EUROZONE: A crawl to the finish

As much as it would be nice to deviate from the economic chaos in Europe, it seems to be pervading all aspects of private equity real estate. Indeed, a collection of conversations over these past four weeks suggest that those firms that back in 2009 and 2010 thought they could launch their first-ever private equity real estate fund are now having major second thoughts. Some of them feel as though the field is now the domain of the established few.

Even in terms of commitments to funds by established firms, it has been a long hard slog for many managers. For example, it has taken Legal & General Property six months to raise an additional £52 million (€59 million; $83 million) for a UK property fund that aggregated £300 million in the end. As one person observed, the fundraising period had been punctuated by one death, one marriage and one birth, so it has been an almighty feat.

In addition, on the transaction front, bank financing has once again become sticky. Inside banks, real estate loan professionals are finding it bothersome to take certain deals to investment committee, particularly if the investment involves a meaningful amount of risk.

Furthermore, some of the most senior professionals are acting more like brokers than fund managers, spending whole mornings or afternoons presenting the ins and outs of a particular transaction to a separate account client. As an aside, one client recently asked a senior manager presenting to him  whether his firm could bid for a trophy asset in London, gain a negotiating position, then recut the deal with the vendor by citing Europe’s dodgy economy.

There is no question that most aspects of the private equity real estate business have slowed down, and that goes for the largest global investors as well. APG Investments, which manages the real estate investment activities of Stichting Pensioenfonds ABP, is among the largest beasts in the jungle and the biggest institutional investor in Europe, according to PERE’s new Global Investor 30 ranking (in this issue). Different than other large Dutch investors because its indirect team invests in both equities of listed property companies as well making investments in unlisted funds, it is something of a bellwether for the state of the private equity real estate market.
Speaking to PERE in late October, Robert-Jan Foortse, APG’s head of non-listed European property investments, noted that APG has slowed down its investment pace compared to last year. He added that it certainly is tending to see deals take longer because there is so much uncertainty.

A conversation with APG is always informative, as one tends to find its approach generally mirrors that of the largest global real estate investors. As well as confirming a slowdown, the investor also has been putting money to work by increasing commitments it already has made with tried and tested operators. In Europe, two recent commitments happen to be with listed property companies that APG clearly rates as operators.

In the first example, APG has made an additional commitment to an existing venture with the US’ largest lodging REIT, Host Hotels & Resorts, and a like-minded investor in GIC Real Estate. In July, the venture purchased the Pullman Paris Bercy Hotel in Paris from Accor for €105 million.

In the second investment, APG increased its capital commitment to a Nordic joint venture it has with French retail REIT Klepierre. The original arrangement was sealed in August 2008, when APG and Klepierre joined together to buy Steen & Strom, the largest shopping centre owner in Scandinavia for around €2.7 billion.

Although APG does invest in pan-European opportunity fund managers when it wants to (Perella Weinberg’s Europe fund run by Leon Bressler is an example), it has not made commitments to a European opportunistic fund in recent times.

Moreover, APG certainly feels that its approach is more ‘core’ in the assets as well as the markets it is targeting. At some point before the 2008 credit crunch, it was being pushed out of the core markets into higher risk categories because returns for core assets were too low. However, it can now expect to achieve better returns from core that fit the needs of its pension clients and their long-term liabilities.

That doesn’t make for pleasant reading for opportunity fund managers, seeing as many other large institutional investors are following a similar track to APG. However, the investor does assure us that it is open to ideas for niche strategies where alignment and governance are up to scratch.

Furthermore, APG does not plan to alter its philosophy of investing indirectly. The reason it will continue to invest in the unlisted real estate sector is that its biggest client, ABP, has not yet met its target allocation to real estate of around 10 percent.

Perhaps that is the motivation to keep some of Europe’s largest investors investing: the need to achieve target allocations. If many institutions are short of their target, there is reason to suppose they will continue to invest, even in these slower times. They just may not be doing so with opportunistic fund managers.