The Italian fund management industry is evolving fast as domestic investors go global and foreign investment moves in. Carlo Svaluto Moreolo reports

The Italian economy is yet to show clear signs of recovery and the country’s political situation is far from stable, domestic real estate funds are in a positive mood.

A number of trends appear positive for the prospects of the industry. First, Italian institutional investors are increasingly seeking exposure to foreign real estate assets and are turning to experienced domestic fund managers to help them find the best opportunities. Second, foreign players are looking to build their presence in Italy either as investors or advisers, where they see potential value.

Italian fund managers say that across Europe there is renewed interest in Italy’s real estate. Foreign fund managers are looking for assets through partnerships with domestic players or are recruiting new staff in their Italian offices.

More importantly, many in the industry report that lenders are again willing to provide financing to purchase assets. If true, this should provide much-needed backing to a sector that many institutional investors see as a must for diversification of their portfolios.

Recently, a number of joint ventures and funds were launched to provide new ways for Italian investors to tap domestic and foreign real estate. These typically involve an Italian company setting up a fund of funds and bringing in a larger foreign investment adviser.

But foreign fund managers are also offering Italian-regulated products without an Italian partner.

Property investment manager Cordea Savills recently appointed a new managing director for its Italian subsidiary in Milan, Giuseppe Oriani, former founding partner of Hideal Partners. The appointment reflects the company’s intention to expand in Italy, demonstrating its “commitment to a highly relevant market,” says Oriani.

Cordea Savills already has 20 employees working in Milan and has strengthened its management team to build up presence. Over the years, the company has structured an SGR asset management company working under Italian law with a gross asset value of €900m, including funds and mandates on behalf of domestic and international institutional and private investors.

Oriani, who owns a stake in the SGR, says: “From the Milan office we can cover all of the pertinent areas of the real estate market. We try to access the specific needs of clients, structuring funds or providing solutions to invest in individual assets. To be competitive in a market like ours, it is very important to present tailor-made solutions.”

Oriani says the growing number of Italian investors wanting to gain overseas exposure is growing. “In the last 12 months we have come across a larger number of investors who look at overseas opportunities to balance their portfolio, and there have been many tenders from Italian investors,” he says.

“A newer trend is foreign investors wanting to invest in Italy, while a year ago they were still trying to reduce exposure. This renewed interest is positive as there is a whole range of attractive assets in Italy beyond high-value buildings in the main cities. There are types of assets that have shown resilience, especially those where the owner has bargaining power over the tenant, such as high street retail property which is connected to a brand and office property.”

Oriani concludes with an optimistic view of the market. “There is a strong perception by investors that the situation in Italy is stabilising, that the economy is going to pick up,” he says. “This is, therefore, the best time to invest, because there is an opportunity to find an appropriate balance between the different needs of investors, owners and tenants. There is the possibility of being selective and finding attractive deals. The situation overall is made all the more favourable by banks, which are starting to consider again providing finances to real estate deals, while only a few months back it was a no-go area for them.
One of the reasons we are ourselves looking at transactions is that we are seeing a real comeback from the banks.”

AXA launches Caeser fund
In early 2013, AXA Real Estate announced that its Italian-regulated subsidiary had raised €209m from 13 Italian institutional investors and AXA Insurance companies (the latter committed around 20% of the capital). The funds flowed into a new closed-ended vehicle named Caesar, which could potentially reach a total fund size of €420m once fully invested. The Italian-regulated, pan-European fund is targeting investments in office buildings in the euro-zone, particularly France, Germany and the UK but also with an eye on Benelux.

Giorgio Pieralli, managing director at AXA Real Estate SGR and fund manager for Caesar, says 50% of the funds have already been invested and that Caesar is on track with its targets: a 9% IRR net of fees and a 5.5% dividend. According to Italian law for regulated funds, after 24 months from launch (February 2015) AXA Real Estate will have the option to reopen Caesar for further subscriptions.

Pieralli says: “Caesar was launched at the end of 2012 to meet the needs of institutional investors such as Casse di Previdenza [pension funds for professionals], and we think it offers a great opportunity for them. By joining Caesar they are totally compliant with Italian regulation and can benefit from investments across Europe, which allows them to ride different positive trends as they begin to show.”

He adds: “Investment in foreign real estate assets is not such a new proposition for Italian investors, but previously it was only common with retail investors through specialised funds or with large institutions with vast amounts of liquidity to invest directly in the asset.
We think we offer an innovative solution in the way we structured the fund. Each investment is considered and negotiated separately and a single SPV is set up for each one of them.

“By clustering each investment in a specific vehicle, we can offer investors the benefits of a lower cost of debt and a reduced risk, since any downside or default will not affect the fund as a whole, but only the single SPV. This structure also offers a clearer picture for the regulator, making it more attractive for institutional investors to participate because of greater simplicity in reporting.”

Pieralli adds: “Italian institutional investors are very much ready to invest abroad. They are selective, and aware that the EU landscape does not present a unique trend, so they have to take a conservative approach and evaluate every proposal carefully. Still, they value liquidity so we think our model fits their requirements well.”

According to AXA Real Estate, no single investment within Caesar will exceed 15% of the fund’s target portfolio value. Caesar is the second regulated product managed by the Italian subsidiary of AXA Real Estate. Previously, it had launched the Core Italian Properties Fund, which was also reserved for Italian institutional investors, but was invested exclusively in Italian office, retail and logistics.

Fabrica in JV with CBRE GI
In December 2012, Rome-based asset manager Fabrica Immobiliare SGR joined forces with US firm CBRE Global Investors to set up co-branded Italian regulated real estate funds mainly addressed to Italian institutional investors. The agreement allowed the two companies to work together to structure and distribute closed-end real estate vehicles subject to Italian regulation and focused on investing domestically and abroad.

Fabrica, founded in 2004, has since worked with Italian investors, particularly Casse di Previdenza, to provide investment solutions with an emphasis on diversification. Casse di Previdenza, such as Inarcassa for architects, are the best candidates for overseas real estate investment, because of their structure, which involves large cash flows and a more lenient regulatory framework.

However, Marco Doglio, managing director at Fabrica, says there are ways to attract other investors to these types of investment. “The main issue is transparency. The real estate market has to be improved in terms transparency,” he says. “Investors should be asked to provide more frequent reports, with the same frequency that non-real estate investments are monitored. Italian fund managers need to structure themselves accordingly, following best practice at a European level. It is not easy for pension funds, but the regulatory framework is in place, although it has not been put to the test.”

Doglio says Fabrica decided to find a large, experienced partner to team up with and provide more diversification potential to clients. The aim is to respond to increasing demand from investors for products that would allow them to invest freely internally and abroad.

Doglio says: “This agreement is the result of a long process that began five years ago. First we needed a rating from Fitch, which we achieved after establishing a fruitful dialogue with their staff. Then we spoke with the five largest asset managers in the world, and we reached a positive agreement with CBRE GI. After the agreement was signed, we immediately started organising meetings with our current and prospective clients in Rome, where we heard what their needs were, and we devised the correct asset allocation with a medium to long-term view. We are now in a position to offer tailor-made investments solutions.”

The agreement will see Fabrica act as fund manager for the newly co-branded funds, while CBRE Global Investors will act as the adviser for the non-Italian asset allocation strategy, as well as investment selection and asset management.

The two companies hope to provide Italian institutional investors (with an eye on foreign clients as well) with a vehicle to capitalise on the opportunities in the domestic market as well as to diversify their real estate allocation abroad. Fabrica and CBRE Global Investors will aim to help clients take advantage of different real estate cycles in the main markets globally.

Prelios teams up with UBS GAM
Prelios SGR, the institutional fund management arm of Italian listed property company Prelios, has set up a partnership with UBS Global Asset Management with the aim of satisfying the growing demand from Italian institutional investors for investments in overseas real estate.

Prelios said it had teamed up with UBS to set up a fund-of-funds platform for Italian investors. The agreement has a similar structure to the others that have been signed. Prelios SGR will manage and raise capital for the fund of funds, while UBS will act as investment adviser through its multi-manager business.

Prelios has gone through a period of change recently after the institutional fund management business, which has €4.3bn in assets under management and manages 23 funds, became financially unsustainable. There was a change of management earlier this year, with Sergio Iasi named chief executive, Giorgio Bruno, chairman and Massimo Caputi deputy chairman. The management began a capital-raising programme that allowed the company to renegotiate its position with lenders and bring the business back onto a sustainable footing.

Paolo Scordino, chief executive at Prelios, says: “This agreement is designed to satisfy the current needs of the investors. The market was lacking a structured investment solution for indirect investment in real estate, which offered diversification and the benefits of economies of scale. By creating a single SPV for every asset and offering a stake in the fund we have a better control of potential risks. We want to offer a global alternative for investing in office and residential, which is why we chose one of the largest players in the world, to which we are offering a large contact base in the Italian market in turn.”

Scordino explains why it was uncommon for investors to tap foreign markets until recently.
“Investors would study what were the best solutions, but they would stop when they realised it was too difficult to structure the investments from a regulatory point of view.
There were also fiscal aspects that had to be considered, which often made it uneconomical to invest in foreign assets. We have worked hard to find the correct solutions and now we have good products.

“It’s a young industry, especially the fund management side, so there is the potential upside of growing demand, although there is a gap with our EU counterparts that will not be easy to fill. Some would say that this is not the best time to invest, since the intrinsically low value of many assets makes it difficult to find the financing. But we see a positive development in foreign players coming to Italy willing to work with investors or to invest themselves.

“It is early, but it could represent a turning point. Recently there is a sense of optimism in meeting rooms. Our clients and partners overseas no longer see Italy as a high-risk country. The market will be very selective but investors already have their eye on certain assets.”

Sorgente moves into Brazil
Sorgente is one of the forerunners in the Italian real estate sector, with a long tradition of investment in international assets.

Valter Mainetti, a well-known real estate investor, launched the company in 1998 and three years later it was the first to offer a real estate fund to Italian investors. It manages more than €2bn of assets and has a portfolio of 21 funds. Sorgente has focused mainly on trophy assets but last year it launched a joint venture with a Brazilinvest, a Brazilian partner, to take advantage of Brazil’s booming economy.

Managing director Stefano Cervone says: “Our philosophy has always gone beyond merely investing with third-party capital. We offer the possibility of investing in assets that have an identity and we work hard on building that identity. We want to spread a culture of real estate in Italy by adding value to domestic assets and allowing Italian investors to benefit from the value that selected overseas assets bring. We also see this as a way to control risk effectively.”

Cervone say the investment in Brazil fits Sorgente’s strategy: “We are focusing on São Paulo, which is part of a global system of large urban centres where the advanced functions of the economy are. São Paulo has an important stock exchange, government offices, the headquarters of large corporations and large residential areas that are growing in an orderly way.

“We are there to offer our clients a slightly different option, based on the same principle of investing in real estate with an identity, but at the same time reaping the benefits of investing in a younger economy with a tested institutional system. We have decided the investment structure and we are working on the offering for the client. The fund will be up and running in the second half of this year and we will begin investing in the two Brazilinvest towers in the city.”

Cervone says the need for geographical diversification is a natural, but late, response by Italian investors and that, while they are lagging investors from other countries, there are positive signs. “Investors realised that focusing on domestic real estate did not help them weather the financial storm of 2008,” he says.

“It would have been wiser to have a larger geographical horizon. The sector is behind for many reasons – primarily in regulation and culture – but there are positive signs coming from the market. One is that the crisis has ‘cleansed’ the market, and entities that were playing a marginal role have been absorbed by larger players or have left the market entirely.

“Second, and most important, there is movement in the development sector. Developers are starting to see the possibility to intercept investors willing to finance assets. This is where Italian fund managers have to come in and play their role carefully – each will have to face the aggressiveness of new domestic or overseas operators.”