In an interview with PropertyEU, Hines Europe CEO Lars Huber outlines the company’s new diversification strategy across asset classes and geographies, including its march into residential for rent.
Nine months ago, when PropertyEU met with Lars Huber for an off-the-record update, it was evident that lots was going on within Hines. Indeed, the head of Europe who has been in the post for two years, hinted at enough live initiatives in the region to fill several pages of a notebook. They spanned a broad range of countries, asset classes, risk profiles and capital sources in three structures; funds, joint ventures and one-off transactions.
Since then, if anything, momentum has increased as geopolitical risks have receded (except for the UK). So, it is no surprise the conveyor belt of press releases has followed through.
Huber, who took over as sole head of Europe from Michael Topham a year ago, sat down again with this magazine in February to explain the company’s activities. And there was even more ground to cover.
Expansion beyond offices
To many folk, the perception of Hines is of a well-established, traditional property company with big, shiny office developments being its bread and butter. However, the focus of the business in Europe is much more than that. It has embarked upon a diversification strategy, embracing new markets, new asset classes, and moving from a 100% per cent focus on development to a wider array of strategies.
With 310 people in the region, Hines is a large employer in Europe. It has operations in 12 locations from the UK, France and Germany to Ireland, Italy, Spain, the Nordics, and Greece. It has remained a private company headquartered in Houston, Texas, since 1957. Globally, it has $100 bn (€81 bn) of AUM. Some $54.5 bn of that is harboured in the investment asset management division and $45.5 bn in another part that provides third-party property related services. In Europe it has €14 bn, having first entered the region back in 1991.
The past year has seen a number of new departures for Hines. It has established a presence in the Nordics with investments in Denmark, Finland and Norway, and the firm closed its maiden investments in Greece and The Netherlands.
Its broader focus now encompasses office, retail, residential for sale and rent, student housing, and even hospitality via a hotel investment in Greece, with the logistics sector being another major new focus.
And as Huber points out, it is not just about fresh investments. Though Hines carried out €3.2 bn worth of investments in 2017, there were also €2.4 bn of dispositions, the daddy of which was the Sony Center in Berlin for €1.1 bn sold to Oxford Properties and Madison International Realty.
This disposal is the kind of success that gives Hines most pleasure. The Sony Center investment case study is by now well known. Property circles accept that Hines bought the Helmut Jahn-designed 115,000 m2 Sony Center located at Postdamer Platz in 2010 early in Europe’s recovery, exemplifying confidence. It was indeed one of the first big investments made post financial crisis. The property was the headquarters of Deutsche Bahn, Sony and Sanofi-Aventis and Hines teamed up with Asian capital - South Korea’s National Pension Service - to acquire it from Corpus Sireo, The John Buck Company and Morgan Stanley’s MSREF VI International Fund for €585 mln.
Sony Center deal
Since then, Berlin has ridden a wave to become the number one office district in Europe thanks to structural shifts and Germany’s strong economy. The sale last year for a gross €515 mln profit underlined the good timing. But perhaps what is less well known is that Hines had to draw deep on its vertical developer expertise as the Sony Center had a complex problem; it required the exchange of around 28 kilometres of damaged sewage pipes while the building was still in operation. Hines undertook the work and completed it in on budget without disrupting tenancies. It also attracted new occupiers so by sale time WeWork and Facebook were also there. Says Huber, ‘We made a clear improvement in the occupancy and asset management. It is something we are proud of. We are not just about riding the market. It is about local execution too.’
Most real estate investment managers will admit that current pricing in Europe is a challenge in many pools they fish in, and Hines is no exception. Nevertheless, the prognosis seems good. Huber: ‘We are seeing continued healthy growth and outlook in Europe. We have continuing confidence in most of the European markets. Putting the UK aside, we are seeing good economic growth and more jobs being created than in the US. We can feel it because of the office tenant demand-side, which is pretty strong. We see vacancy rates falling and rents increasing in most European markets on the office side.’
Meanwhile, when it comes to retail, Hines doesn’t predict a major drop in values across the board as witnessed in America. Says Huber: ‘We continue to see a consolidation of the retail market. But the best quality locations both in terms of the high street and shopping centres are performing. Secondary and tertiary are suffering a bit more.’
Logistics wave
And when it comes to logistics, which as an asset class is entwined with retail because of e-commerce, Huber says: ‘We are also seeing a continuance of growth in logistics. Call it a wave. There is more demand for the same product than there used to be, and we think that will continue. The UK is at the forefront, but also Germany and other markets. There is more demand in particular for more urban areas and, yes, rental growth in the coming years which is something we have seen in the US.’ He stresses: ‘We think that is more than just a cycle. It is a wave and a structural shift with regards to the impact of e-commerce on logistics space.’
In a fourth sector, Hines has introduced product diversification by engaging in residential property. ‘We feel very strongly about the residential sector and the residential-for-rent sector, in particular. We are now active in the residential-for-rent sector and other sub living sectors such as student housing,’ says Huber.
Market slowdown
Hines feels there are probably a ‘few years’ left before a market correction comes to Europe. ‘There are signs that we are probably getting closer to a slowdown in growth in some markets, but I'd say that while that is more imminent in the US, we probably have a little bit more time in Europe,’ says Huber. ‘So, we are very active across the board in Europe and particularly across the different markets and product types and also really across the risk spectrum.’
However, Hines is certainly not being gun ho. Huber: ‘We continue to be selective. An example would be Milan. Obviously, the Italian economy has not been going at a great speed and probably won't be in coming years so would we go and develop a speculative office a little bit further out from Milan city centre and see what happens? No. But we would continue to be positive and confident about CBD projects where we would develop speculatively, be it offices or high street retail or residential.’ He adds: ‘We are in the process of announcing a development project at a great location in Milan. We would rather look at cities and make our choices regarding analysis of those city markets than we would countries. Milan is just one example of many.’
Capital partners
Hines has announced various initiatives on behalf of capital partners of late, such as BKV, VGV and APG. Are there any signs of a slowdown here? Huber says no. ‘The question is what happens to interest rates and indicators like job growth and economic growth rates, and whether we will see a slowdown at some point, but for the time being it is a pretty robust market that we are positive about, and investor allocations to real estate are increasing.’
One barometer of capital flow is the level of requests for proposals Hines receives, but another is how potential partners react to Hines proposals taken to them for transactions. ‘If you look at the overall capital raising stats for 2017, that year would have been a year with less capital raised than prior years in the European property industry. We have not had that at Hines. We have had a continuing strong capital inflow to our different vehicles and initiatives in 2017 so we are not seeing that. But we are seeing capital going to different ends of the risk spectrum. You have investors that possess increased appetite for core for more strategic, defensive investments, but you also have investors sharing the belief that in some markets right now it is a good time to produce good new stock because there has been a limitation on good new supply. That has its merits especially if you are an investor that can build and hold long term.’
This is why one month you can see Hines’ buying very dry strategic core income assets and the other starting speculative development.
Consolidation
Industry consolidation in Europe has been abundant with a raft of private real estate investment management companies selling majority or minority ownership to larger financial institutions. This has meant a smaller number of players but at the same time better capitalised ones. Is that a pro or a con for Hines in the competitive landscape? Hines is all about organic growth, says Huber, so it will not contemplate taking over another group or being taken over. In addition, Huber believes the consolidation in the property industry has generally been a net benefit to Hines.
‘We think the best way to keep the Hines culture is to grow organically. But we witness consolidation.
Many more niche managers used to be out there, and many investors chose them as they felt they could have more control, which was more desirable after the financial crisis. They felt they could have more leverage upon terms and more dedication from senior management. Over the years, though, a lot of institutional investors have preferred to reduce the number of managers because they saw less benefit from manager diversification than they had hoped for. Instead, many of them now prefer to have larger managers which can service them across different market types and strategies.
Once they know a manager they can trust, they are more likely to trust that real estate manager for a new strategy or in a new market or product type. For us, that general trend of consolidation in the industry has clearly been a net positive. Of course, the competition is still fierce, but the field of competition has gotten thinner. It doesn't mean pricing has got less competitive, but you see more often the same group of players across Europe whereas six or seven years ago there was a much bigger variety of players. It is a trend we have appreciated and welcomed.’
Residential play
Given this backdrop, some investors are now trusting Hines with residential-for-rent in Europe. It’s a new area for Hines in Europe, following experience gained by the firm in the US. Huber: ‘The story is pretty consistent across many European markets. The housing market has been traditionally dominated by buyers, and prices have gone up 50 to 100% in many European cities in the last five to eight years while wages have not kept pace. So, buying property has become less affordable for the younger generations at the same time as debt is not so readily accessible. They have to provide high deposits. Their ability and perhaps willingness to buy has deteriorated, so they are interested in renting. At the same time a lot of stock that was built was built for sale. But good institutionally-designed built, managed and owned residential-for-rent properties have been rare and we feel there is a huge demand for that product.’
In particular, Hines sees strong demand for efficient units delivered to the market at affordable prices with above-average amenities, and so do institutional investors that are allocating capital to the sector. ‘They have found those yields to be more attractive than 10, 20 years ago relative to other investment opportunities,’ explains Huber. ‘So, you have quite a good alignment of the stars for the sector and we are quite determined to move into it with high quality product that we will develop for, with, and on behalf of our institutional investors.’
Capital sources
Hines European Core Fund (HECF): an open-ended vehicle with €300 mln of dry powder targeting office and retail property. It expects to reach €1.3 bn of gross assets by the end of Q1 this year.
Hines European Value Fund (HEVF): Office and retail but with some allocation to logistics and residential.
Separate accounts: Accounts for roughly half of Hines’ accessible capital in Europe.
Biography Lars Huber
Nationality: German
Company: Hines
Position: CEO Europe, senior managing director, capital markets group
Time in job: 1 year
Previous position: Joint CEO Europe
Graduated: European Business School in Frankfurt
