US institution TIAA-CREF and Sweden’s AP1 and AP2 are pooling their European real estate portfolios to create a €4bn joint venture.
The Swedish buffer funds will seed the new entity with six properties managed by Cityhold Property, a wholly-owned subsidiary of the two funds, while the US financial services provider will contribute nine properties currently part of its general account.
The €2.2bn portfolio, consisting of offices in London, Paris, Munich and Hamburg, will be renamed Cityhold Office Partnership and managed by TIAA-CREF subsidiary TH Real Estate.
TIAA-CREF will own a 50% stake in the portfolio and the buffer funds will hold 25% each.
The partners have agreed to invest a further €2bn in Cityhold Office Partnership over the next three years, splitting investments between core assets in cities including London, Paris, Munich, Hamburg, Frankfurt and Berlin – all areas the AP funds had initially identified when Cityhold Property was launched in 2011 – and value-add locations such as Milan and Madrid. It will target a loan-to-value ratio of 50%.
Johan Magnussen, chief executive of AP1, said: “The greater capital base provides the vehicle with better opportunities to make good long-term investments in commercial properties in a number of selected large European cities.”
The sentiment was echoed by Phil McAndrews, CIO of TIAA-CREF Global Real Estate, who said the agreement would allow TIAA-CREF to diversify its office holdings and establish a broader platform to expand European holdings.
Helena Olin, head of real assets at AP2, told IP Real Estate the venture would initially target a 20% exposure to value-add opportunities, which could include leasing, renovation and development.
Asked about the risks of some of the markets identified for its 80% core strategy becoming too expensive, Olin said: “It is of course worrying, and that’s why we added this 20% [value-add allocation].”
Olin also said the decision to transfer property management duties from Cityhold to TH Real Estate was reached as the desired diversification would have been difficult to achieve with relatively little local expertise, noting that TH Real Estate had over 250 “boots on the ground” across eight offices in Europe.
She denied that the venture was the first step in the implementation of the government’s reform of the AP fund system, which is yet to be ratified by Sweden’s parliament but could see real asset holdings consolidated into AP2.
Jasper Gilbey, director at TH Real Estate, noted that the strategies would largely focus on low-risk, liquid markets.
“In addition to liquidity and diversity,” he said, “the target markets have been selected on the basis of their long-run structural trends, such as demographics, technology and sustainability, which we expect to drive strong growth prospects and result in enhanced investment performance in the long-term.”
The new venture is not the first time AP2 has worked closely with TIAA-CREF. It recently backed TIAA-CREF’s second agriculture fund, which followed an earlier farmland joint venture.
