The race is on to take advantage of UK real estate opportunities, as well as broadening out into European infrastructure. Richard Lowe reports
The UK continues to see a flurry of activity as managers launch a myriad of opportunity funds looking to take advantage of discounted UK real estate and distressed assets arising from forced sales. Quintain Estates and Schroder Property are two of the latest players to join into the race, sharing space with the likes of Managing Partners Limited, Valad Property Group, Laxey Partners, Threadneedle Investment.
For the most part there seems to have been a lot more talk than action. "There are quite a lot of people known to be setting up funds ready to snap up opportunities when they see them, but we haven't seen much real action yet," says Andrew Smith, head of investment strategy at Goodman Property Investors.
It will be interesting, though, to see the point at which "some of these investors actually have the courage to back up what they say is going to be done with some action, making some of these opportunistic purchases," he adds.
However, there are signs that things are beginning to move. New Star Asset Management sold its largest London office building in its UK property fund to Evans Randall for £127.5m (€169.3m) at an initial yield of around 5.5%, having originally bought the building in November 2006 for approximately £147m at a yield of 4.75%.
Invista Real Estate Investment Management, meanwhile, has made its first acquisition for its £250m opportunity fund: a strategic 50 acre site in the town of Witney, Oxfordshire. The land is earmarked for development as part of a mixed-use scheme.
The fund itself "seeks to identify and exploit real estate opportunities arising from mis-pricing", and can invest in array of assets, from direct to indirect property, debt and equity securities. Asked where he sees the best opportunities, Duncan Owen, chief executive at Invista, points to the indirect space and site prices. "We are opportunistically looking at investment in undervalued companies," he says. "Site prices have come off enormously."
There has been much of talk of UK real estate write-downs sometimes in the region of 20%, but Owen believes this does not compare to site prices, which you can buy at 60%, or even 70%, lower than they were valued in the summer.
"If people don't think property values are going to go up, they won't pay more for the site. Site prices have fallen through the floor. It is a really good opportunity."
How much these UK opportunity are attracting interest from pension funds is not clear.
Certainly, German pension funds like the €19bn BVV and the €4.5bn VBV Pensionskasse are not focusing on the UK market despite such claims of potential opportunities there. Robert-Jan Tel, head of real estate at TKP Investments, which runs two European fund of funds for pension funds, already invested in a UK opportunity fund in 2006 - the Frogmore Real Estate Partners fund. This aims to invest in assets that it believes are poorly managed, mispriced or have unrealised development, refurbishment or improvement potential.
The decision to enter the fund arose because TKP wanted to invest in the UK, but traditional core office sectors were too "tough to take positions into". Tel admits he couldn't have "anticipated what happened in the markets after the credit crisis", and it looks as though TKP timed its investment in the Frogmore fund well. "We contributed to Frogmore already within its investment phase and it is very nice timing that it can benefit from this," he says.
If TKP was under-allocated to the UK, Tel says it would have "taken a more aggressive" approach. "Indeed we see a lot of managers knocking on our doors who see a lot of opportunities. We think it is an interesting time to buy into the market."
Nick Duff, head of property at Hewitt Associates, believes that fund of funds managers that invest on behalf of UK pension funds are "generally investing in more defensive funds in the UK at the moment", such as those specialising in health care, student accommodation or other sectors that let on long leases with RPI uplifts or fixed uplifts.
He adds: "They have a problem raising capital generally to target new investment, because of the illiquidity they are experiencing in respect of existing funds they are invested in. However, if the right fund or funds came along, I am sure they would consider investing." Pension fund investors continue to show interest in European infrastructure. Bouwfonds Asset Management has launched the Rabo Bouwfonds Dutch Communications Infrastructure Fund (RBIC) enabling institutional investors to invest in the Dutch telecoms sector.
Vervoer, the €6.4bn industry-wide pension fund for the private transport sector, has acted as a seed investor allowing the vehicle to purchase Dutch cable company CAIW, which provides telecoms services in the Dutch regions of Westland and Midden-Delfland and has a total network of 135,000 clients.
The fund plans to attract €750m worth of capital to invest in other telecoms companies and antenna sites for wireless networks. Martine Menko, investment officer at Vervoer, confirms that other pension funds have approached Bouwfonds with an interest, although this so far extends only to those based in the Netherlands.
"At the moment it is Dutch pension funds," she says. "One of the things that made it interesting for us is that it is local. From an assessment point of view, it is more tangible than if you invest in infrastructure in South America, for example."
Menko explains that the investment in the fund is part of a wider policy to seek investments with a low correlation to existing investment categories. The telecoms sector is attractive, she says, because "regardless of how the economy is doing, there will always be demand".
It might vary, she says, "but it is not as volatile as other things and because the fund owns the actual network it has a lot of real estate characteristics as well".
Infrastructure is certainly "an interesting topic" for Austrian multi-employer pension fund APK, says Manfred Brenner, senior investment manager at the €2.3bn pensionskasse. However, APK finds opportunities in the US more appealing and Brenner believes the Bouwfonds fund is "too specific".
"We do not have any exposure yet in infrastructure, apart from a stock market equity fund which invests in infrastructure companies, but this is not really infrastructure investment. "In the first step to invest in infrastructure, we would not concentrate so much on a country-specific fund," Brenner explains. Instead, APK would favour a more broadly diversified route.