Hines’ pan-European core real estate fund had its strongest year for capital raising in 2019 as Japanese and large investors turned to the vehicle to gain exposure to the region.
The €1.43bn open-ended Hines pan-European Core Fund raised close to €700m last year, securing more than half in the final quarter.
The growth of fund mirrors that of the wider universe of pan-European core property funds, which increased from 12 to 13 funds managing €23.9bn to €31.3bn in 2019, according to INREV’s European ODCE Index.
Fund manager Peter Epping said demand for the fund had recently come from overseas investors – principally Japanese investors – seeking to diversify internationally and large investors that traditionally invest in core European real estate directly.
“Japanese investors have been a big part of our fundraising in 2019 as a whole, trying to diversify away from the previously domestically orientated base,” he said.
Meanwhile, two European investors represented the lion’s share of the €442m raised in Q4 of last year. “They typically have done their own investments domestically and other European countries, but they are finding it ever harder to put the money to work and find assets,” Epping said. “Therefore, they are open to the idea of investing into funds.”
Low and negative interest rates in Europe have intensified the race for core, income-producing real estate. “It has made the market so competitive that for many investors – as professional and significant as they may be – [they] struggle to place the money and get access to product,” Epping said.
“One of the key factors for them is: can the fund manager find assets, can they place the money, and can they place it into deals that make sense, not just in today’s context but also over a medium and longer-term outlook?”
The fund, which as recently as last month was acquiring a mixed-use asset in Amsterdam, is now operating amid ever-growing uncertainty and disruption in Europe created by the Coronavirus pandemic.
Epping said the current situation “validates our focus on the prime types of assets and the very defensive types of locations”.
“Our expectation is that this will have a significant impact,” he said. “This disruption is something I personally haven’t seen in my career of 20 years. Previous downturns have been significant as well, but this looks like it will be on a different scale and we have to expect there will be some effect most immediately probably in the hotel sector and retail.”
He added: “We think at some stage there will also be an impact on office demand and potentially on logistics. It is difficult to predict. It will all depend on how long this extraordinary situation will continue for and how quickly things can spring back to normal.”
Housing is likely to be more stable, but Epping warned that, “even within residential, you need to be careful exactly what types of investments you pursue”.
Hines is targeting the mid-market segment and not luxury residential, which “may actually see a more immediate impact”, he said.
The investment in Amsterdam involved a mixture of office and residential space, representing the fund’s first move into the housing sector.
“You could think that core is all pretty much the same in some ways, but the universe of what you can do in the core space is actually quite diverse,” Epping said.
“There is a lot of differentiation between how different cities in Europe perform and how we expect them to perform going forward – and, of course, between the sectors and between different types of locations within the cities.”
He adds: “The strategy is about having exposure to the most promising long-term markets in Europe – so those cities that we feel are the most healthy, have the strongest drivers for demand and at the same time have the most constraints to new building and supply.
“We have identified a group of 21 cities where we see this being the case much more strongly than in other cities. In those we focus on those locations that are either prime CBD or otherwise have the strongest drivers.
“What we try to avoid is an exposure type of strategy where it’s just about getting your foot on the ground in a given market no matter what the location or type of investment it is. We have seen over the last cycles very big divergences of how sub-markets perform.”
Hines said the fund generated a net levered return in of 8.2% per annum over the past five years, and was also ranked the highest performing fund among 117 European diversified funds by ESG benchmark GRESB in September 2019.
The GRESB rating has “become a really important criterion” for investors, Epping said.
“Many investors have set minimum requirements and GRESB seems to be the standard that has been established… we’ve taken it very seriously.”