AEW Europe anticipates ‘significant’ growth in value-add space

After acquiring more than €1 bn of value-added and opportunistic assets since 2010, AEW Europe is anticipating ‘significant growth’ in the sector over the next few years, the company’s CEO Rob Wilkinson told PropertyEU.

‘I think we could see a significant shift to value-add and opportunistic assets in the next three-to-five years, especially when it comes to clients who are keen to find relative value amid increased competition,’ he said. ‘There is an increasing part of the investor universe that is moving towards core plus and value-add, given that core yields are still under downward pressure today.’

In March, the company announced that it had signed an investment programme focusing on German retail assets as part of its ongoing expansion of its opportunistic platform. It will work will German retail specialist partner Kintyre to acquire a portfolio of around €150 mln, targeting lot sizes of between €5 mln and €15 mln. The duo will be looking for retail deals in mid-size German towns. Typically, centres will be anchored by a supermarket or a DIY chain.

‘We’re not looking in the ‘Big 6’ but rather at secondary cities,’ Wilkinson said. ‘We have €50 mln of assets under offer for our retail investment programme in Germany with Kintyre and we hope to invest more than €100 mln via this partnership this year,’ he said. Together, the two firms are expected to invest around €300 mln in their joint venture. Contracts have been signed for the first asset, with an additional eight assets under offer, according to AEW.

Also in March, AEW Europe announced that it had raised €235 mln for its Europe Value Investors Fund at the second close. The fund expects to undertake further closings this year and will target a total investment capacity of €700 mln. The value-add fund has already acquired two properties in Germany and three in France. A further deal in Paris is expected to go through shortly, taking the total investment volume of the fund to around €200 mln since its launch in June last year. The fund will take advantage of office assets that can be repositioned to core and will invest largely in the UK, Germany and France.
AEW Europe is also betting on value-add offices in the south-east of the UK, excluding London. The firm has a South East Office Fund in the UK and it would like to invest another €100 mln on behalf of that fund this year, according to Wilkinson.

Logistics assets are also a draw. AEW has raised €1.4 bn of equity to-date for its logistics fund, Logistis. ‘We’re now focussed on investing that via development projects. We have three more logistics parks in the pipeline for Logistis, in which we are investing €300 mln. We’d like to invest at least €500 mln on behalf of the fund this year. We’re mainly targeting logistics projects in Germany, the Benelux region and Central Europe, including the Czech Republic. We’re prepared to take on some pre-let and development risk,’ Wilkinson said.

And AEW has ambitious target returns: for core-plus assets, it typically expects an annual target return of between 8% and 10%, with value-add generating returns of about 12% and opportunistic assets around 15%, according to Wilkinson. For the development stage of a logistics project, AEW is looking for a total return of between 15% and 20%. ‘If you focus in the right way, these opportunistic returns can be more achievable than you might think, especially given the low cost of debt in Europe, which can enhance returns. For example, interest rates in Germany can be as low as 2% and we are typically targeting a net initial yield of around 8% for our opportunistic programme in Germany,’ Wilkinson said.

The fund manager is also on the brink of launching a pan-European debt fund as a follow-on vehicle to its Senior Loan Fund to capitalize on ‘strong appetite’ for debt vehicles, Wilkinson said. ‘For such a platform to be meaningful, €3 bn would be a good target size.‘We feel there should be strong appetite for a pan-European real estate debt fund, particularly given that bond yields are so low and that the fund would offer returns that are several percentage points above government bond yields. The fund will also offer investors a chance to diversify,’ he said.

Further details regarding the fund and its investment remit have yet to be disclosed, although Wilkinson said that marketing will start later this month). The new debt fund will be the natural – albeit larger - successor to the firm’s Senior European Loan Fund launched in 2012 and for which it has raised €323 mln.

The investment manager raised €2.2 bn in equity last year and ‘it would be good to get the same levels this year’, Wilkinson said. Of the €2.2 bn raised last year, €1.3 bn was from fund raising and the rest was via separate mandates.

AEW Europe had €17.3 bn of AUM as of end-December 2014.