AEW completed €3.8 billion worth of transactions across Europe last year, including €3.2 billion in acquisitions. What was the strategy at play in 2016, and did it pay off?
We were pleased with what we achieved last year, although there was less deal flow overall. Our transaction figure has actually increased since these figures were released, as a couple of deals that we did on our debt platform pushed the total to over €4 billion. It was down from 2015, an extraordinary year, but in 2016 we achieved our second-highest level of deals in our history and the capital-raising side was very positive at €3.3 billion.
We’ve continued to invest across a broad range of strategies, from core deals to opportunistic ones, and have diversified into markets where we have not been very active since the financial crisis. Particularly, we have invested in Spain, Denmark, Copenhagen, Belgium and the Netherlands. We have moved away from focusing on deals in the UK, France and Germany and now look for greater value outside of those markets where prices have increased significantly.
We also noticed a shift from the core space towards core-plus and value-add transactions. For AEW in Europe, deals in the core space fell from about 70 percent of total deal in previous years, to about 50 percent in 2016.
This is mainly driven by pricing—as core pricing has become so expensive, we’ve increasingly focused on non-core real estate where there is less competition among investors. Last year, we significantly increased our investment in alternative real estate such as the
hotel and senior housing space. This is a trend that will increase for us going forward as a diversification play away from the traditional three main sectors.
What effect did the merger with CILOGER have on your plans for 2017?
We brought in over €5.5 billion in assets under management on completion of the acquisition, which meant we had €26 billion in assets under management in Europe at the end of 2016.
It was a sizable but manageable acquisition. If you are trying to merge two businesses of the same size doing exactly the same thing, it can be more complicated, but this was an additional business managing funds for retail investors in France. Apart from the additional scale it brings, CILOGER gives us access to another distribution network, but fundamentally it’s not changing what we do.
This is an area of the market that has seen considerable expansion in recent years. Retail investors, as much as institutional ones, are looking for somewhere to invest their money when bonds and equities are not offering very high yields. The equity market has been somewhat volatile and so real estate has been a beneficiary. The growth of this area of our business has been significant, so the merger is more about revenue synergies than it is about cost synergies.
The RESIDYS Fund recently closed. Is French residential real estate a major target for AEW?
Investors’ interest in alternative forms of real estate is growing significantly, and residential is one of these.
Interestingly, the residential sector has typically offered very stable but low yields compared to commercial real estate. We are now at a point where the differential in yields isn’t that great and investors are leaning towards having more residential in their portfolio.
Last year, we were able to get the RESIDYS Fund from launching in the market to closing in a matter of months, but we’ve been in French residential real estate for as long as we have existed. This fund is a blend of traditional residential, but has the ability to forward fund development projects, as well as the ability to invest in senior housing projects.
It is an institutional fund, and we got just over €100 million on first close—our target is around €400 million. Traditionally with institutional funds, you often have three or four closings. We are actively working on a number of prospects for the second close.
We have seen some commentary around less capital being raised last year. We bucked that trend, although that may partially be down to the type of projects we were working on. I also think the figures get distorted in some years by some of the largest managers that raise enormous funds of multiple billions.
There is generally still good investor appetite for the right sort of real estate funds. What helps is if you have a specific strategy that an institution cannot replicate, such as residential, logistics or shopping centres. These are specialist asset classes and most investors would acknowledge they’re not in a position to manage them. We have managed assets in these sectors for several decades and have a good pipeline of deals.
AEW has also opened a new office in Madrid. How important is on-the-ground knowledge for increasing the Madrid portfolio?
We started investing in the Spanish market again a couple of years ago when we raised a fund to focus on value-add investments. The Paris and London markets had already re-priced to some extent and we started to look into markets such as Madrid where we were of the view that the occupational market was likely to improve but that pricing did not yet reflect this. We completed two office acquisitions there for that fund, and added two retail acquisitions in prime locations for another fund.
As our assets under management have grown significantly in this market, it became important to have resources on the ground. We were delighted when Carsten Czarnetzki, who was already with us in London, agreed to move to Spain and head our business there. Czarnetzki was the manager of the fund that bought the two office assets, so he was familiar with the market and moved to Madrid at the end of last year to open the new office.
The office deals have been successful—one had an occupancy level of about 67 percent at the time of acquisition and that is already up to more than 80 percent.
The two retail properties are both undergoing a redevelopment. One is already fully let to a retailer and the other one is almost there. We were buying into the recovery of the Spanish market, but also accessing real estate with an element of risk to it. The result was a lower price and a higher yield than we would have secured had we bought the properties already delivered and leased. We do see that as an interesting market going forward, and we expect to do further deals in the office and retail sectors, as well as logistics.
Finally, how important is the NGAM brand to AEW as a real estate investment platform? What kind of services does Natixis provide that strengthens AEW’s offering?
The wider Natixis Global Asset Management (NGAM) platform we are part of is very important to us. Firstly, it gives investors and the market a high level of reassurance, knowing we are part of a wider banking group.
Secondly, we are lucky that we have a shareholder that supports us in launching new products. That can involve co-investing in funds alongside our investors, creating a significant alignment of interests and also benefitting from their overall financial support.
NGAM has also adopted a multi-boutique model approach across its different asset management businesses. AEW is the real estate part of it, but it has its own powerful brand. The combination of NGAM’s support and the strength of the individual brand seems to have worked well for the various asset management businesses over the years.