Two words are regularly used in the industry to describe the ING Real Estate’s fund management team: sharp and smart. Yet the trio, sitting in ING’s UK headquarters at London Wall, are bickering over how to classify part of the £1.2bn Abbey “Dove” portfolio bought in August the largest property deal ever completed in the UK.
Kevin Aitchinson, the self-described “baby” of the team, explains: “We took out the properties from the Abbey acquisition that were more opportunistic.”
“You mean rubbish,” says Ian Whittock, head of European research and strategy.
“No, they just required active management,” says Aitchinson.
“Some might say problematic,” brokers a laughing Nicholas Gill, head of UK acquisitions.
This banter weaves its way through the rest of the conversation, and could easily be misconstrued as a clash of personalities. But it has allowed the team to become one of the UK’s most acquisitive fund managers.
In the past three years, it has placed almost £4bn in UK property, with the lion’s share within central London. This calendar year, it has invested £744m in the capital more than double 2005’s £348m.
In the City, just three acquisitions contributed £600m to that total:
88 Wood Street, EC2, which ING REIM bought outright for £230m; 55 Broadgate, EC2; and 1 Bunhill Row, EC1, bought as a joint venture with the Canadian Pension Plan investment fund in May.
With their central London spending programme nearing completion, the team talk about recovery in the City market, and how they would have handled things differently had the sale last year of Milton Gate, Moor Lane, EC2, gone their way. They speak of their rainy day plans and, while others call the top of the market, how those selling now might be making a big mistake.
More than 65 years of experience sits around the table 42 of those racked up at ING and Barings. In that time, they have witnessed not only the property crash of the late 1980s but also one of the biggest collapses in corporate history, the demise of Barings bank.
All three come from the Baring Houston & Saunders side of the business. When the bank that was involved in financing Napoleon’s war effort in 1802 was brought down by rogue trader Nick Leeson in 1995, Whittock and Gill unwittingly found themselves part of ING after the financial institution bought Barings for £1.
Gill admits that, initially, there was a bit of a stand-off. “We thought, do we really want to be part of this, are they the right partner? We quite liked our independence,” he says.
As it happens, Gill says, the team landed on its feet. “The growth we’ve witnessed over the past five years has been fantastic,” he says.
That growth has seen acquisition levels double every year from a relatively modest £500m in 2002 and 2003 to £2.1bn last year.
The spending spree is now drawing to a close. Apart from a handful of acquisitions, they are “pretty full up”.
Is this a sign that ING REIM now thinks the investment market has peaked or can yields harden further? “Yes, yes, yes,” says Whittock. He dismisses bearish comments rippling through the industry that yield compression is over. “Momentum is building up behind the sector,” he says. “You cannot underestimate the power of it. People make an assumption on what is fair value and think the markets stop there, but they just don’t.”
ING’s investors can handle yields of 4% in the City, says Whittock, adding that the medium-term prospective total returns are far in excess of what is required. “There is still some way to go on an ungeared basis, and on a geared basis I really do believe the returns could be spectacular. Rising rents will give you so much capital appreciation that investors will continue to bid those yields away.”
As a result, he says, those gripped by selling fever could be cashing in too early. “But that’s what makes a market and creates the opportunities.”
But the team has not been blinded by blue skies. “There is a point when that will change,” says Whittock. “Anyone can make money at the moment but, one day, a bump will separate the good from the bad, and we’ve got a plan for that day.”
He jokes: “The 1990s were agony, but we are so old we think we know how to deal with a bear market.”
Gill adds: “You can draw a line under anyone in this industry who is 35 and say: ‘You have never seen a bear market.’ That has prompted us to make sure we are reading the market quite carefully.”
For now, the rainy day plan remains firmly locked in the ING vault. With prime City rents at £50 per sq ft, Whittock believes rents will exceed those in the last cycle, bursting through £70 per sq ft by late 2008.
“That level was set in 1988, so they are not expensive, and this time around there isn’t the same degree of competition from Canary Wharf, which significantly held back rents during the last cycle,” he says. “I’d temper that by saying that’s the balance of probabilities. The risk is that the development cycle will fire up too early because yields are that much lower today.”
Today, with signs of life appearing in the occupier market, most City commentators would agree. But two years ago, when many of the recovery funds were launched, it was a very different story.
Launching such a fund at the nadir of the rental curve was viewed as, at best, risky. History has vindicated ING REIM’s decision to gamble on the City market. But what guided those choices?
Rental recovery
“We’d seen rental growth coming through and we wanted to get in at an early stage,” says Gill. “Two years ago, the City had a vacancy rate of 14% but, stripping that down, average long-term take-up was around 4m sq ft. And we saw that there were only really a couple of years’ supply to take us back to an 8% vacancy rate. At that point, our research said, rental growth would come through.”
Yet ING REIM was not the only one to spot the opportunity. The company is often compared with rival UBS itself a heavy spender in the City market.
“We are quite flattered to be considered to be of the same ilk,” says Gill, “but we are very fleet of foot and make quick decisions. We’ve worked very hard to achieve our approach as an organisation that is not afraid of paying key prices. We’re strong on deliverability and that has meant we have got onto a shortlist of two or three that are offered opportunities, which means we are probably seeing a lot more stock than our competition.”
He adds: “Bishopsgate and Bunhill were done not quite off-market, but with a very limited marketing campaign.”
Yet there is a mischievous glint in his eye when he talks about Milton Gate. The team went head-to-head with UBS over its sale. UBS and Exemplar Properties won the bidding process, paying £50m for the site, which they speculatively refurbished. After sitting empty for four years, the 167,000 sq ft block found a tenant in June, with Thomson Financial poised to sign a prelet. But by August, Thomson had pulled out.
Would ING REIM have done things differently? Gill says: “We were working with a small developer and we had a very quick turnaround planned for the refurbishment. We were looking at letting floor-by-floor instead of holding out for a single occupier like UBS.”
Gill draws parallels with 25 Copthall Avenue, EC2. ING REIM, along with Starwood Capital, bought the 135,000 sq ft office from Morley in August 2005. “When we got it, Morley had spent well over £30m on the building and it had, essentially, been all but vacant for more than four years.”
The previous owner had already cut rents from £45 per sq ft to £39.50 in a bid to stimulate lettings.
ING REIM immediately withdrew it from the market and brought in design guru Terence Conran to refurbish the reception. In March, the new reception was launched and two floors were put under offer at £43 per sq ft.
Gill says: “Now we’ve just got two floors to let and there’s strong interest in both of those. We are achieving in excess of our estimated rental value, and we are well within the void period we’d allocated.”
Spending £85m on a virtually empty building must have been fairly hair-raising at the time. Aitchinson plays down the risk. “It was a fairly compromised building, but that was the opportunity. We believed in it.”
The key lay in lettings at the building’s direct competitor, Hammerson and Henderson’s Moore House, EC2. “We knew we had a prominent location and we could undercut Moore House’s rents.”
Going forward, expect more of the same. ING REIM is discussing setting up a second property fund similar to the one created for the Abbey portfolio. This, says Aitchinson, had some gearing and was created for those who want a “little bit of risk”.
In addition, following the £200m sale of parts of the Abbey portfolio to Prudential and Morley, Gill talks of “one or two other deals which I can’t currently disclose”.
Future acquisitions will be joint ventures, similar to the Wood Street acquisition. These will target what Aitchinson calls “value-added-style returns” and will be opportunity driven rather than addressing a need to spend a specific sum of money.
Could the Gherkin, placed on the market last month by Swiss Re, be on that list? With a reported price-tag of £600m, it is nearly three times the value of ING REIM’s single-biggest UK asset, 88 Wood Street.
Aitchinson rolls his eyes and laughs. “I’ve been asked that three times this week, including by a client,” he says.
The team agrees that it cannot discount the landmark building.
The information pack is still in the post but, adds Gill: “We would have to be able to add value. We don’t want just a flagship building.”
The Gherkin, officially 30 St Mary Axe, EC3, still has 50,000 sq ft to let. “That, of course,” muses Aitchinson, “could be the opportunity.”
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Kevin Aitchinson Educated University of Reading Qualifications ARICS, Dip IPF Building conversion Experience Joined industry 1987 ING service Six years, senior director, fund manager Lifestyle Married Aitchinson is an elected associate of the RICS and a member of the IPF |
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Nicholas Gill Educated Oxford Polytechnic Qualifications BSc Estate Management, ARICS, FRICS Experience Joined industry 1980 ING/Barings service 18 years Lifestyle Married, two children, plays golf, sailing. Gill is a managing director at ING REIM and heads the in-house acquisitions and disposals team. He has been with the company since 1988 and, over the past five years, has personally overseen more than £4.25bn of transactions on behalf of in-house clients |
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Ian Whittock Educated Polytechnic of Central London Qualifications BSc, ACIArb, FRICS Experience Joined industry 1983 ING/Barings service 18 years Lifestyle Married, loves football. Whittock is a managing director at ING REIM and has been with the company since 1987. His early career was spent in portfolio management before moving to research in 1994. Whittock now heads the European research and strategy team, which produces the in-house qualitative and quantitative research. He also sits on the client committee, which ratifies all investment decisions |
