund management industry has seen another 12 months of spectacular growth since last year’s EuroProperty/INREV fund managers’ survey. The survey now includes data from managers with more than €810bn of assets globally, with €560bn of assets under management in Europe.
As might be expected from a survey that is entirely focused on fund managers who are either European or have a base in Europe, the strongest growth since last year’s survey came in Europe. A significant part of this growth was explained by the addition of a number of new entrants, but many of last year’s entrants also enjoyed strong growth.
ING Real Estate Investment Management overtook RREEF to become the world’s largest property fund manager, with €65.5bn of assets under management. The group has increased its assets under management by more than €18bn since the last survey, an increase of nearly 40%.
Pieter Hendrikse, chief executive of ING REIM in Europe, says: “The growth of the global business has come from the needs of clients, whose interest in real estate has grown dramatically. This is because real estate has developed into a major asset class through the work of INREV, IPD, EPRA and others. And our performance record continues to attract clients.”
ING REIM has launched a number of substantial funds globally in the past year. In Europe, the firm is raising capital for funds investing in the French residential sector, Italian shopping centres, Dutch offices, all sectors in Central and Eastern Europe and a pan-European fund of funds.
Significant growth for ING has come outside Europe, where the group has nearly two-thirds of its assets under management. As well as significant operations in Australia and North America, ING REIM is expecting strong future growth from Europe and Asia. “There is still room for yield compression in continental Europe, especially in eastern markets. In Asia, increasing transparency and accessibility will drive the market for investors,” says Hendrikse.
The largest player in Europe, Morley Fund Management, is slightly unusual in that the vast majority of its assets under management are in its domestic (UK) market. Continental assets of €2.2bn are outweighed by a €42bn UK portfolio, whereas the group has only €242m of assets outside Europe. It is the only fund manager in the global top 10 (by assets under management) that could not be described as a truly international business.
Ian Womack, head of property at Morley, says: “Coming from a very strong UK-only base less than five years ago, we see the international business as the place where the long-term expansion will be. Generally, the expansion of cross-border business has been and will be the focus of developments in the property fund management business.” Morley has just opened its first office in China. There is no property presence yet, but it is expected soon.
Hendrikse says being global is an important driver of ING REIM’s business. “Our global network gives us access to global capital flows – there is more capital moving from region to region than ever before, as well as within regions. The network helps global investors to invest locally.”
Although M&A have not been a major part of the market recently, activity that has taken place has often been related to the development of a firm’s international presence. Since the last survey, Merrill Lynch Investment Management merged with Blackrock, making the UK-focused MLIM property team part of a global operation. Since then, the former MLIM property business has been focused on expanding in continental Europe. UK manager Schroders bought Aareal’s continental fund management business, to boost its ex-UK operations. The acquisition gave Schroders exposure to €2bn of continental European assets and €1bn of committed capital.
Australian fund managers, most of which operate as “stapled securities” with a fund management business linked to a listed REIT, have been expanding or developing European platforms, although they are not represented in the survey except Macquarie Goodman, which bought Arlington Securities in 2005. Companies such as Valad, GPT, Challenger and Stockland have all built a presence in Europe. This has not always been through acquisition, Challenger has mandated Protego to build it a European portfolio, while Valad has invested in a portfolio managed by Cambridge Place Investment Management, but the stapled managers have stated that their aim is to build a European platform in the long term.
Pending tax legislation in Australia could make it easier for listed property trusts (Australian REITs) to invest overseas. In turn, this could make a European business arm more attractive for their stapled managers. One European fund manager says: “A big drive from the Australian managers into Europe could really shake things up a bit. The real estate business there is more sophisticated than it is here, even if you include the UK. If you look at Macquarie Goodman, which has a European development business feeding some of its funds, you can see the sort of vertically integrated business they like. And of course they know plenty about managing REITs and REIT funds.”
In this year’s fund managers’ survey, a third of managers say they are prepared to expand by acquisition as well as organically although, in person, most managers say they are “open to opportunities” rather than actively seeking buyers.
Fund managers such as ING REIM and Morley have expanded their assets under management in the face of enormous competition for assets. As a consequence, managers have had to seek new markets, looking further east, and new sectors, such as infrastructure. The two largest fund managers, ING REIM and REEF, both have infrastructure businesses as part of the real estate business.
Andy Rofe, chief executive of Invesco Real Estate in Europe, says that managers and investors will be pushing even further east this year in order to find stock. “We are seeing interest in Russia from three sources of German institutional capital,” he says. “For overseas investors, Russia means Moscow or St Petersburg and those markets are very tight in terms of standing investments. However, the opportunities in development are almost limitless, if higher-risk.”
Development, always important for opportunity fund managers, is becoming an increasing part of the value-added fund market in Europe. Vehicles that either develop, or have a secured source of development stock, have been more successful in adding assets. However, ING REIM’s Hendrikse says that strict corporate governance means ING’s development arm is seen as any other potential source of stock. “What is more important is the sharing of information and know-how,” he says.
Outside of the unlisted fund world, 2007 has seen significant movement in the establishments of REITs in Europe. UK REITs launched in January, the German REIT legislation is in place and an Italian REIT system is in progress.
Invesco’s Rofe says that the moves will have a significant effect on fund managers in Europe. “About a third of Invesco’s business is in REIT funds, most of which is in the US. However, we’ve just launched a global REIT fund that is generating a lot of interest. Once we have established REITs in all the largest property markets in Europe, there will be a great demand for products that invest in them.”
However, Womack is less certain that REITs in Europe will bring major change to the property fund management business. “We’re very much in favour of REITs, and are doing things in that arena, but I don’t think they’ll change the world. A REIT is just another form of wrapper for property assets.”
At present, only 1.7% of assets under management worldwide are in securities funds and much of this in the hands of specialists, such as Russell Investment Group. There is still a division of opinions in the fund management world about whether property securities funds and mandates should be managed by the property or the equities team.
