Value-add real estate funds have been in vogue recently. In January, when European real estate association INREV released its annual investment intentions survey, it showed that institutional investors have been favouring value-add strategies over core strategies.
As the COVID-19 fallout steers Europe towards a recession, real estate investors are likely to reassess riskier strategies. In March, when the coronavirus hit Europe, UBS Asset Management published a global real estate report. One finding for Europe was that core investments are likely to perform better than value-add strategies in the near future.
(Extract from IPE Article published May 2020)
Another fund manager identifying the challenges the pandemic brings is Europa Capital. Partner Jason Oram says COVID-19 will have a significant impact on all types of real estate investment in the year ahead as “liquidity requirements may necessitate the sale of assets and impact letting activity”.
He says: “On a positive note, there remains a healthy level of uninvested, committed capital within the private-equity real-estate industry that will provide an important level of liquidity to support the real estate market going forward. The possible concern is that much of that capital will be held within funds that have undertaken significant levels of investment pre-COVID-19. Not only will this require management focus and possibly impact the overall performance of particular funds, it may also affect the confidence with which those funds are able to undertake further investments.”
Oram adds: “The quantity of uninvested committed capital held within funds that have undertaken limited or no investments pre-COVID-19 may well be a very small proportion of the overall amount of ‘dry powder’ the industry is hoping will be available, although these funds will be particularly well-placed to provide valuable support to the real estate market once this crisis has passed.”
Oram says that beyond this previously unexpected influence on the markets, Europa expects the medium-term drivers of occupier demand resulting from European urbanisation trends will continue against a backdrop of limited supply, particularly in the office, residential and logistics sectors. “Meeting this occupier demand in the context of a supply-constrained market will continue to underpin value-add investment opportunity, even during a time of increasing economic uncertainty,” he says.
Europa Capital is planning to raise €750m and has a hard cap of €1bn capital for its sixth pan-European value-add real estate fund. The previous fund, Europa Fund V, which raised €716m, completed 16 investments. The majority of these were in the office and residential sectors.
Two investment examples are an 11,710sqm office building in Paris and a three-building, 318-unit residential portfolio in Copenhagen. Oram says they reflect a focus on locations benefiting from urbanisation and demand for office space through job creation, and residential space through household formation. Both markets are characterised by low levels of vacancy in their respective office and residential sectors.
“As a value-add manager we are focused on the delivery of realised returns and so we are always reviewing the opportunity to divest of our assets earlier than originally underwritten and both of these investments were sold at least one year ahead of business plan to enable early distributions to our clients,” he says.
Oram says, what sets the Europa fund series apart from its competitors is that “we focus on the real estate asset and create value through a granular understanding of the importance of an asset within its immediate micro-location – mindful of the macro, but focused on the micro. We deliver a structurally-driven investment strategy that is less dependent on cyclically-driven investment opportunity that may change from one fund to the next. We consider that our consistency of strategy and scale since the [2008] global financial crisis is increasingly unusual in an industry that is ever more focused on scale.”
20 05 IPE Real Assets – Value-add
