Hermes Real Estate, one of the UK’s biggest fund managers, is inching closer to its first foray into continental Europe. Ben Sanderson, director of international investment, tells PropertyEU why the time is right for such a move. The article below is available to preimum subscribers only.
Following its move into the US market in 2011 - in a joint venture with US investor Hampshire Real Estate - Hermes Real Estate is now setting its sights on continental Europe.
PropertyEU: Hermes has £5.9 bn (€6.8 bn) of gross assets under management in both UK and international portfolios: how is this broken down by region?
Sanderson: Previously, around 90% was invested in the UK, with the rest invested in markets such as North America and Australia. Our goal now is to up our exposure internationally, so that around 70% of our portfolio is held in the UK, with 30% invested elsewhere, including Europe, North America and the Asia-Pacific region. (Hermes decided at the end of 2010 to raise the weighting to overseas real estate to 30% from 10%.)
PropertyEU: Why have you decided to make the push into continental Europe at this time?
Sanderson: The British Telecom Pension Scheme is our biggest client and is keen to increase its exposure to other markets. Until recently, we were cautious about Europe, due to economic issues and fundamental pricing ones. However, this year, we have seen pricing improve, rental growth is looking more likely and the gap between buyer and seller expectations is narrowing for the sort of product we want to buy.
PropertyEU: Which European markets and asset classes are you targeting?
Sanderson: We are mainly looking at Germany, France and the Nordic region because of their stability and transparency. Actually, we are on the verge of closing our first deal in France.
We think there are good investment opportunities in the office sector, although not necessarily in the CBDs, where yields can be quite low. We also like retail but are driven by price and value. In many markets we prefer high street to shopping centres on pricing grounds. However, it is difficult to generalise as there’s a real stratification within retail - there’s a very different dynamic, for example, between secondary and prime shopping centres and with high street retail in Hamburg or Düsseldorf compared to Paris or Munich.
Staying close to the occupier is part of our approach in the UK and we try to understand occupiers wherever we invest. We’ve also got some legacy exposure to residential portfolios, particularly in markets such as Germany.
PropertyEU: Do you prefer to enter into partnerships abroad?
Sanderson: Yes. Our approach is to find asset management partners locally to invest with, either buying real estate assets jointly or even on a club deal basis. We typically want to commit between $100 mln and $150 mln per programme, or between $20 mln and $50 mln per deal. We like properties where there is the possibility of improving them from an asset management angle or where there is an element of modest leasing risk where this is priced well. Typically, we are looking for an annual return of between 8% and 10%.
PropertyEU: How much do you plan to invest in Europe this year and how much did you invest globally last year?
Sanderson: We have committed around $400 mln in the past 18 months in the US and Australia. (He declined to give further details.) We don’t have a set target for this year.
PropertyEU: Are you also interested in debt funds or funds of funds?
Sanderson: Primarily, we’re an equity investor but we do consider debt investments. We have already invested in the debt space in the US. We’re also very open-minded about other funds as sometimes they can provide the best opportunities to access some hard to come by asset classes, such as logistics. There has to be a compelling reason to invest in funds and we prefer discrete focused strategies. However, we are not interested in funds of funds.
PropertyEU: do you have any new fund launches on the cards?
Sanderson: We cannot comment on new fund launches but we are constantly looking at opportunities for our clients.
PropertyEU: Are there any geographical markets or asset classes that you are not interested in?
Sanderson: Yes. We are not interested in markets that are not transparent and don't deliver the right risk return trade-off for our client such as Russia. We’re also not looking at southern Europe in the short term because of the economic climate there.