ING REIM Europe raises risk profile after soaring returns

ING Real Estate Investment Management ING REIM) has taken a strategic decision to launch a new suite of funds in the 'value-added' space in Continental Europe, after its most successful fund debut ever for a new vehicle in this strategy by the traditionally 'core' investment house. 'The Iberian Value Added Fund was our first vehicle in this strategy and the launch was the most successful we've ever had. The fund was fully committed within six months with EUR 300 million from international pension funds,' said Pieter Hendrikse, chief executive for ING REIM in Europe in an interview with PropertyEU.

The Iberian fund will focus on the office, logistics and retail sectors in Spain and Portugal and has a EUR 1.2 bn investment programme with about 60% leverage. 'The investment proposal for our core funds was for returns of around 10% with leverage of no more than 50%. But the performance of our core retail funds in particular has been over 20% in the last three years. It’s not the leverage that has brought the returns, it's the management and the growth of the market and the weight of money. I don't know whether that weight of capital targeting real estate is going to continue, but there's still a lot around. We'll probably fall back to more normal returns of between 6% to 9%, which is modest for core, but still good compared with bonds and equities, when you look at the risk profile,' he said.

The European Association for Investors in Non-Listed Real Estate Vehicles (INREV) defines core funds as those providing stable income returns, which are a key element of the total return. Core funds' overall target (post fees and taxes) return is up to 11.5% per annum and their permitted capital leverage ratio is below 60% of gross asset value.

Inrev defines value-added funds as being driven by a combination of income and capital with a target (post fees and taxes) return of between 11.5% and 18.5% per annum with a permitted capital leverage ratio between 30% and 70% of gross asset value. ING REIM now aims to add a Dutch value-added initiative and a French value-added fund to its portfolio and has already put value-added strategies into its new Italian and German retail funds.

De facto value-added strategies have also been operating in ING REIM's Central and Eastern European funds. 'We have moved into this area because of institutional client demand for the higher returns they're now used to with the core market. These were high, but with the lower level of risk associated with the core strategy. Now the core returns are moving lower because of yield compression, investors are saying we still need the 10% and more, but how do we get there? You get there by adding more value-added risk, but the risk is being compensated for by active asset, portfolio and financial management. Leverage should still not be the tool to enable you to come up with these returns,' Hendrikse said.

ING REIM will continue to invest in prime locations, in particular retail and offices. 'I don't think we're going to see big price depreciations in Europe except possibly in some second and third tier markets.'

This article by Steve Hays, founding director of Bellier Financial, based in Amsterdam, appears in the September edition of PropertyEU Magazine.