Tailored solutions instead of off-the-rack products for institutional investors

Real estate demand in Europe is growing dramatically, particularly thanks to large influxes of funds from Asia. But large international investors’ requirements vary widely – and as such, local expertise and custom solutions are essential to meet their expectations.

The low-interest phase continues. Pre-crisis bonds with attractive yields are growing scarce, even in the portfolios of pension funds with a long-term approach. Conservative bonds simply don’t give investors enough of a return these days to meet their pre-defined earnings targets. The question is what to do with freed-up cash and incoming funds, when even high-risk assets – Greek government bonds are an example – continue to stagnate? Even worse, this scenario of shrinking returns isn’t likely to change anytime soon. Leading central banks have been raising short-term interest rates either cautiously or not at all, because both current inflation and inflation expectations are still lingering within the target range that monetary policy likes. The result: financing conditions will probably remain favourable for a while longer, despite all assurances of an imminent interest rate turnaround. No wonder, then, that institutional investors worldwide are trying to build up their real estate holdings.

If these investor groups actually put their plans into action, the market will feel the consequences. According to a study prepared for PATRIZIA, institutional investors are significantly underinvested in the real estate sector: only 7.2 per cent of their total capital is invested here. But the study says they plan to raise the figure to an average of 9.1 per cent.

Europe’s real estate market attracting massive amounts of capital

At the same time, institutional investors want to diversify their portfolios internationally. Asian funds in particular are channelling more capital toward Europe. After all, from these investors’ perspective, properties in the European Union are relatively economical. Exchange rates for the euro and pound are favourable, and returns on commercial rentals are attractive. Not to mention that the region offers long-term political stability. As a result, nearly 80 billion euros in investment capital flowed into the European real estate market in 2016 – almost twice the previous year’s figure. Yet major investor groups’ objectives vary widely.

An insurance company from Taiwan has investment goals that are completely different from a state-backed fund in the Middle East or a U.S. pension fund.”

Dr. Konrad Finkenzeller, Head of Institutional Clients International, PATRIZIA

American companies generally expect a spread for their foreign investments that varies in size depending on the asset class. In the European market, this performance target can be met only by properties in the Value Add and Opportunity categories.

Asian funds prefer the core segment

Those segments would be too risky for Fubon Life. Early in the summer of 2015, PATRIZIA acquired the property of London’s famed Madame Tussauds wax museum – in operation for more than 130 years – for the Taiwanese insurance corporation.

The building complex cost the equivalent of about 466 million euros and is under a long-term lease to the operator. Excellent local contacts were instrumental in closing the deal. After all, the institution is one of central London’s best-known tourist attractions. “In implementing their global investment strategy, large institutional investors are increasingly coming to rely on strategic partners. With our network of expert teams in the various European real estate markets, we can offer solutions to those investors from a single source”, says Wolfgang Egger, CEO of PATRIZIA. Most of the time, Asian investors apply this strategy in the core segment. Their focus is often on well-known buildings that shape a city’s silhouette, wherever possible leased long-term to a main tenant. That means landmark buildings like the Astro Tower in Brussels and the Commerzbank Tower in Frankfurt am Main. PATRIZIA acquired both buildings for Korean investors last year. If institutional investors from South Korea are especially interested in the European market, that’s largely due to foreign exchange rates, as the Korean won has gained enormously against the euro since the financial crisis: where a single euro cost up to 2,000 won in the spring of 2009, these days it’s worth only 1,300.

Korean investors prize landmark buildings

A top location and an excellent lease make the freshly renovated Astro Tower an outstanding core investment. The 33-storey office tower is located in the central business district of the EU metropolis and has been rented out in its entirety to the Belgian government employment bureau since October 2016. The indexed 26-year lease, with no cancellation option, lends the deal the kind of earning quality that conservative investors seek out. The situation is similar for the Commerzbank Tower.

“Clients in Asia appreciate our specialised knowledge of their needs when it comes to real estate investments, as well as our fully integrated investment management,” says Dr Finkenzeller. PATRIZIA acquired the high-rise – built in 1997 by a design by star architect Sir Norman Foster – for the Samsung Group under a single-deal engagement. At 259 metres, or 300 metres including the antenna, Germany’s tallest building is a landmark of the banking metropolis. With roughly 120,000 square metres of floor space, the office tower is leased long-term to Commerzbank and won the City of Frankfurt’s Green Building Award in 2009 for its innovative, sustainable design.

The focus is on returns in the Middle East and on security in Europe

Sustainability is another important criterion for institutional investors from all over the world, including some of the oil states in the Middle East. Take the United Arab Emirates: Abu Dhabi has been building its Masdar City ecological settlement since 2008. But in its European real estate investments, the state-funded Abu Dhabi Investment Authority – like the state funds in Qatar and Kuwait – generally looks for higher-return properties. So these immensely well-capitalised investors are primarily interested in Value Add and Opportunity investment products, and sometimes Core-Plus products as well. But pure Core strategies aren’t of interest to these Middle Eastern state funds. Institutional investors from Europe, in contrast, prefer secure, conservative products and have much less interest in opportunistic strategies. The latter tend to be short-listed only in extraordinary market situations. In their home markets, investors in Germany, France, Spain and Scandinavia need less advice in this regard because they are well-networked, and they’ve also reaped splendid earnings in recent years. But in cross-border transactions – about half of all real estate investments in Europe in 2015 – the picture is different. Here locally based investment consultants have far better contacts and significantly more experience. 

Europe’s real estate markets are booming. This increasingly attracts capital from other continents, and institutional investors worldwide want to diversify their portfolios. Yet their investment horizons and risk propensity result in an utterly diverse range of expectations on any one given investment property. Well-networked, highly experienced consultants on location can do a better job of custom-tailoring solutions, whether in Core, Core-Plus, Value Add or Opportunity products.  

Photo: Fotolia