US alternative investment manager Ares Management is mulling the launch of a European real estate debt fund, Bill Benjamin, senior partner at Ares Real Estate Group, told PropertyEU this week.

US alternative investment manager Ares Management is mulling the launch of a European real estate debt fund, Bill Benjamin, senior partner at Ares Real Estate Group, told PropertyEU this week.

‘Over the past 14 years, we have raised $3 bn of equity, including co-investments, to invest in opportunistic European real estate. Now, our plan is to get into European real estate lending, which is a natural extension for us,' he said.

While Ares has the capability of investing in the European lending space via its US REIT, Ares Commercial Real Estate Corporation (ACRE), it doesn’t have a dedicated European real estate platform – yet.

Ares has not yet disclosed further details about its upcoming debt fund, although it has already built up a strong track record in the corporate lending space in Europe, amassing a $6 bn corporate lending portfolio in the UK and continental Europe.

Its European real estate lending unit will be based in London and will lend on assets in both the UK and continental Europe, according to Benjamin, who is also based in London. ‘Ares already has longstanding lending businesses in the US in both corporate (around $9.2 bn) and real estate lending (around $2 bn), as of September 30, 2014, so we have the track record and the infrastructure to add this asset class, given that it is also what our investors are seeking,’ he said.

FUNDRAISING HAUL
Ares Management announced earlier in January that it had closed two real estate funds, both of which were oversubscribed. The $1.3 bn Ares European Real Estate Fund IV will target investments in residential, retail, office and industrial real estate located in key European markets, such as the UK, Germany and France. The fund exceeded its initial target of $1 bn.

The $824 mln Ares US Real Estate Fund VIII will target value-add investments in income-producing property types such as multifamily, industrial, retail, hotel and office in major cities across the United States. It exceeded its initial target of $750 mln.

With gearing, Ares’ latest European real estate fund will have a war chest of around $3 bn to invest over the next three years, Benjamin said. Its European real estate funds have a strong weighting in favour of the UK, with around 40% invested there, 20% in Germany, and the remaining 40% split across markets such as Spain, France, the Benelux region and Poland. The firm is believed to have invested around $400 mln in Europe last year.

‘We favour Europe’s largest liquid markets – like the UK and Germany – which attract international investors. We haven’t done many deals in Italy, for example, although we do look at deals selectively there. When we invest anywhere, we always have the exit strategy in mind and that informs our investment decisions,’ Benjamin said.

Ares’ gross annual return target for its European Real Estate Fund IV fund is between 16% and 20%. ‘You could say that we ‘straddle’ the value-add and opportunistic segments of the market. We like to focus on taking what we consider to be more controllable risk,’ Benjamin said. The firm’s holding period is typically between three and five years.

FLEXIBLE STRATEGY
As befits an opportunistic investor, Ares has a very flexible investment strategy. It doesn’t have a fixed allocation regarding geographical markets or asset classes. ‘In Germany, we like offices in its ‘Big 7’ markets but less so in secondary locations. However, we look at retail and residential properties in both primary and secondary locations in Germany. With regard to the UK, we like offices in major urban centres, and because the UK economy is strong, we are also seeing good opportunities in the retail and residential sector there, too,’ Benjamin said.

Benjamin describes his ideal assets as ‘income assets’, particularly in the retail sector: ‘We are very active in the retail space because it is a sector that we understand and like. When it comes to retail and residential properties, we look at markets with strong job growth and limited supply and have been interested in shopping centres on the Iberian Peninsula,’ he added.

However, the ongoing sluggishness in the European economy is a challenge, Benjamin admits.
‘We have to be cautious about investment because there is weak demand in the euro zone. However, even if a given country’s GDP growth forecast is lacklustre, you can still find great investment opportunities in some cities. Cities like Berlin, for example, have a lot going for them - it sits at the crossroads to Europe and real estate is cheap there. We bought an office there last year (further details have not been disclosed) and currently have a centrally-located office under offer in the city,’ he said. Ares acquired an 1,021 square metre office in the city centre in December last year, which also boasts a retail component, for an undisclosed sum.

Ares Management’s Real Estate Group manages a variety of public and private equity and debt strategies, with about $9.6 bn of AUM as of September 30, 2014. The group focuses largely on lending and investing in properties that have been under-managed or that are in need of repositioning in core markets. It offers investors access to both US and European real estate funds as well as separately managed accounts and other fund types, as well as via its REIT, Ares Commercial Real Estate Corporation (ACRE).