The Duke of Westminster’s property group is expanding its real estate funds business under a new boss after a three-year hiatus, with Japan and Europe fund launches planned, writes Jane Roberts
After swinging from a £236m loss to a £395m profit last year, Grosvenor is in expansion mode once more and so is its £3.8bn international fund management business. Some three years since Grosvenor Fund Management (GFM) raised a vehicle, it has just uncorked the first of a new vintage of products and expects to be raising capital for others this year.
Stuart Beevor oversaw much of the preparatory work for the new phase, while steering the business through the financial and property crash, to the point where GFM contributed £12.5m to revenue profit last year, compared with a £4.1m loss in 2009. He served as head of fund management for nine years, including setting up GFM in 2005 as a separate group within the sixth Duke of Westminster’s property company, but this March he stood down and GFM has a new head, Jeffrey Weingarten.
Weingarten is a quietly-spoken American who worked at Goldman Sachs for 20 years in research, but he knows the GFM business after two years there as a consultant. He inherits an experienced team that is a mix of old and new hands, including: James Raynor, Paris-based continental European head and chief investment officer; Morgan Laughlin, who joined in January to run GFM in Asia; Douglas Callantine, US head since 2006; Mervyn Howard, long-standing head of UK funds; and Dominic Field, who joined last year as head of business development.
Fund management has become key to the Grosvenor group, not least as a way to expand further than it otherwise could – through partnerships with other investors Grosvenor chief executive Mark Preston says: “Our trust ownership means we don’t have equity coming in and shareholders want to retain 100% ownership. We can’t grow significantly through debt, even if we wanted to, which we do not. So growth is most achievable via other people’s equity.”
The pull of market opportunities
Preston says an equally important factor is the market opportunity from all sorts of investors – institutions, sovereign wealth funds and private wealth. “Real estate is a tangible asset in uncertain times, which is very relevant now. Over time it has become a more accepted asset class, through things like benchmarking and more transparency.”
He adds that investors also want a reliable manager – like Grosvenor. The sub- text might be that investors don’t want an opportunistic global investment bank, so carpe diem. “Finding someone reliable to manage your assets is key, because you can’t just sell property the next morning if you change your mind, as with equities.
“In property fund management there is a lot of upheaval, with businesses deciding it is no longer a core activity; or perhaps they can’t do it now because of regulation, like US investment banks with their co-investing restrictions. We are a long-term, stable company with committed shareholders who won’t change their minds. So this is an interesting opportunity for us.”
GFM’s 16 funds, eight mandates and 70 investors are spread around the globe (see table). While the parent company has been a successful developer and investor in some markets for many years, particularly North America and Australia, GFM seems thinly spread for a business of this size. But Preston says there is no headline expansion target on the back of renewed investor interest in real estate, because assets under management “is not a measure of success – though it is a product of it.
“We want to generate good returns for investors and beat our benchmarks and if we do, we will grow. But I’d say £3.8bn is not effective for an international fund manager in the long term. In five years’ time I’d expect to be at least twice as big.” The buzz at GFM about the opportunities ahead is tempered with caution. Before he left, Beevor told Real Estate Capital that he expected “bumps in the road, which will create good opportunities in specific assets.
So GFM will be relatively focused and we want to identify what we are good at.” In the US, this is bound to include further investment in multi-family housing, while in continental Europe, Grosvenor’s main expertise is core retail, where it has had notable successes recently (see below). The annual report refers to a mandate for a partnership to develop luxury housing around the Pacific Rim with a sovereign wealth fund, starting in Vancouver and involving Asia Pacific, North America and Australia, but the details are confidential.
Weingarten says that since the start of this year: “Our intention and ambition has increased substantially. The environment has improved and investor appetite has increased. There is ample room to grow.” A follow-on fund is slated for Japan and a central London value-added investing club has just been unveiled. A new products committee, comprising research head Richard Barkham, US capital raiser Alexia Gottschalch and James Raynor, is meeting.
Weingarten, whose research background was real estate equities, says a property equities product is a distinct possibility, as are more liquid structures than its previous predominantly closed-ended funds. “We’ll focus on larger flagship funds,” he says. But like other fund managers, GFM has to keep adapting to investors’ preferences. UK funds manager Howard says some medium- sized European institutional funds are not as active as when GFM was last raising capital on any scale, while large pension funds and sovereign wealth funds very much are.
They are also seeking different structures, “bilateral relationships of one sort or another. We are talking to them about joint ventures and segregated mandates. That’s a big change. Before, launching a product would have involved talking to 100 investors to get five to 20. Now we are likely to end up talking to one or two. Club deals are back.”
s new structures, but it is for two of the first: an investor consortium in Europe and a second Grosvenor London office vehicle. GFM has been wooing investors for at least 18 months for a value-added rather than core strategy central London vehicle. This month GFM announced a joint-venture partnership with a new investment partner, Canada Pension Plan Board, to invest 200m in the next two years.
Grosvenor’s first, core, London fund, which owns four stable, prime office assets, was due to be wound up next year but four out of the five external investors voted to extend its life to 2017. Fund manager Scott Rowland hopes to bring in new investors so that it can make more investments. The new London office mandate is important, as the UK business is otherwise fairly mature. The club that owns Liverpool One apart, its two biggest UK funds – Gros-venor Shopping Centre Fund, plus the fund that owns Basingstoke’s Festival Place mall – will probably be wound up in the next few years, based on investors’ current thinking.
Shopping centre funds suffer
GFM says all its UK funds have “outper-formed their benchmarks over their lives”, but these two shopping centre funds entered the property market crash relatively highly geared, so performed far worse in the down-turn than ungeared or low-geared peer group funds like Lend Lease’s and Standard Life’s.
Distributions were suspended and in a rare instance of Grosvenor getting a bad press, stories suggested investors in the Grosvenor Shopping Centre Fund were not happy that GFM had not cut gearing earlier. The Liverpool Fund, like Festival Place, is a single-asset fund created to hold a Grosvenor development. The huge Liverpool One scheme, developed and leased at a tough time, has performed strongly in the past two years. The owning partnership was refinanced in December with an investment loan from four banks and the investors oversubscribing for £80m of new equity.
O&H, the private property firm owned by Eli Shahmoon and David Gabbay, is a key investment partner in the UK (see table) and one of 17 of GFM’s 70 or so investors that are invested in more than one vehicle. The relationship grew out of a 50/50 residential joint venture in 2005, which became Grosvenor Residential Investment Fund. Plans to raise more capital from new investors proved too challenging after the market turned in 2007/08.
Expanding the Asian fund management business – which manages £528m of assets – particularly in Japan and China, is a priority for Grosvenor. In the new role of GFM head of Asia, Laughlin is closely involved in the launch of a multi-sector Tokyo fund. GFM currently manages two residential and one commercial funds in Japan, all fully invested, plus one in China.
At the end of this year, Australia also comes under his aegis. The strategy there is switching to indirect expansion only, and Australia CEO Rob Kerr is leaving at the end of the year. What will happen to the A$405m of assets the group owns there? “We are studying all our options,” Weingarten says. “In the past, we have used existing assets as seed investments. Australia remains an important part of our Asia-Pacific strategy.”
The group is committed to China, where GFM bought the first asset for the Grosvenor Vega-China Retail Fund for RMB1.7bn in November. Called ‘The North’, it is a seven- level, 1.3m sq ft retail development near Changfeng Park in Shanghai. GFM had hoped the $260m private equity fund would be fully-invested by now, but sourcing investments with the right risk- adjusted returns has been challenging. The fund took over two years to make its first investment; it closed just before Lehman Brothers collapsed in September 2008 and had to wait for stability to return to financial markets before looking for investments.
Parent group Grosvenor’s £800m of co-investment capital in GFM’s £3.8bn funds is now centrally managed by Chris Taite, who reports to Preston. “He is working up a strategy and will be responding to GFM ideas,” says Preston. The group is unlikely to take 25-30% stakes in funds, as it once did. “It will be more consistent than in the past. I’d say 5%,” adds Preston.
Sweden and France are top spots for Continental arm
For the past year Grosvenor’s Paris-based Continental Europe team has been buying French assets for Grosvenor’s French Retail Investments Fund, which still has a large amount of cash to spend. The office works with 17 investors, via that fund and one other, plus several joint-venture clients, and had £735m of assets under management at the end of last year.
GFM has since entered the Swedish market. A joint venture for Dutch pension fund manager Bouwinvest REIM and a Canadian institutional investor, in which GFM has a 5% stake, has spent €416m on a Swedish/French portfolio. The six assets were sold by Europe’s largest REIT, Unibail-Rodamco, which is selling 10% of assets it regards as non-core.
On 1 July the European business launched its third fund, Grosvenor Retail European Properties 2, which has allocations to the Nordics and France. Talks have started with potential investors and European managing director James Raynor says the Unibail deal “provides a track record and has helped generate a good pipeline” for the new fund.
He says the team has studied the Swedish market for several years and will open a Stockholm office this year. “The new fund should offer investors a stable, long-term investment product,” Raynor adds. Separately, the Grosvenor Group has exposure to retail in southern Europe and Brazil via a long-standing £363m investment in Portuguese retail developer Sonae Sierra, which, says chief executive Mark Preston, “acts as a proxy for proprietary activity”.