- North American clients want to take advantage of weak euro
- Firm to focus on `value-add' buildings that need improvements
BlackRock Inc., the world’s biggest asset manager, plans to buy as much as 2.5 billion euros ($2.7 billion) of continental European properties over three years -- more than doubling its pace of investment -- as its clients seek to take advantage of a weak euro.
"Investors, particularly from the U.S. and Canada, are looking to diversify into European real estate," said Thomas Mueller, a portfolio manager who joined BlackRock’s London office in February to oversee an increase in investment focused on office buildings in France and Germany. "The devaluation of the euro is clearly an interesting play for them."
Record volumes of European properties are being bought by investors from North America, Asia and the Middle East to boost returns amid low interest rates, and a weak euro is fueling further increases by making buildings cheaper. Buyers from those regions added 32.5 billion euros of commercial properties in mainland Europe in the first nine months, 53 percent more than a year earlier, according to data compiled by Real Capital Analytics. The euro has lost about 12 percent against the US dollar in the past year.
BlackRock, based in New York, will focus on buildings known in the industry as “value-add” because the owner can boost the price by doing renovations or improving the tenant base. With pristine, fully occupied offices fetching record-high prices, more investors are taking the same approach.
"Value-add is where we see opportunities," said Mueller. The yield spread, which measures the value of prime properties against second-level assets “is at almost historic high points." BlackRock spent less than 1 billion euros on mainland European properties in the past three years.
In Munich, for example, a core building in the central business district might change hands at a net initial yield of about 3.8 percent; compared with 5.8 percent for an asset of a lower quality in a less-popular location, according to data compiled by broker Jones Lang LaSalle Inc.
Europa Capital profited from a value-add deal when it sold the Tour Vista in Paris to Alduwaliya Asset Management for more than 130 million euros this year. The London-based company purchased the property in 2013 for 87 million euros and refurbished the common areas, auditorium, cafeteria and five vacant floors, in addition to finding new tenants and extending the leases of existing renters.
In the wake of the financial crisis, many investors focused on prime properties in their hunt for reliable returns while the value-add market was dominated by private-equity firms including Blackstone Group LP and the Carlyle Group. Now, traditionally conservative investors including pension funds and insurers are taking on more risk to improve returns because yields are low for assets such as prime buildings and sovereign bonds.
Investors bought 19 billion euros of value-add office properties in Europe in the first nine months of this year, up 50 percent from a year earlier, according to data compiled by Real Capital Analytics Inc.
BlackRock has also benefited from refurbished European buildings in the past. In May, the firm said it sold the Illum department store in Copenhagen to Thai Central Group, fetching as much as 400 million euros, according to an estimate by Nordic Property News. The property was acquired in 2011 for about 220 million euros by MGPA, now a unit of BlackRock, then refurbished and expanded. Mueller declined to comment on the deal.
BlackRock will seek assets in Germany and France, with some acquisitions in smaller countries including Denmark and Poland, Mueller said. The focus will be on office and retail buildings, each valued at less than 100 million euros. The firm manages $21.5 billion of real estate assets in 11 countries in Asia, Europe and the U.S. It had about 7 billion euros of assets in Europe at the end of 2014.
Mueller will also continue to invest in U.K. properties, with the pace of investment there remaining steady compared with previous years. BlackRock plans to sell assets in the country within three years of buying them because prices have risen so much that there’s a risk of getting caught by a decline.
"You can make money with various strategies in the U.K., but if you’re going long four to five years you could get burned," he said.