Cordea Savills has just completed a second closing of its German property fund, writes Fionnuala Synott
According to Justin O’Connor, working out the strategy behind a property fund is, in itself, not that difficult. Instead, the real challenge lies in executing the strategy. The head of business development at Cordea Savills explains: “We try to balance being product-led with being client-led. You have to listen to the client and understand where the investment opportunities are. We do both but it is our product focus that makes us stand out from the competition.”
O’Connor thinks the European property fund manager’s success (and its e2.9bn of assets) is due to offering clients products that are not just ‘me toos’. One example of this approach is the recently launched German Retail Fund, a Luxembourg FCP-FIS offering institutional investors income distributions and capital gains from German retail properties. (The fund is targeting returns of 10% including income distribution of 5% per annum.) The fund secured a cornerstone investor in May and has just completed its second closing, raising more than e190 million of equity in total.
“We realised that the potential of German retail property hadn’t been unlocked by many investors. There were quite a few funds listed on AIM [the London stock market for smaller companies] but we saw that there was a gap in the market when it came to unlisted funds. Germany is a major economy and has the largest commercial property market. It is a very fragmented market [maximising mispricing opportunities] with good potential for yield compression.”
Property companies to be acquired by the fund have already purchased an initial portfolio with an estimated value of e230m. Assets include a regional shopping centre, discount supermarkets, retail parks, city centre retail and DIY stores. Cordea is also conducting due diligence for assets worth around e200m including another regional shopping centre.
Cordea is particularly interested in having the opportunity to invest in large retail units in city centres. “German municipalities want shops in town centres. This is positive as we can do more with larger retail units. But this is quite a broad sector; it’s not just about shopping centres, there are also a lot of warehouses available.”
Cordea believes in having extensive local market knowledge and the fund will be managed by an investment team with a proven track record in German real estate, who will take an active management approach in order to obtain higher rental and capital growth.
Cordea operates across the UK, Germany, the Netherlands, Italy, and the Nordic region and the balance of commercial and residential property in its portfolio largely depends on the opportunities in these different markets. O’Connor observes:
“At the moment, the overwhelming majority of our assets are in residential property. In Europe, unlike the US, residential property is often not regarded as a mainstream investment for institutional investors so there tend to be more investment opportunities.”
Cordea believes that the lack of maturity of many of the continental markets often leads to mispricing. This is the case in Italy, where the fund manager has had a presence for the past four years. “There is a lack of information, comparables and intermediaries. A lot of deals take place off the market, which leads to mispricing,” says O’Connor.
The fund manager recently launched Italian Opportunities No. 2. It is targeted at institutional investors looking for net returns of 20% per annum and the idea behind the fund is to exploit single asset and portfolio real estate opportunities identified by Cordea’s Milan-based investment team.
According to O’Connor, having a local team and being well connected is particularly important in the Italian market: “Italy is a difficult market to get into. The barriers to entry are very high and there are a number of strong dominant players such as Pirelli.”
The Italian fund held a first closing at just over e100m and Cordea intends to hold a final closing in October on e400m, which will allow it to manage e1.5-2bn of property assets in the country.
Cordea also has a number of specialist investment vehicles in the UK, including Serviced Land Funds No.1 and No. 2, which look to achieve returns by sourcing and improving the value of land for housing development. “The current housing shortage means that now is a good time to buy strategic land in the UK,” says O’Connor.
The second fund, launched in October 2006, has already invested the €25m committed by mainly private investors. The capital has been allocated to four sites in the UK that have either been earmarked for future housing by local authorities or are considered suitable for large scale residential development.
There can be a creative tension between the client and the product: “It can be a challenge to persuade investors to take the innovative route. But as you build a brand name you build trust. People listen to us.”
But, for many investors, the product or fund for investment is irrelevant. “They want to have the investment opportunity and want to know that you can deliver performance. They need to see that you have investment capability and already have assets acquired.”
At the moment, Cordea’s investor base is split between institutional investors (90%) and private investors (10%), although there are plans to grow the private part of the business and expand Cordea’s investor base in the US and Asia. “Because of the transfer of wealth currently taking place, we are targeting high-net-worth investors.”
When it comes to distribution, Cordea doesn’t have the necessary channels to target the mass retail market. The fund manager favours a direct relationship with its investors as it believes this is the best way to deliver what they want. It also maximises opportunities for repeat business.
For a property fund manager, fiscal considerations mean the ownership structure is important. “Before, it was all about property level returns but now it’s all about the structure and presenting yourself as a financial product with underlying property assets.”
Investing the capital raised can be a challenge for some property investors but Cordea claims not to have any unspent money. “We spent the money from our first fund within six months of closing,” says O’Connor.
O’ Connor is optimistic about the future of the asset class. “The natural maturation of real estate markets, even if certain markets are not doing well, will see global flows of money moving from region to region...
“As long as we have the investment opportunities and deliver performance, we will do well.”
© fe September 2007