Investors from Norway to Singapore are bypassing property funds and putting money into London commercial projects with developers, taking more risk in a bid to increase returns as the U.K. market recovers.
Pensions, insurers and sovereign-wealth investors, among the biggest property investors, are teaming up with companies including Great Portland Estates Plc and Land Securities Group Plc to develop land in the city’s most desirable areas and buy offices and shopping malls.
Investors shielded wealth from the fallout of the financial crisis with broad-based property funds, which usually offer more safety -- and lower returns -- than direct real estate holdings. Now that prices are rising in the U.K., institutions such as Canada Pension Plan Investment Board, GIC Pte, the Singapore sovereign-wealth fund, and Norges Bank Investment Management are forming joint ventures with companies that build and manage commercial projects in the U.K.
“We’re seeing funds that are interested in higher-risk, higher-return deals,” Martin Greenslade, chief financial officer of Land Securities, the largest U.K. real estate investment trust, said by phone. “Getting the skill-set on the ground is difficult, so you need a partner.”
For foreign investors, the partnerships bring knowledge of the market and projects under construction. The British companies gain access to new sources of capital while retaining control of their developments.
Successful joint ventures are also extending beyond their original agreements to buy additional sites or lend to other developers. These include partnerships between CPPIB and Hermes Investment Management Ltd., Norges Bank and Axa, and Stanhope Plc and Mitsui Fudosan Co.
“Direct investment through joint-venture partnerships provides greater alignment of interest as well as greater control and transparency,” said Wenzel Hoberg, managing director for European investments at CPPIB. “We have a ‘smart partner’ approach, investing alongside local partners with deep local expertise as well as operational and management abilities.”
A scarcity of prime office space in central London is reducing risk and increasing the potential returns from development, Great Portland said in a Nov. 14 presentation. Investors have set aside 25 billion pounds ($41 billion) to acquire commercial properties in the city, outstripping the 2.3 billion pounds of real estate that’s for sale, the company said.
Great Portland spent 54 million pounds renovating an office at 95 Wigmore Street in the West End, and the company said last month that it would make a 67 percent return on investment if it chose to sell the building. Total returns for U.K. offices were
1.9 percent in November, helped by significant rental growth in central London, broker CBRE Group Inc. said in a Dec 9 report.
U.K. commercial real estate values climbed the most since April 2010 in September and have now risen for six straight months, according to data compiled by Investment Property Databank Ltd. The gains, led by London, have attracted investors including the Hong Kong Monetary Authority.
Great Portland sold the Hanover Square Estate site in London’s luxury-shopping district last month to a 50-50 joint venture it created with HKMA for 202 million pounds. The completed development could be valued at as much as 475 million pounds, according to Great Portland.
Interest in partnerships is increasing as investment falls in property funds, which seek to reduce risk by spreading money from clients across multiple deals.
Pension and sovereign-wealth funds put 6.3 billion euros ($8.6 billion) into European real estate joint ventures during the first nine months, compared with nothing at all in 2008, according to Jones Lang LaSalle Inc. European closed-end property funds raised 6.2 billion euros in the first 10 months of 2013, compared 20.6 billion euros in 2008, according to research company Preqin Ltd.
Choosing individual partners over funds increases an investor’s chance of losing money on an unsuccessful project or company. The Bank of England last month expressed concern that the search for higher yields at a time of low interest rates may lead to investors underestimating risk.
Asian investors are leading the way in London joint ventures. GIC bought Blackstone Group LP’s 50 percent stake in the Broadgate office complex for 1.7 billion pounds in August, according to two people familiar with the transaction. British Land Co. owns the rest of the cluster of 16 office buildings, shops and restaurants.
“Although the U.K. economy was negatively impacted by the global financial crisis, it is now beginning to recover,” said Christopher Morrish, regional head for Europe at GIC Real Estate. “London is thriving and we believe it will continue to be a major global financial hub given its advantageous geographic location and depth of skilled labor.”
Stanhope is building a 1 billion-pound business park in east London with backing from Chinese developer Advanced Business Park. Quintain Estates & Development Plc formed a venture with Hong Kong-based Knight Dragon to build 10,000 homes on the Greenwich Peninsula. The developer on Nov. 4 agreed to sell the remaining 40 percent of the project to Knight Dragon.
“The financial crisis exposed the fact that many of these Asian institutional investors were over-reliant on their home markets,” David Green-Morgan, global capital markets director at Jones Lang, said by phone. “The Malaysians, the Koreans, the Indonesians and increasingly the Chinese are being encouraged by their governments to invest outside of their home markets, but on the real estate side, many have tiny teams.”
Norges Bank, which oversees Norway’s $808-billion sovereign-wealth fund, received a mandate from the government to put 5 percent of its assets in property. The company has 30 to 35 people working to invest the money in Europe, according to spokesman Thomas Sevang.
The Norwegian bank last year paid 348 million pounds for its 50 percent stake in the Meadowhall shopping center in Sheffield, England, and said it intends to supply loans as large as 600 million euros alongside Axa Real Estate, a unit of Eruope’s second-largest insurer. Norges bank is the biggest shareholder in Land Securities and the second-largest in British Land, which owns the other half of Meadowhall.
On Dec. 3, Norges Bank bought a 25 percent stake in the Crown Estate’s 390 million-pound Quadrant 3 project in London’s West End. The 270,000 square-foot development has tenants including Al Gore’s Generation Investment Management US LLP. The Norwegian investor already owned a 25 percent stake in the Crown Estate’s Regent Street holdings.
CPPIB spent 173.9 million pounds in July for a 50 percent stake in eight central London offices owned by Hermes. The pair also bought Aldgate House in the City of London for 100 million pounds, Hermes said on Nov. 1. CPPIB is also funding a 1 billion-pound development in the West End alongside Land Securities.
“There’s definitely been a change coming from the investment committees of these big institutions,” said Green-Morgan. “They’re saying, ‘Listen, we’re not getting enough visibility on how these assets are performing and what assets are being bought.’ They want to make sure they’re getting access to the best real estate, which typically is owned on a long-term basis by people like British Land, Stanhope, Hermes and Prudential.”
Closed-ended European real estate funds continue to attract individual investors, smaller pension funds and local governments, Gary McNamara, founder of information exchange Indirex, said by phone. These investors will always need to pool funds to gain access to the best real estate, he said.
“These big investors are looking at their experience in the run-up to the global financial crisis and are acknowledging that they were paying substantial fees” to funds, and losing money in many cases, Ben Sanderson, a director at Hermes, said by phone. “They typically aren’t interested in putting money into these blind pools anymore. They want to be involved in the execution.”