Henderson GI sized up a number of suitors before finding its new mate TIAA-CREF. Together they have formed a global powerhouse
Henderson GI sized up a number of suitors before finding its new mate TIAA-CREF. Together they have formed a global powerhouse
TIAA Henderson Real Estate has been one of the most active investors in Europe so far this year following the launch of the new combine on 1 April. According to PropertyEU Research, the joint venture – which brings together the European and Asian real estate businesses of US financial services provider TIAA-CREF and UK-based fund manager Henderson Global Investors – has racked up deals totalling around €1 bn so far this year and a similar amount or more is in the pipeline, according to Mike Sales, managing director of Europe at TIAA Henderson Real Estate.
But although the marriage has got off to a flying start, it was a long time in the making, Sales told PropertyEU. ‘We kissed a lot of frogs before we found the right partner. The culture, the people, our long-term investment horizon for property are all complementary.’
Together, the TIAA-CREF real estate and TH Real Estate platforms represent one of the largest real estate investment management enterprises worldwide with a combined total of $71 bn in real estate assets under management as of end-2013. The main rationale for the joint venture, Sales said, was the diminished popularity of fund vehicles and pooled funds since the onset of the global financial crisis. ‘Joint ventures and segregated accounts are now more the flavour of the day. To compete on that front as an investment manager, we needed to align ourselves with more co-investment and seed capital. Consolidation is a much-used word, but you have to offer a well-resourced platform to tick investors’ boxes, like compliance and risk, corporate transactions, treasury, VAT etc. All of that points to a big platform.’
The move also reflects the joint venture partners’ global aspirations. By mixing their respective expertise and geographies, TIAA Henderson Real Estate now has a truly global presence, Sales said. Prior to the alliance, Henderson had a strong presence in Europe and a reputable but small presence in the US within the multifamily sector as well as a relatively small business in Asia, he noted. For its part, TIAA-CREF had a large and strong presence in the US but a much smaller business in Europe. ‘We both want to do a lot more in Asia and have a real ambition to grow there. All in all, it’s a pretty good fit.’
Aside from their cultural alignment, complementary geographic spread and global ambition, the pair also share a strong focus on local management, Sales added. ‘We both have good people in local offices with the necessary sector specialisms and expertise to deliver performance. ’
Since the official launch of the TH Real Estate alliance in April, the new combined entity has embarked on a veritable shopping spree across Europe, snapping up retail, office and logistics properties in the UK, Germany and Austria. ‘We have been very busy,’ Sales conceded. ‘A lot is happening, particularly in Germany and the UK. We have deployed in the region of £800 mln in the UK market in the past 15 months through our retail trust and have spent wisely. In Germany, we mainly invest on behalf of domestic capital to match its domestic liabilities. Property is attractive for institutional investors given the stable income it generates and the current low yields on German Bunds. We like the stability offered by Austria too and have been buying retail and offices there.’
Overall, retail assets account for the bulk of TH’s portfolio or roughly 60%, with offices accounting for 24% and logistics for another 8%. So far this year, the investment manager has focussed on these two segments in Germany. ‘We like logistics and out-of-town retail in Germany,’ Sales said. ‘It’s a big market and we see plenty of local opportunities thanks also to our local presence. It’s a springboard for further business.’
The shopping splurge follows a number of recent fundraises. In May this year, TH launched a German retail fund with a target investment volume of €400 mln. The Core German Retail Fund will invest across retail parks, department stores, malls and inner-city shopping centres. That initiative followed the launch of another new retail fund focusing on Poland and the Czech Republic via Warburg-Henderson, a joint venture between the UK firm and German private bank Warburg.
Fund vehicles continue to be successful in Germany, Sales said. ‘There’s still demand for pooled funds there. You don’t get big yield swings in Germany, certainly not to the extent that you see in the UK and some other markets.’ Other markets that Sales is targeting in Europe include Dutch offices and Italian and Nordic retail, ‘We have €500 mln to deploy in the Nordics, primarily US and European money. Altogether we have a pipeline of around €1 bn through to the end of the year. We’re looking to invest for our funds as well as TIAA-CREF’s general account and hopefully some of those deals will come through before the year-end.’
Within Europe, TH Real Estate is not straying from its focus on the northwestern and southern countries, Sales added. ‘Growth is slowly coming back to the European market but it is city-specific. As a long-term investor, we focus on transparent and liquid markets. Russia, for example, is not on our playlist.’
FUND EXTENSIONS
Investors seem happy with that focus given TH Real Estate’s success in extending existing fund vehicles. In April, the investment manager announced it had created a new European Outlet Mall Fund to replace its €1.5 bn vehicle which expired in February following a 10-year life during which it delivered IRRs of around 12% per annum. The new fund will continue with around 80% of unit holders in the original Outlet Mall Fund, including a range of pan-European institutional clients as well as European designer outlet specialist McArthurGlen and TIAA Henderson Real Estate itself. In addition to its European Outlet Mall Fund, TH Real Estate also extended the life of its Central London Office Fund – a Jersey-based Property Unit Trust – by a 10-year term, earlier this year. Sales: ‘On the whole, investors want more control of their property investments, but there is still appetite for the right funds and with good assets and governance. Successful extensions are a definite vote of confidence from our investors, as are those funds which trade regularly in secondary markets.’
One of the most striking features of the current cycle is the massive wall of global capital heading for Europe. ‘It’s huge,’ Sales conceded. ‘And it’s not going anywhere else soon. We’re seeing private wealth and retail investors, asset allocators and sovereign wealth all increasing their exposure to Europe. There’s a huge momentum of capital at the moment and no signs of capital drying up. That could make yields overshoot.’ While property yields still look like good value relative to other asset classes, thanks also to generous spreads between borrowing rates and acquisition yields, economic growth is a vital component, Sales warned. In that context, he welcomed the ECB’s latest interest rate cut and moves to stimulate the European economy. Drawing a comparison between the velocity at which global capital is moving in the current market to public (equities) markets, he said. ‘Some investors are paying up front for growth potential. There may be arguments to pay a little more upfront for stable cashflow, but it’s easy to get carried away.’
SHORTER CYCLES
A key success factor, Sales claims, is to keep an eye on the exit. ‘You need to ask: what’s the missing ingredient? That could well be growth. Some pockets will see a lot of it, but others will not get a lot. And you have to have growth to justify the expected outward yield movement.’
Ultimately, performance is the best judge of whether an investment has been sound or not, but speed of decision making and subsequent execution are vital in a fast-moving market, Sales argued. ‘You can’t press a button on a screen when you want to buy a direct property. Strong structuring and transaction capabilities are key.’ The weight of capital is also being fuelled by some of the bigger European REITs which have emerged as winners from the crisis and which now have sizeable war chests, Sales added. ‘I’ve been in the property business for 25 years, but I’ve never seen the cycles move as quickly as this. But that’s our job, to monitor the cycles and markets and protect the long-term value of our assets. It’s back to the fundamentals. It always is.’
Aside from its partnerships with German bank Warburg and designer outlet specialist McArthurglen, TIAA-CREF is also active on behalf of CNP Assurances, a leading French insurance company. The pair recently signed an agreement to co-invest in TIAA-CREF’s three existing retail properties in Germany. The portfolio has a gross value of $1.2bn and consists of shopping centres across Germany: PEP (Munich), Erlangen Arcaden (Erlangen) and Gropius Passagen (Berlin).
TH Real Estate is also active on behalf of Norges Bank Investment Management, primarily in the US. In their most recent acquisition of a prime office asset in San Francisco (The Orrick), TIAA-CREF will own a 50.1% interest, and NBIM will own 49.9%. Meanwhile, new Australian investors are moving into the TH Real Estate fold. In June, Melbourne-based superannuation fund AustralianSuper appointed TH Real Estate for its emerging Central London office property investment strategy. The mandate follows TH Real Estate’s appointment as investment manager last year for AustralianSuper’s UK shopping centre strategy.
Besides these non-European sources, Sales sees potential for new pan-European and/or global mandates from institutional investors in Italy, France and Scandinavia. ‘So far the Germans have had a purely domestic focus, that’s part of their hangover from the crash. But now some investors are beginning to look again at Europe. Other countries, like Italy, are still cautious. Creating a joint venture and working up a mandate is an educational process.’
TIAA Henderson Real Estate is also forging ahead with its newly-formed debt business, for which it made two origination hires over the summer. The platform will initially focus on the UK debt market before casting its net wider across Europe. No fixed lending target has been set, but the company is prepared to issue loans of between £100 mln and £200 mln for office, retail and logistics assets with maximum LTVs of 75%.
COMPANY PROFILE
TIAA Henderson Real Estate was launched in April 2014 and is jointly owned by Henderson Global Investors (40%) and TIAA-CREF. Together the joint venture has offices across Asia, Europe and North America with global assets under management of over $70 bn (€57.5 bn). Henderson Global Investors manages more than €93 bn) of assets across multiple classes including equities, fixed income, private equity and property. TIAA-CREF (Teachers Insurance and Annuity Association – College Retirement Equities Fund) is a Fortune 100 financial services organisation that is the leading retirement provider for people who work in the academic, research, medical and cultural fields.
PERSONAL PROFILE
As managing director of TIAA Henderson Real Estate’s European business, Mike Sales is primarily responsible for overseeing the running and investment side of the company’s business. Sales started his career in 1989 as a development surveyor at Morgan Grenfell Laurie, where he was then appointed to head of UK Investment Agency in 1993. He joined Henderson as UK property investment manager in 1994 and has held a number of senior management roles before his current appointment in 2011.