ANALYSIS: The new high fliers

The playing field in the European real estate industry is changing fast due to new and powerful alliances driven by investors like the Norwegian sovereign wealth fund.

In two and a half years, its investment arm Norges Bank Investment Management has built up a high-quality real estate portfolio of almost €5 bn from scratch thanks to its ability to attract the strongest partners in their respective specialisations. Since forming its first joint venture for the Crown Estates Regent Street retail properties in London in late 2010, Norges has spread its wings to the Continent and in a very short space of time has shown us how well it can fly.

Initially Norges stuck to more predictable routes to build up sizeable retail and office portfolios with partners like Crown Estates in the UK and AXA and Generali in France and Germany. At end-2012 it became more adventurous and struck a sale-and-leaseback deal on its own in Switzerland. Hard on the heels of that transaction in December last year, Norges announced it was teaming up with logistics giant Prologis to buy its former PEPR portfolio. In one fell swoop, Norges has become one of the titans in the European logistics sector with access to €2.4 bn worth of class A warehouses.

Norges is clearly an actor to watch out for in the future given its goal of building up a real estate portfolio of up to €20 bn in the coming years. Through strategic moves like its alliance with Prologis, it is changing the dynamics - and the opportunities - in the real estate sector in a very fundamental way. In the logistics sector, it has become the part owner of a high-quality portfolio that could remain ‘locked up’ with one or two major investors for an extended period at a time that it is becoming increasingly attractive. The retail industry is undergoing major changes due to the rapid rise of e-commerce and as a result demand for warehousing is growing.

In an interview with PropertyEU earlier this month, APG’s Robert Jan Foortse said the Dutch pension fund heavyweight had ‘no regrets’ that it exited PEPR in early 2011. At the time, APG and partner Goodman Group played a clever game of cat-and-mouse with Prologis by launching a takeover bid in March 2011 for the former PEPR. Ultimately Prologis retaliated with a higher bid for its listed European arm and APG and other institutional players such as GIC were able to cash in their shares for more than they were worth before their takeover bid. PEPR was delisted from Amsterdam/Euronext in August 2012.

But is APG putting a brave face on things? Foortse confessed that APG had been interested in playing a role in PEPR’s recapitalisation but that the parties had failed to reach an agreement. To be sure, APG still has exposure to the European portfolio through its participation in Goodman’s European Logistics Fund (GELF ed.) which has rapidly expanded in Europe these past few years and has a portfolio approaching that of the former PEPR portfolio with assets totalling almost €2 bn. The Sydney-listed company is aggressively seeking further expansion in Europe through developments for the likes of Amazon and is, according to PropertyEU research, currently the biggest logistics developer in Europe. Moreover, APG still has an indirect stake in PEPR’s European portfolio through its 4% shareholding in Denver-listed Prologis.

That stake is worth almost half a billion euros and gives APG access to a class A logistics portfolio worldwide. In other sectors such as retail, hotels and real estate debt, APG has also pioneered alliances with the likes of Westfield in London, Lemon Tree Hotels in India and Pramerica in Europe.

Meanwhile APG’s image remains untarnished in the real estate world as one of the strongest champions of corporate governance and sustainability. Indeed, its strong emphasis on corporate governance was one of the key reasons for its dissatisfaction with its PEPR shareholding. APG felt that PEPR’s previous underperformance on the stock exchange could not be seen separately from the lucrative management contract PEPR’s management had awarded Prologis Europe.

In addition to the established players and newcomers like Norges there are more sovereign wealth funds from the Middle East and Asia preparing to swoop on European real estate. As they mature, their appetite for asset classes outside the mainstream sectors of offices and retail is bound to grow. Should Prologis decide at a future date to recapitalise part of its stake in the former PEPR portfolio, no doubt more eagle eyes will be watching.