The global fund manager’s European business gained a German subsidiary last year and is now planning to launch a fund targeting French and pan-European markets
Large US fund manager Invesco Real Estate acquired its European side when it bought London-based investment adviser Parkes & Co in 2001. “Our mandate was to be the European piece of a truly global single platform and to expand the business as an independent asset manager,” says Gerald Parkes, chief executive of IRE in Europe.
Invesco is part of the listed Amvescap group, one of the worlds largest independent fund managers, and the real estate arm owns €14.5bn of investments – direct and indirect – in the US and Europe.
“One of the reasons why Parkes & Co merged with Invesco was because it was already a recognised manger in equities and bonds, had a highly respected real estate management arm in the US, but had no real estate capability in Europe,” says Parkes. “The merger gave us access to Ivesco’s offices in Europe and to institutions and business acumen in different European markets.”
The European business has increased substantially in size and scope since then, and now has €4.1bn of assets under management. In December last year, it gained a German arm, when IRE bought a 75% stake in Hypovereinsbank’s institutional fund management business, which looks after €3.4bn of assets. The German business unit runs seven property vehicles, plus two spezialfonds for German and Austrian institutional clients. The 177 properties are spread over the UK, US, Spain, France, Italy, the Netherlands and central Europe.
IRE has operating control over the German business unit and took on its 30 staff in Munich and New York, but HVB retains a strategic stake in the business. “HVB wanted a strategic partner that would create investment products for its clients, which it could then distribute,” says Parkes.
The Invesco brand also helped in winning a mandate to manage Real Estate Opportunities (REO), a London-listed company, last year. REO was a split-capital investment trust that had become embroiled in the controversy surrounding the sector and its then manager, Aberdeen Asset Management.
“Since then I’m pleased to say that the ordinary share price has doubled,” says Parkes. Of the £481m REO portfolio, 82% is in Ireland and the rest in the UK. The Irish portfolio is managed by Treasury Holdings, which is one of the major shareholders.
“The plan now is to focus heavily on the existing assets, which have a lot of upside,” says Parkes. “The Irish portfolio is a first-class one, with some existing assets and some tremendous development projects – Treasury really know their stuff.” The developments are mostly in and around Dublin, and include residential property, which is a booming sector in Ireland.
IRE’s London office has a 30-strong team, there are three staff in Invesco’s Paris office and two in Prague. IRE will be opening an office in Madrid shortly.
On the fund management side, its main client is US pension giant Teachers Insurance Annuity Association. Unusually for a US fund, TIAA has a programme of direct investment in Europe, which IRE has been masterminding since 1995.
The portfolio has grown to $1.3bn, mainly in the UK and France. It includes joint ventures with Scottish Widows, British Land, Hammerson and retail warehouse specialist Granchester in the UK and Société Foncière Lyonnaise in France. IRE has been selling some of Teachers’ assets over the past three years, including Northcliffe House in the City of London, which was bought by Deutsche Bank Real Estate for £99.2m last autumn. “We felt we’d seen very strong performance and had a slight question about its future performance,” says Parkes
However, at the end of last year IRE took TIAA back into the City, buying Angel Court, a 19,600m2 office building let to JP Morgan, for £100m. “We had been concerned about some of the prices being paid in the City and questioned whether people had thought about residual value,” says Parkes. “But the makeup of Angel Court passed muster.
“Teachers has got increasingly comfortable investing in Europe, and would like to do more,” Parkes adds. The wish list includes large assets in Paris and Italy. “When we look around Europe, the markets offer some reasonable buys,” says Parkes, noting that the signals coming from TIAA’s existing portfolio in Paris are encouraging.
“Italy is a bit more marginal – the pricing is very tight,” says Parkes. “We’d certainly look at large-scale retail, but opportunities are few and far between.” TIAA has a 50% stake in Sonae’s NorteShopping centre in Porto, bought in 1999 for €81.8m, which is “a tremendous performer”, according to Parkes.
Parkes says IRE could invest “well over €1bn” for its clients this year, but is going to be hard-pushed to do so. “These are tough markets to put money to work in. In most places the fundamentals are not exciting and there’s a mountain of new capital.”
IRE has some new funds in the pipeline. It has a good track record in central Europe, as Parkes & Co had been acting for clients in that area since the early 1990s and had put together a €150m Central European fund, which has 10 properties in the region. HVB’s business contributed another €160m central European fund to the fold.
IRE plans to launch a follow-up to the latter fund, aimed at German and Austrian investors and concentrating on prime property. It is is also about to close another fund targeting central Europe: the Endurance Fund, which is co-sponsored by Orco and is aimed at international investors. Endurance will follow a core-plus strategy, buying investments with the potential to add value, in smaller deals. It will stay in the main markets of Poland, the Czech Republic and Hungary.
“We’ve spent a lot of time looking at some other central European markets, such as Bratislava and Russia, but the yield compression in those core-ish markets has been very significant, while rental growth has been weak,” says Parkes.
IRE is also planning to launch a pan-European fund, again aimed at the German institutional market. “There is still strong interest in Germany for non-German investment, although aggressive bidding has pushed yields down so far that even in Germany, questions are being asked – such as are people really comfortable with these yields?” says Parkes.
In France, meanwhile, IRE has launched a €100m Islamic fund aimed at Middle Eastern investors, which will focus on deals in the €15m to €30m range. “We’ve been working on it for a year; the sharia element is new to financing in France, and there are different interpretations of compliancy with Islamic law. Our fund is very strict,” says Parkes.
IRE still does some ad-hoc advisory work. “Most has been focused on the hotel and leisure sector, but always with an eye to creating fund management opportunities further down the track. This sector interests us because it is quite a fragmented industry in Europe.” IRE has recently teamed up with HVS International to create a specialist unit advising on hotel financing.
Parkes is also keeping a keen eye on how the market for listed investment vehicles, similar to US real estate investment trusts, is developing in Europe. In the US, Invesco is a major player in this arena, running about $4bn of managed accounts.
“We could come into this market in Europe with a very strong operating platform. But the key question for us is whether there is going to be sufficient volume in the market to make investment worthwhile,” says Parkes. “I don’t see the point of having a securities business here owning just €300m of assets – that’s not a viable business for us.
Invesco Real Estate
10 Mount Row
London W1K 3SA
Tel 44 20 7543 3500
Fax 44 20 7543 3588
