APG is interested in breathing new life into more non-listed real estate investment vehicles that have reached the end of their cycle, Robert Jan Foortse, APG’s head of non-listed European real estate, has told PropertyEU.
APG is interested in breathing new life into more non-listed real estate investment vehicles that have reached the end of their cycle, Robert Jan Foortse, APG’s head of non-listed European real estate, has told PropertyEU.
APG is interested in breathing new life into more non-listed real estate investment vehicles that have reached the end of their cycle, Robert Jan Foortse, APG’s head of non-listed European real estate, has told PropertyEU.
In January, the Dutch asset manager announced a partnership with UK listed REIT Grainger to launch a £349 mln (€414 mln) UK residential property fund. Named GRIP, the fund will acquire the residential property portfolio previously owned by G:res, a UK residential property fund set up and managed by Grainger.
The move follows a decision by G:res shareholders in June 2011 to progressively liquidate the fund. APG will invest £158 mln in the new vehicle, with Grainger putting in £59 mln. The fund will have leverage of around 40%.
‘We’re open to investments in more of these vehicles that are reaching their maturity,’ Foortse said. ‘A number of very good platforms that were set up at the beginning of the century are now due to expire.’
Foortse also sees scope to invest in funds set up between 2005 and 2007 which have a shorter life-term and are now also nearing their expiry date. ‘Not all of them are well managed and some of them were not properly financed, but there are some funds amongst them with good assets. Depending on the quality of the assets, we may be interested in rolling them over or even injecting new capital. But the governance structures must be modernised. In fact, I believe the that modernisation of the governance terms should be an automatic process for all (open-ended) funds that reach their maturity.’
FUND MATURITIES
According to figures from INREV, the European association for the non-listed real estate sector, over 200 funds with a gross asset value of €79 bn are scheduled to expire between 2013 and 2017. Of this figure, a significant portion - or €30 bn - is due to mature this year. Foortse: ‘We’re interested in teaming up with two or three partners and are open to new investors in the Grainger fund as well. But English investors don’t seem to have a strong appetite for residential real estate, almost as if it’s not really part of their investment universe.’
In the case of Grainger, APG already had a stake in the listed company but was not an investor in the non-listed vehicle, Foortse explained. ‘We knew that the fund was about to expire, but didn't know anything about the terms of the fund. We asked to receive the documentation to get a better insight and proceeded from there. A lot of expiring funds may continue in a new form, with the same or other shareholders, new managers and a new governance structure to reflect current demands regarding lower LTVs (loan to value) and fee structures.’
APG - the asset management arm of Dutch civil servants pension fund ABP - has been a shareholder in Grainger for several years. 'APG has a long history of investing in residential real estate, mainly in the Netherlands,’ Foortse noted. ‘We believe prospects for the Greater London rental market are promising and we are enthusiastic about adding this exposure to our portfolio.'
In the UK, residential real estate is not widely seen as an institutional asset class due in part to a firmly entrenched owner-occupier culture. By contrast, the asset class is viewed as one of the safest investments in the Netherlands which has a long rental tradition, both in the regulated and non-regulated segments, and where the rising percentage of owner-occupiers is a fairly recent phenomenon.
The tie-up with Grainger was a logical step for APG, Foortse added. ‘We have long been seeking to expand and diversify our exposure to residential real estate in the Scandinavian countries and cities like Paris, but were unable to find the right opportunities. In the Netherlands we’ve learned over the years that residential real estate generates solid returns with low risks in the long term.’
RETURNS
Overall, APG is believed to be seeking returns of 7-8% for its residential investments. The direct cash returns are confined to about 3-4% compared to 7-8% for logistics assets, but long term there is greater scope for rental growth in London residential properties, Foortse said. The venture with Grainger is targeting the burgeoning middle segment of the market, he noted. ‘London market rents are strong at about £350-400 (€408-466) a week. And the population is expected to continue to grow in the coming years.’
APG is keen to promote the further development of middle-segment residential real estate as an institutional asset class, but the possibilities outside the Netherlands are limited, Foortse said. ‘It’s difficult to find the right portfolio and partners. In Scandinavia we looked but couldn’t find either even though the expected returns and the economic fundamentals there are very attractive. We also looked in Paris, but other factors were at work there. The prices were rising very fast due to tax advantages that favour local investors.’
Even in the UK, the possibilities to scale up the Grainger vehicle are restricted. The Grainger portfolio comprises low-rise residential units located in the centre of London near the City and the northern belt of the UK capital. Foortse: ‘We are definitely interested in expanding the portfolio, through acquisitions and development, but development is quite difficult in this segment. In many cases it’s difficult to get a permit for conversion. ’
GERMANY
On the Continent, Germany is currently the hot spot for residential real estate investment, but Foortse has no plans to step into similar non-listed ventures in that country. For a start, the number of sizeable listed residential vehicles is growing with LEG Immobilien forming the most recent example of a successful IPO. Economies of scale lead to greater management efficiency, Foortse pointed out. ‘A big listed residential sector provides plenty of options and liquidity. There’s now limited added value in creating a non-listed vehicle in such a market.’
Many institutional investors are driven to Germany because of its safe haven status rather than the dynamics of supply and demand. ‘London is a growth market,’ Foorste said. ‘In Germany, Berlin and Munich are growing as well, but the demographics in other cities are not as favourable.’
Outside Europe, APG invests in the residential sector through listed companies such as Equity Residential in the US and has taken steps in recent years to buy into residential sectors in emerging markets such as China and India.
Last year, the pension fund administrator announced it was taking part in a residential development platform launched by Godrej Properties which will focus primarily on the development of mid-income residential projects in tier-one cities such as Mumbai and Bangalore. A number of options exist to invest in residential developments in China through listed vehicles in Hong Kong, Foortse added. ‘A middle class is emerging in these countries and there is a growing need for mid-income housing. The supply and demand fundamentals are very strong.’
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