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June 9, 2013 7:16 am
The valuation gap between trophy property assets, such as offices and shopping centres in major capitals, and less glamorous out-of-town secondary property is starting to narrow as institutional investors broaden their sights in search of better returns and less overheated prices.
Sovereign wealth funds are contributing to the shift. Last week Norway’s $720bn oil wealth fund, run by Norges Bank Investment Management, snapped up a £250m portfolio of UK suburban warehouses, used as retail distribution centres.
“Sovereign wealth funds and pension funds are looking around for something other than prime retail and getting into industrial property assets such as warehouses, which look appealing,” says Philip Marsden, director of European capital markets at Jones Lang LaSalle. The property group advised on the joint venture between the Norwegian sovereign wealth fund and ProLogis, its industrial property landlord partner.
The rise of internet shopping and the resultant demand for large warehouse space has added to the appeal. “As assets get conglomerated and warehouses get bigger, so larger players such as sovereign wealth funds are coming in,” says Mr Marsden. Several large Canadian pension funds are also looking at warehouses, he adds.
High prices and low yields on trophy assets have been the trigger for the trend, with sovereign wealth funds after yields of about 5 per cent. NBIM’s warehouse portfolio will yield 6.3 per cent. In comparison, trophy office assets are now typically yielding between 2.5 per cent and 5 per cent, depending on the city and property.
Like the Norwegian fund, most other sovereign wealth funds favour a joint venture route to such investments to share the risks, costs and skills. “A lot of overseas investors and sovereign wealth funds like to do a partnership to share the risk with someone who knows the terrain and puts in their own money,” says Mr Marsden.
Investment in European logistics and industrial assets started well this year, with total transaction volumes of more than €3bn in the first quarter. This is more than twice that in the same period of 2012, according to Jones Lang LaSalle. The UK, Germany and France were the top three markets in terms of transaction volumes in the period.
Tom Waite, associate director of European capital markets at Jones Lang LaSalle, expects the strong start to 2013 to lead to “greater exposure to the sector, as investors are attracted by healthy income returns”.
Yields in prime logistics assets in London, Frankfurt, Warsaw and Paris range between 5.75 per cent and 7.25 per cent, he says.
More mature sovereign wealth funds that have built up skills, such as the Abu Dhabi Investment Authority and Singapore’s GIC are the ones “heading into secondary and not trophy assets”, says Mr Waite. Their newer counterparts start off by investing in prime assets in top-tier cities such as London, New York, Paris and Frankfurt, then shift to secondary assets later on, according to Charlie Walker, business development director at L&G Property, a division of insurer Legal & General.
So is the gap between trophy and secondary assets closing? The gap between “prime and good secondary [assets] is beginning to close, but it will take time – as long as it takes for the economic recovery to become fully fledged”, says Mr Walker.
Mr Marsden also sees “a small narrowing of the gap”, but points out more risk is involved in investing in secondary assets.
A considerable amount of investment is keen to enter real estate but there is not enough prime property to go around, says Emma Harding, senior research analyst at M&G Real Estate (previously Prupim). This has been “pushing investors across Europe up the risk curve into secondary [assets] over the past six months”, she adds.
However, investors are being cautious, sticking primarily to perceived haven countries such as Germany and the UK, she points out.
“We started to move away from prime to secondary assets two to three years ago, as trophy assets reached record prices,” says Claude Angeloz, co-head of private real estate at Partners Group in Switzerland.
“Who would go into these with yields as low as 2.5 per cent and high prices?” he asks.
But investing in secondary assets requires a different type of skill, with “people constantly on the ground, fixing anything that breaks. This is plain vanilla real estate management,” Mr Angeloz says.
However, he believes the jury is out as to whether the trend is permanent or temporary.
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