DWS Group head of UK provides clues to products in the pipeline

In her first interview with PropertyEU since taking on an enlarged role in June, the newly appointed head of UK said clients saw opportunity in re-priced logistics in the UK and potentially Continental Europe.

There is also interest from investors in an expanded real estate debt offering.

Meanwhile, some large investor clients who might not otherwise be able to allocate to real estate credit see a solution in taking a preferred equity position in assets given the current market cycle.

And when it comes to offices, Grade B assets located in Grade A locations that can be upgraded and decarbonised are also in its sights.

Hardman has retained her role as head of European portfolio management and head of DWS UK real estate group but added to responsibilities as head of the UK business in June. She joined Deutsche Bank in 2004 in its UK real estate transactions group before being appointed head of portfolio management in 2017.

As one of the largest asset managers in the world, DWS is being watched to see how it might react to new market conditions.

The company has over €840 bn AUM in various investments categories, with 13% that being in alternative assets – a division overseen by new hire, Paul Kelly, who joined DWS as head of alternatives in February this year from The Blackstone Group.

Credit
DWS already has a number of junior and mezzanine real estate credit products, but the asset manager feels the time is right to launch a whole loan strategy in H2 this year. That could grow as large as €1 bn in equity commitments, giving it even greater firepower to deploy into real estate markets.

‘Whether it is in real estate or infrastructure, one area we would really like to strengthen further as a business is our debt capabilities,’ explained Hardman.

She pointed out some investors possessed a long-term increased allocation to credit products. Meanwhile, she said there was a ‘cyclical advantage’ to credit.

‘For sure, two things are happening. Firstly, more investors – whether they are in fixed income or real estate – have a demand for these credit products. Secondly, the market has escalated when you look at pricing of those products versus real estate equity or corporate bonds, and they are super interesting.’

DWS expanding its debt platform is not new; It has been growing a credit platform since 2014. Headed by Alexander Oswatitsch in Europe, the company has six European senior and junior strategies including client mandates, open-ended and closed ended funds with a total volume of €2.5 bn. European transactions are covered through offices in London, Frankfurt, and Paris.

The company is still raising equity for European Junior Real Estate Debt Fund, which held a first close on €150 mln in May 2022 towards a €500 mln target.

But Hardman said a new whole loan product this year could aim for between €500 mln up to €1 bn in equity to make loans of between €50 mln - €75 mln to borrowers.

Kelly joining DWS in February is another catalyst for expanding the credit platform, she said, given he was COO of Blackstone’s credit division.

Offices
Like many other firms, DWS is ‘leaning in’ towards a ‘transformation of office’ strategy in line with a brown-into-green conversions.

She said DWS had always had good experiences buying good quality CBD offices next to transport hubs.

She recalled in the wake of the Global Financial Crisis of 2008, the company successfully invested in around €3 bn in office assets, and it would have been possible to have even doubled that volume. Currently, with offices having been re- or devalued across Europe, market timing and risk assessment needs to be carefully thought about.

But Hardman feels the experience of DWS successfully investing in offices bodes well.

The company has existing capital sources to invest in assets should the right opportunity materialise. However, hinting at a new investment product in the near future, she said: ‘We manage €33 bn of assets in Europe, and some of that is in offices. Packaging up that experience makes a lot of sense and we are looking to do that in the next 12 months.’

Living assets
Similarly, the firm has 10 years’ experience in residential real estate, most recently in student accommodation starting five years ago. She said the company was beginning to see some ‘interesting price opportunities’ once more.

‘We are comfortable with the risk factors, and I can see us moving more capital not just into the traditional residential sector but also into student living, co-living, and possibly senior living.’

‘Residential asset classes are now forming their own personalities. For example, it is evidenced that more students apply for further education when the jobs market is slowing. In residential, we are probably going to see less supply because some developers are struggling a bit to reweight their books. Policy making and reform is happening but overall, residential remains a big, solid yet undersupplied market.’

Logistics
Naming another sector, Hardman said DWS had started - and could see - the firm investing more in logistics over the next 12 months.

Earlier this month the manager published a real estate research paper entitled “Return to European Logistics” outlining its stance. In it, the manager said the majority of logistics repricing had taken place and that it expected yield compression in 2024.

Said Hardman: ‘The market has corrected significantly. We called it in March 22 because we were becoming uncomfortable with pricing. Now we see opportunities.’

The company recently struck an urban logistics deal in London for one of its big institutional investors.

‘We can transplant this strategy to Continental Europe although price discover has a way to go yet. That said, the fundamentals are there.’

Preferred equity
Finally, Hardman said an interesting play was preferred equity investing. Some investors are prevented from allocating to pure debt products if categorised as fixed income. As the firm’s debt business grows, she said the company was increasingly aware of the ‘cross over’ between equity and debt that it could play into.

‘In today’s market cycle, protecting a risk-adjusted return but also playing into the potential upside of an asset is a pretty interesting space to be in.’

DWS is seeing the same situation as other investors: some sponsors of standing assets or developments need refinancing. Many conversations are taking place around this, she noted. The wider debt market may not be open to some investors, so preferred equity can play a part. This opens the door to Joint Venture partners offering capital at a certain price to allow a developer to continue with a profitable business plan, for example.

‘Preferred equity through the lens of a mezzanine type product is very interesting, and it’s something we haven't executed on yet in this cycle (although we did during the GFC and selectively after), but the current market dynamics hasn't really been there for it either until now.’

Asked if DWS also had clients in similar positions as some Korean asset managers who are putting assets up for sale in London due to refinancing events, she said ‘no’.

But of course, refinancing discussions and dialogue with lenders were taking place as a matter of course as the typical cycle of loan terms ended for some of its holdings.