Europe roundtable 2021 - Ares Management
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March 2021 • perenews.com
Europe
roundtable
2021
Analysis
R O U N D T A B L E
SUPPORTERS
ARES MANAGEMENT CORPORATION • BC PARTNERS • KENNEDY WILSON EUROPE • PICTET ALTERNATIVE ADVISORS
SAVILLS INVESTMENT MANAGEMENT • SIGNA FINANCIAL SERVICES
Covid rings the
changes for European
real estate
As the initial shock of the pandemic recedes, participants at the Europe
roundtable survey an altered investment landscape.
Stuart Watson reports
I
n 2020, the fallout from the coro- buckle down to the task of addressing the spring, capital kept flowing into
navirus pandemic jolted Europe’s the front-of-mind questions for inves- real estate, notes Zsolt Kohalmi, glob-
real estate market and induced tors in the region. al head of real estate at Swiss-based
temporary paralysis. The result They agree that European real es- Pictet Alternative Advisors. “When you
was a significant fallaway in invest- tate is in a better shape to recover from have open-ended funds getting capital
ment volumes. According to real the pandemic-induced downturn than every month, that means that the pro-
estate deal data firm Real Capital An- it was after the global financial crisis. pensity to deploy is going to remain.
alytics, Q4 2020 deals plummeted to “This time there was not overbuilding And as a core buyer, your returns are
€75.8 billion, 44 percent below the re- in most sectors, or overlending because being measured against the risk-free
gion’s peak volume recorded in the last banks were still unable to participate,” rate, which is only going one way. So,
three months of 2019. In a fate com- observes Bill Benjamin, head of real on a relative basis, core looks better and
pounded by a third slew of lockdowns, estate at global alternative investment better, and you keep deploying.”
that meant the total European invest- manager Ares Management. While funds continued to flow
ment volume for 2020 was 27 percent “There was a world of difference into perpetual life vehicles, closed-end
lower than the previous year. in the policy response this time round fundraising in Europe was a different
Now, with the initial shock fading, compared to the GFC,” adds Peter story with plenty of instances of fund-
the industry is beginning to assess the Collins, president of Kennedy Wilson raising extension requests by managers
lasting effects of the crisis. Meeting by Europe. “The European Central Bank unable to reach a final close amid travel
videoconference from work and home was much quicker to react and so was restrictions imposed by governments.
offices across the continent, the six par- the European Union on the fiscal side.” According to PERE data, $25.4 billion
ticipants at PERE’s Europe roundtable Thus, following a brief hiatus in was raised for European closed-end
36 PERE • March 2021
Analysis
Bill Benjamin
Partner and head of real estate group
Ares Management Corporation
Based in London, Benjamin is head of real estate at global alternative
investment manager Ares, where he oversees the real estate group’s
investment activity worldwide. The firm manages around $179 billion of
assets, primarily in the private markets, including $14.4 billion of real estate
in opportunistic and value-add strategies in Europe and the US, and in US
real estate debt.
Kiran Patel
Global chief investment officer
and deputy global chief executive
officer
Savills Investment Management
Patel joined Savills IM, the
investment management arm
of global real estate services
provider Savills Group, eight
years ago. The business manages
around $25 billion of real estate
assets, employing a team of
300 professionals located in 16
offices across Europe and Asia. Peter Collins
President
Kennedy Wilson Europe
Collins has been with global
Zsolt Kohalmi property company and
investment manager Kennedy
Global head of real estate and co-chief Wilson since 2011 and now
executive officer leads its European business.
Pictet Alternative Advisors Quoted in the US, the firm has
$17 billion of assets under
management in strategies that
Kohalmi joined Pictet from Starwood Capital span the risk spectrum from
two years ago to build the Swiss financial development to core-plus
services firm’s real estate business. Pictet and sectors including offices,
manages €560 billion overall, including around multifamily and industrial.
€4 billion of real estate. The company closed
its first direct real estate fund, Elevation I, at its
hard-cap of €700 million in February 2020.
March 2021 • PERE 37
funds, 12 percent more than in 2019
but 44 percent down on the region’s
peak fundraising year in 2017.
Nevertheless, participants Pictet
and BC Partners both raised first-time
funds in 2020. Pictet closed its vehi-
Stéphane Theuriau cle in February before the pandemic
started. But BC Partners head of real
Partner and head of real estate Stéphane Theuriau endured the
estate challenges of fundraising during the
BC Partners pandemic.
“As a new entrant our experience
is that there is a lot of available capital
Paris-based Theuriau for existing players. We raised money
joined BC Partners in 2018 exclusively from existing relationships.
to launch the company’s The large managers have dispropor-
real estate business, and tionately benefited during this period,
has led an €800 million because it is such an easy decision for
fundraise for its first an investor to re-up based on past per-
real estate vehicle. The formance,” he says.
London-headquartered Capital providers were very selective
firm manages around about which strategies to back, howev-
Richard Johnson €25 billion of assets er, notes Kiran Patel, global chief in-
overall, principally in vestment officer at Savills Investment
Managing director and private equity and credit Management. “The core end of the
head of international strategies. market became even more expensive,
capital markets because people saw that as providing
SIGNA Financial Services stability while everyone was waiting for
price discovery on the more distressed
areas, which did not really materialize.”
Johnson joined SIGNA
two years ago to Favored sectors
expand the Austrian- As the pandemic drags on, the initial
headquartered group’s expectation of a V-shaped recovery
connections among across the whole market has been re-
non-German speaking placed with a growing realization that
institutions. The privately there will be long-term consequenc-
managed investment and es for some sectors, argues Richard
holding company’s real Johnson, head of international capital
estate division manages markets at investor-developer SIGNA.
around €18 billion of “This year, we are going to be saying
standing assets and is that the economy has split into winners
undertaking €12 billion of and losers, which will recover at dif-
development in Austria, ferent rates, and that will affect invest-
Germany, Switzerland and ment flows going forward.”
Italy. The residential and logistics sec-
tors, with their powerful narratives of
resilience, have accounted for an in-
creasing share of investment volume,
says Patel. “Real Capital Analytics’
2020 figures show that industrial has
increased from 12 to 15 percent –
everybody wants logistics, and that is
Analysis
“We are social animals. I think
productivity and morale is better
in the office”
BILL BENJAMIN
Ares
being reflected in pricing. Residential will radically rethink their occupational
has gone from 20 to 24 percent. Office strategies. “Technology is also attack-
came down from 44 percent to 40. But ing offices. This does not appear to be
it was still a significant portion of the a real estate cycle or something that is
market. Retail was the big loser.” “The core end driven by low GDP. If you look at of-
The glut of capital demand for a fices pre-covid, it was pretty clear that
few favored sectors presents investors of the market there was an accelerated obsolescence,
with a dilemma, argues Kohalmi. “The and that what qualifies as core will be a
real choice is which poison would you became even more smaller proportion of what exists.”
like to take? A fully priced bet where Benjamin expects to see “a 10-15
the macro drivers are right? Or an expensive, because percent erosion of demand in rents and
asset that faces slightly adverse condi- capital value for the time being, per-
tions where you can get a better entry
people saw that as haps even 20 percent.” However, he
point? Making general calls is tough in providing stability” adds: “Zoom has helped our businesses
a market with such elevated prices. We during the pandemic. But we are social
all need to find the individual deals that animals. I think productivity and mo-
KIRAN PATEL
make sense.” rale is better in the office, and if you
Savills IM
Collins senses a window for acquir- are starting out in any business, I do
ing distressed assets will open briefly not see how you advance in your career
during the next two years. “For ex- from home.”
ample, a lot of hotel operators have Offices under pressure Nevertheless, even a 15-20 percent
suffered so that could shake out some While there is broad agreement among decline in office take-up could poten-
opportunities,” he says. the participants about the prospects for tially cause huge value destruction,
“But you have to get your tim- most asset classes, the office sector is says Theuriau. “Cap rates are so low
ing right. Retail has the potential to the subject of vigorous debate. Theur- and rents are so high. It does not take
be oversold. There are elements that iau argues that it is not only retail that much of a change in underwriting as-
will survive like convenience and re- will be impacted by the acceleration of sumptions to get to a pretty dramatic
tail warehousing. Overall, distress and technology-led disruption during the repricing.”
repositioning will be the main val- pandemic. He notes that investment Patel says Savills IM will still con-
ue-add themes that everyone is playing activity in the office segment halved in sider office opportunities. But he
across sectors.” 2020, and predicts that many occupiers predicts the sector will go through a
March 2021 • PERE 39
Analysis
“Making general calls is tough in a market
with such elevated prices. We all need to
find the individual deals that make sense”
ZSOLT KOHALMI
Pictet
period of adjustment. “We do expect that are not core because it is the story residential as an emerging asset class
a price reduction, and the office sector everybody believes. What qualifies as that has some of the credentials for
does need to evolve. The model may core now is basically residential and in- core. It is very resilient, sticky income.”
become more like the retail one, mov- dustrial with a huge cap rate compres-
ing towards turnover-based rents and sion,” says Theuriau. Symptoms of change
shorter leases.” “The more operationally intensive Pictures of deserted streets in some of
While bond returns remain low, it is – hotels, leisure, anything where Europe’s capitals during covid lock-
investors seeking steady cashflow and it is as much about the quality of the downs have led to speculation there
comparatively high returns have a pow- manager as the bricks – the less appro- will be an exodus from big cities and a
erful incentive to invest in core real es- priate it is for core,” argues Benjamin. revival of suburban fringe areas. The
tate. But with clouds hanging over the The nascent multifamily residen- roundtable participants doubt there has
office sector, what constitutes a core tial sector in the UK and Ireland has been a lasting reversal of the urbaniza-
investment in the post-pandemic mar- proved its robustness when tested by tion trend in Europe, however.
ket? “There are some assets that peo- covid, suggests Collins, and therefore “What was obvious traveling in Eu-
ple believe in, that are priced as core, deserves the designation. “The pan- rope last summer was that as soon as
with underlying operational challenges demic has proved private rented sector people could go back to living as close
to how they were living before covid,
they did,” observes SIGNA’s Johnson.
European commercial property sales activity, year-on-year change (%) “People returned to offices and restau-
rants became full again. When consid-
50
ering the most resilient investments,
40
well-located buildings in vibrant city
30
centers like Berlin, Munich, Hamburg,
20 Vienna and Zurich are at the core of
10 the answer.”
0 “Young people who work in tech
-10 want what large cities have,” adds Ben-
-20 jamin. “They want good food, good
-30
nightlife, interesting streetscapes. In
Europe, for the most part, those are the
-40
capital cities.”
-50
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Kohalmi argues that in Europe,
40 PERE • March 2021
Analysis
Brexit gets real
Boris Johnson’s government signed a last-gasp trade deal
with the EU just days before leaving the bloc on January 1.
Now that more is known about the true shape of Brexit, the
participants consider the impact on UK and European real
“The economy has estate
split into winners Benjamin: There is a free trade deal for most goods. But then there is
anecdotal evidence of delays at the border and rotting meat. We really
and losers, which don’t know yet what the full impact of Brexit will be on the UK economy.
However, if you are from an unstable but wealthy part of the world, Brexit
will recover at is not as much of a concern, and we continue to see capital inflows looking
for a home in London.
different rates”
Patel: Only the goods side has been agreed. Services has not been part of
RICHARD JOHNSON the negotiations yet, so the UK has lost its passporting right of access to
SIGNA
EU markets, and it will take time to figure out the full impact, particularly
on the financial services side. That uncertainty is built into cap rates. For
the first time, London prime office yields are higher than the likes of Paris,
Amsterdam and Munich.
unlike the US, the virus has had little
impact on the which cities are favored Johnson: While some of the impact of Brexit on European markets has
as investment locations. “The dis- already happened, particularly on the financial services industry in the UK,
counts in most sectors in New York there will be more displacement toward the more attractive and well-
right now show a clear belief among positioned continental European cities.
investors that the city will take a long
time to recover. We do not see that in Collins: The EU authorities have an ambition to make the bloc more
Europe.” self-sufficient in financial services. They will try to move some activity
He agrees with Collins that dis- to Europe. Instead of one European market emerging as a clear winner,
tress and repositioning will be crucial that displaced demand is getting dispersed around. Some of it is going
strategies in the post-coronavirus en- to Dublin, some to Luxembourg, some to Amsterdam among others.
vironment, and while investors may Relocations will be positive for those smaller cities. But given the scale of
not see as much distress as they would London, I doubt that any major financial services impact of Brexit will be
like, repositioning will certainly be on visible there over a one to three-year period – 10 years is more likely.
the agenda. “There will be some fun-
damental shifts coming out of covid. Theuriau: We are seeing the fundraising activities of some very large
I like the analogy with how previous players move to the EU. Luxembourg, which has been very successful as
pandemics have affected real estate. a domicile to provide EU substance, will benefit further. The big loss for
Central Park and the wide avenues in London is its tax advantage for bankers and fund managers. However, I
Paris were created to avoid the trans- believe its appeal will endure because of its finance culture and talent pool.
mission of disease.” Also, Boris Johnson has no choice but to make London attractive, so he will
BC Partners is hoping to harness the probably bring back the tax advantages.
same trend. “If you believe the nature
March 2021 • PERE 41
Analysis
Coveted
properties: the
Südkreuz office
development in
Berlin (left) and
a Peach Property
Group asset
The envy list
Which deals did the participants wish they control of what used to be a €30 billion market-cap
had done in 2020? company was fantastic.”
Kohalmi: Ares pays SFr150 million ($169 million; Patel: German investor Deka Immobilien buys the
€140 million) to become a 30 percent shareholder in Südkreuz office development in Berlin for around
German residential manager Peach Property Group. “I €270 million. “That was one that got away. It was part
will give Bill’s firm my vote. Accessing real estate through pre-leased, which would have enabled us to take some
the public markets was quite attractive in 2020 because leasing risk, and had a very high ESG rating. But our
there were discounts available and it was a way to play in exclusivity period ran out and we lost out to Deka,
markets that were paralyzed for a time.” which ended up paying 15 percent more for it, which
shows what a good deal it would have been.”
Collins: AXA Investment Managers Real Assets’ purchase
of Dolphin Square, a neo-Georgian private residential Benjamin: Brookfield Asset Management buys a
complex in London’s Pimlico, from Westbrook Partners. £264 million ($365 million; €301 million) stake in
“For long-term capital it was a great deployment. British Land, one of the largest UK REITs. “I wish
Multifamily is all about scale and they have more than we had bought British Land and [fellow UK quoted
1,200 units there. London will survive and thrive in the property company] Landsec when their shares were at
long term; the rents look like they can be grown, and their nadir. The paper was definitely cheaper than the
there is clearly a long-term refurbishment play there as bricks at that point.”
well.”
Johnson: AXA Investment Managers Real Assets
Theuriau: Real estate investor Léon Bressler and French acquires Kadans Science Partner, a developer, operator
telecoms billionaire Xavier Niel win the support of and owner of European science parks, from Oaktree
Unibail-Rodamco-Westfield shareholders, who vote to Capital Management for around €500 million. “Any
halt the shopping center operator’s €3.5 billion rights issue investor expanding into life sciences pre-covid, before
and grant their consortium three seats on the company’s the pricing went up, would pat themselves on the back.
supervisory board. “The way they played the chessboard It is a really interesting new type of asset that could well
so rapidly to convert a difficult position into taking become core over time.”
42 PERE • March 2021
Analysis
“Technology is also attacking
“Distress and offices. This does not appear
repositioning will
be the main value-
to be a real estate cycle or
add themes that something that is driven by
everyone is playing
across sectors” low GDP”
PETER COLLINS STÉPHANE THEURIAU
Kennedy Wilson BC Partners
of demand is changing, you have to adds Johnson. “There will be effects already testing to deploy capital in Eu-
believe that investing to convert those from covid. We can see some of the ropean real estate before the pandemic.
assets is a way to protect yourself,” says symptoms of change. But we do not yet But while the crisis has further reduced
Theuriau. “We raised our fund on the know the direction of change. If you the menu of palatable choices availa-
thesis that we were at the beginning of own large blocks in the heart of cities, ble in European real estate, and raised
a big repositioning and cap-ex cycle. It you control locations that are irreplace- questions over the future of some as-
is more carbon efficient than building able. It is then about finding what uses sets, investor appetite remains strong
new space, and old assets tend to be fit best for the next 10-20 years. That is nonetheless. For managers, meeting
better located.” where you create value.” return expectations has rarely been so
That is “almost our business plan,” A hot market meant that it was challenging. n
2020 European sector subtype deal trends
Deal volume, year-on-year change (%)
10
Suburban office
0
Apartment
-10 CBD office
Logistics
-20 Other retail
Development site
-30
Other industrial
-40 Shopping center
Hotel
-50 Student housing
Grocery
-60
Senior housing
-70
-60 -50 -40 -30 -20 -10 0 10
Deal count, year-on-year change (%)
Apartments exclude student housing
Source all charts: Real Capital Analytics
March 2021 • PERE 43Experienced Leadership.
Investment Discipline.
Dependable Partner.
The Ares Management
Real Estate Group manages INDUSTRIAL AND
comprehensive public and
private, equity and debt
LOGISTICS
strategies.
We maintain a time-tested and MULTIFAMILY AND
consistent approach across
our equity and debt strategies RESIDENTIAL
focusing on major property
types that we believe have
value creation opportunities, OFFICE
located in liquid markets with
diversified economies.
HOSPITALITY
Ares Management’s global
platform has approximately
MIXED-USE
$179 billion of assets under
management with more than
1,400 employees operating
across North America,
Europe and Asia Pacific*
For more information,
please visit aresmgmt.com
* As of September 30, 2020. AUM amounts include funds managed by Ivy Hill Asset Management,
L.P., a wholly owned portfolio company of Ares Capital Corporation and registered investment
adviser. All investments involve risk, including possible loss of principal; no guarantee is made that
investments will be profitable. This material is for informational purposes only, and does not consti-
tute investment advice or an offer to buy or sell any security, financial instrument or service.
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commercial activity, and contributed to significant in supply chains and economic activity and are having
Coronavirus and Public volatility in certain equity and debt markets. The a particularly adverse impact on transportation,
Health Emergency Risks global impact of the outbreak is rapidly evolving, and hospitality, tourism, entertainment and other industries.
many countries have reacted by instituting quarantines, The impact of COVID-19 has led to significant volatility
prohibitions on travel and the closure of offices, and declines in the global public equity markets and it
As of March 17, 2020, there is an outbreak of a novel
businesses, schools, retail stores, and other public is uncertain how long this volatility will continue. As
and highly contagious form of coronavirus
venues. Businesses are also implementing similar COVID-19 continues to spread, the potential impacts,
(“COVID-19”), which the World Health
precautionary measures. Such measures, as well as including a global, regional or other economic recession,
Organization has declared to constitute a pandemic.
the general uncertainty surrounding the dangers and are increasingly uncertain and difficult to assess.
The outbreak of COVID-19 has resulted in numerous
impact of COVID-19, are creating significant disruption
deaths, adversely impacted global
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