Consumer trends

Real estate fund launches remained limited in size but some might indicate the start of something more significant. Richard Lowe reports

Latest capital-raising figures for real estate funds from Preqin showed that the final quarter of 2012 experienced a significant pick-up: $22.6bn was raised, more than double the $10.7bn in Q3 2012. But much of this aggregated volume has been attributed to Blackstone’s mega-fund Real Estate Partners VII, which alone secured $13.3bn in commitments.

Other large successes were the $1.65bn raised for the Fortress Japan Opportunity Fund II and the $1.59bn secured for Westbrook Partners’ global Real Estate Fund IX. Orion Capital Managers also raised €650m for the first closing of its Orion European Real Estate Fund IV.

Two Europe-focused opportunistic fund managers already attracted new capital. Tristan Capital Partners raised €170m for a first closing of its European Property Investors Special Opportunities 3, while Rockspring Property Investment Managers reached a final closing for its TransEuropean Property Limited Partnership V, securing commitments of €350m in total.

Preqin has concluded that 2012 was “another challenging year” for real estate fund managers on the road. The company’s research suggests that more than half of investors are planning to make new commitments in 2013, but the volume of capital this potentially represents is unlikely to match fund managers’ aggregated targets.

But the industry has already witnessed a number of fund launches in early 2013 that might not be overwhelmingly large but are nonetheless significant as indicators of emerging trends.

Two European core funds launched for Swiss and Italian investors, respectively, are a case in point. Both groups of investors have a history of focusing on their domestic property markets, and the two new vehicles launched by Schroders and AXA Real Estate suggest things might be changing.

Schroders partnered with Zurich Investment Foundation (both are represented equally on a joint investment committee) for a first close of the Schroder Core European Property fund, which raised €225m from Swiss institutional investors.

AXA Real Estate Investment Managers, meanwhile, secured €209m from 13 Italian institutional investors for a first closing of its pan-European Caeser Fund. A fifth of the capital raised came from AXA insurance companies.

AXA Real Estate has also moved into an increasingly popular area for pension funds looking to hedge against inflation by launching its UK Long Lease Property Fund. The fund manager has raised £125m for the strategy, which will acquire assets let to secure tenants on long leases, and has already acquired supermarkets let to Waitrose and Tesco.
Long-lease, secure-income funds are gaining a lot of interest from investors looking for better yielding alternatives to fixed income and it is already a competitive market. New entrants like AXA Real Estate will come up against established players like M&G Investments, which has the largest fund in the market in the form of the £1.2bn M&G Secured Property Income Fund.

Supermarkets have for some time been top of the shopping list for secure-income funds due to their long leases (often inflation-linked) and strong covenants. But competition in this area has led to fund managers seeking other alternatives.

A good example is M&G’s fund, which acquired the new Hilton Hotel at Heathrow Airport’s Terminal 5 through its real estate investment management arm PRUPIM. The hotel was acquired for £21.1m from a Shiva Hotels parent company and the deal is subject to a 200-year full repairing and insuring ground lease.

Another sector in the UK garnering a lot of interest is residential, although it has yet to see any significant allocation of institutional capital. But with the Netherlands’ largest pension fund asset manager securing a £158m exposure in one fell swoop, perhaps this is about to change.

APG has used this capital to acquire a majority stake in a UK market-rented residential portfolio through a joint venture with Grainger. The listed residential specialist will own a 26.2% stake worth approximately £50.7m. The portfolio will be placed into a new fund called GRIP, which is expected to grow in size through new acquisitions funded by APG and, Grainger hopes, other third-party investors in the future.

“We see APG’s commitment as a clear acknowledgement of UK residential property’s growing appeal as an institutional asset class,” said Andrew Cunningham, CEO of Grainger.

It has been known for some time now that Aviva Investors are keen to set up an institutional fund for market-rent housing in the UK. It will be interesting to see if this finally transpires in 2013 following APG’s entrance.

In the meantime, Aviva Investors has announced a final close for its Tokyo Recovery Fund, a joint venture with Secured Capital Investment Management, raising a total of $300m from investors. The fund will pursue a core-plus strategy by acquiring quality office buildings in prime locations in central Tokyo.

January also recorded some activity in the real estate debt fund market, which is expected to pick up momentum in 2013. ICG-Longbow raised £105m for a new real estate debt fund to be listed on the London Stock Exchange. It was the second debt fund in less than two months to successfully attract institutional capital through an initial public offering (IPO), with Starwood Capital also raising £229m for its London-listed Starwood European Real Estate Finance fund at the end of 2012.

Unlike Starwood’s vehicle, which is pursuing a mixed-debt strategy, the ICG-Longbow Senior Secured UK Property Debt Investments fund will focus on senior debt. The fund manager is also active in the whole-loans and mezzanine markets through its latest non-listed debt fund, for which it raised over £200m in late-2012.

ICG-Longbow is targeted at a dividend income of 6% per annum once fully invested. The fund will originate new senior loans backed against “quality income-producing investments, in support of well capitalised borrowers who can demonstrate a track record in asset management.” Jack Perry, chairman of the ICG-Longbow fund, said: “Raising over £100m in what is currently a very difficult fundraising environment is a great achievement.”