Private equity firm MGPA has adopted a rigorous approach to fundamental and economic research to locate investment opportunities. Lynn Strongin Dodds talks to Jim Quille about where the search is taking it
Although it has not been an easy year, private equity real estate investment advisory firm MGPA has stayed the course, looking for interesting opportunities across the global property spectrum. Against the financial crisis backdrop, the firm has adopted a selective approach, although Asia and Europe are two of its favourite hunting grounds.
Jim Quille, chairman and chief executive of MGPA, says: "We spend a lot of time on researching the underlying fundamentals and macro economics of a country to build our investment thesis. While we all fear a double dip recession as reductions in government fiscal support slow, it does seem as though Asian markets have turned a corner. The Chinese domestic economy has already provided some insulation against the impact of a US slowdown and this gradual decoupling looks set to continue. There are opportunities to invest, but for us to consider them they need to be value trades and not value traps! So in Europe and Asia, there is no specific ‘signal' that we are looking for to invest, rather we are focused on what represents value."
MGPA, which is owned by its senior management team and the Macquarie Group, currently manages $11bn (€8bn) in assets and has a 280-strong team based in 13 offices throughout Europe and Asia. The firm's managed investments range from development and redevelopment projects to joint ventures and real estate operating companies in the office, retail, industrial, residential and hotel sectors. The firm was formed when Ochtar Capital Partners, which was headed by Quille, led a management buyout of Lend Lease Global Real Estate Advisers in 2004. Macquarie Property Investment Banking took a 49% stake, and the company changed its name from Ochtar to MGPA.
Five years ago, the group closed its MGPA Fund II with around $1.3bn, and a year later launched its MGPA Japan Core Plus Fund which has about $865m of equity commitments. In 2008, the group presented its Fund III, with equity commitments of $5.2bn, of which around $1.3bn was targeted for Europe. To date, assets have been bought in the UK, France, Italy, Greece and Poland. Last year €500m was invested in Europe making MGPA one of the most active investors in the region, and just over half the fund remains available for investment.
As for specific opportunities, MGPA is looking at the retail sector in Germany and Poland. Quille notes that the main attractions of Germany are sound financial fundamentals, such as a running account surplus and low debt, plus a relatively underleveraged German consumer. This is likely to mean spending will grow faster than in the more traditionally consumer-led economies of Spain, Italy and France. In addition, the current tight planning regime ensures that supply will remain in check.
Quille is bullish on Poland because of its strong economic performance which has translated into strong retail sales. The sector is expected to reap the benefits from increasing household income, as well as an undersupply of good quality retail /destination centres. The firm recently made the headlines with the largest transaction in the country since 2007 - the purchase of the Karolinka and Pogoria shopping centres with an option to buy a third. This cost €236m.
In Asia, Singapore, Japan and China top MGPA's list. Quille says: "In China, shopping centres in tier two cities still look very interesting with rents at roughly one quarter and cap rates nearly double that of other Asian developed markets such as Hong Kong. With total retail spending in China surpassing that of the US for the first time last year, the potential for continued retail growth looks good. Furthermore, now that pension and insurance companies are increasingly being allowed to buy real estate, the relatively high risk premium built into mainland cap rates is already starting to fall, proving that, whether right or wrong, we all feel safest in our own home markets."
Looking ahead to this year, the economy and financing remain two of the biggest challenges. Quille says: "Lending in Europe is available but is restricted to prime income-producing real estate. The only active international lenders are German and therefore the requirements of the Pfandbrief covered bond programme are the prevalent credit criteria across the region. There is some evidence that French and UK banks are more willing to lend in their home markets although transaction evidence is low. Our recent transaction in Poland, where we secured 65% loan to value of two retail centres, shows the increasing willingness to widen appetite. This is a loan that we would not have expected to be available at the beginning of 2009 when all of Central and Eastern Europe was off limits."
Debt is also a hurdle in Asia. "Some of the terms offered for new financing reflect a desire by the banks to capture super profits due to an absence of financing. This is similar to Europe and is understandable, given the desire of banks to rebuild margin on their loan book from the low levels pre-crash, but it is starting to hamper regional investment."
Limited partners have also changed their attitudes, with a focus more on real estate fundamentals over financial engineering, according to Quille. "While the discretionary nature of funds will continue, there will be a requirement on behalf of the general partner to seek LP approval if they seek to move from the investment thesis articulated in the offering documents."
Fees are also a hot topic, although Quille points out: "We are hearing a consistent message that catch-ups and ‘deal by deal' promotes are no longer acceptable, which is a position which MGPA agrees with. Promotes should only be available to GPs after LPs have received a full return of capital."
Views though are more mixed on sustainability although in the longer term Quille believes it will be a cornerstone of the industry. "At this intermediate stage, there is ongoing debate about the cost-benefit of interventions to improve the sustainability of existing buildings in particular. There is certainly no consensus yet about the positive return to investors resulting from such activities. But we believe that the need to raise the sustainability of all properties, both new and existing, will only increase over coming years, and it will soon become both socially, and commercially, essential to present to the market buildings that clearly demonstrate a responsible level of performance in this respect."