Clutch of new funds are the target for Arrows’ launcher

As well as raising a third fund for its Glenn Arrow series, pan-European property fund manager Aerium is starting a venture to fill a gap in the housing development market, writes Lauren Parr

Ideas seem to spill out of Aerium Properties. The European fund manager, formed just over eight years ago, is raising capital for its third fund in the Glenn Arrow series, and recently launched a €100m loan platform that will offer bridge financing, mainly for UK residential developments, through its Aeriance Investments debt business.

Aeriance, set up in 2007 in response to a lack of bank lending, already runs a €500m debt fund, with senior debt, mezzanine debt and CMBS sub funds; its clients include Morgan Stanley. The company also trades real estate securities and interest rate swaps. The new bridging finance business, run by Daniel Bendavid, has already earmarked most of its resources and will provide loans of between £250,000 and £5m at high interest rates for schemes in London and the M25 corridor in the next six to 18 months.

Glenn Arrow III has raised £35m of a target £150m at its first closing. Aerium’s existing investors are a core group of 40 that includes pension funds and financial institutions from Europe and the Middle East. It will take in co-investment by Aerium’s co-founders, chief executive Franck Ruimy and his brother Ely Michel Ruimy, who set up the specialist pan-European property fund manager at the end of 2002.

The sub fund to Glenn Arrow I and II will be run from Aerium’s London office by New Star’s former European acquisitions director Robin Carr. Modelled on previous core/core- plus funds, but with a focus on higher returns, it will take on a closed-ended, five-to-seven-year structure. The first Glenn Arrow fund was launched in late 2008 with £90m of equity, to buy UK trophy offices at the bottom of the cycle, in the wake of Lehman Brothers’ collapse. A successor fund rapidly followed with £60m of equity in 2009.

In December 2010, a mixed-use office and residential asset from the first fund, 40 Portman Square, was sold to the Malaysian Employees Provident Fund, advised by ING Real Estate Investment Management, for £181m, at a 5.57% yield. Aerium had bought the building less than a year earlier and Franck Ruimy says its quick resale “reflects the group’s ability to unlock value in a short space of time”.

Aerium has spent £700m building up a portfolio of 22 properties across London, Manchester and Bristol. For its latest fund, the wheels are in motion for three more office projects, in partnership with developers the group already has relationships with, worth a combined £150m on completion (see below). This will take the Glenn Arrow funds’ UK investment capacity to £850m. A further two deals are in the pipeline.

New phase in the strategy

Fund III’s focus reflects a new phase in Aerium’s investment strategy, given the yield compression towards the second half of last year. The new fund will focus mainly on redevelopments where capital appreciation and value-added returns can be made through asset management. This entails hunting for vacant or short-let properties.

“Market conditions caused significant yield compression for core office assets  and further opportunities may arise from re-gearing leases and capital expenditure, with a continued focus on core properties with strong covenants,” says Ruimy.

Last April Aerium spent £183.4m on Allied London’s 3 Hardman Street office scheme at Spinningfields in Manchester, in a deal reflecting a 6.4% yield, as part of its quest to secure income-producing assets for its Glenn Arrow funds. Allied London continues to manage the property and Eurohypo backed the deal with a £122.75m loan. One third of that debt was syndicated to Landesbank Berlin.

“In the UK, we outsource development; we are the financing partner,” says Ruimy. “A lot of these transactions came to us through developers that know the market.” This is a key aspect of how the manager works, because Luxembourg-based Aerium has found it challenging to engage with banks that have assets to sell, at least at the level the group is targeting. “[Deals] are given to people that the banks know very well and have strong ties with,” Ruimy says.

However, Aerium did manage to buy a Bristol office development from administrator PricewaterhouseCoopers for £83m this month. Like 20 Cannon Street (see below), 1 Glass Wharf was in receivership. Original lender Lloyds took a large writedown on the construction loan it provided to the project’s now bankrupt developer, Castlemore.

The high-quality building in Temple Quay was bought for a new separate account mandate from a Middle Eastern investor. The financing was harder to pull off, as it got caught up mid-deal in initial arranger DG Hyp’s withdrawal from international lending. DG Hyp had planned to underwrite the £83m acquisition alongside Deutsche Hypo before its decision to retreat to its domestic German market.

Although Glass Wharf is prelet to Burges Salmon, several banks that were approached would not lend outside London. Aerium then called on its existing relationship with Santander, which had financed the group’s purchase of 14 Somerfield and Co-op stores. Deutsche Hypo became the lead underwriter, with the £54m, five-year loan split equally between the two lenders. The margin is thought to be above 200 basis points over LIBOR; the cost rose by 30 basis points when Santander joined the deal.

Other banks the group has relationships with include RBS, Société Générale and BNP Paribas. A lot of its financing came from German banks last year, such as DG Hyp, Eurohypo and Deutsche Pfandbriefbank. At the start of this year, the latter provided a three-year, €181m refinancing, at a 60-70% loan-to-value ratio, for a Central and Eastern European portfolio in Aerium’s Bainbridge Capital Retail Properties Fund. These will be sold from 2014. Hypo Real Estate issued the original five-year loan, with a two-year option, in 2004. It matured last November.

Bainbridge replaced the entire debt on its Turkish shopping centre portfolio with a separate $240m facility from Turkey’s largest merchant bank, Akbank, last June. It will use the capital to carry out extension and redevelopment works.

Fourteen-fund track record

As well as managing separate accounts for institutional investors, Aerium manages €7.7bn of assets and has raised more than €3.5bn of capital via 14 funds, typically with €100m-€250m of equity each. The manager uses leverage ranging from 40% to 65%, the average being between 50% and 60%.

The group’s 150 staff work from five offices in London, Paris, Geneva, Düsseldorf and Istanbul. Its deal sizes range from €20m to €100m, with no single asset allowed to exceed 20% of Aerium’s overall portfolio. The group’s focus this year is the UK, France, Germany and Turkey. It will explore secondary markets for its €500m, pan-European sale-and-leaseback fund, but in the UK is interested in the top six cities.

Only the top three cities meet its criteria in France, where it launched its Vendome I Fund last November. This prime retail fund aims to raise €50m-€60m of equity and is targeting 9-11% returns. It is the first of a series of small, niche ‘special opportunities’ funds launched to capitalise on immediate opportunities in the market.

For a second special opportunities sub  fund, the group recently paid €71m for a vacant Karstadt store in Kiel, Germany – its first German buy since 2008. Aerium hopes to hold a final closing for its German Retail Opportunity Fund, run by Tim Malonn, in the autumn. It plans to demolish the Kiel building and develop a 20,000m2 shopping  centre in partnership with Matrix, which is due for completion in October 2012.

Aerium opened an office in Germany last year, where its strategy is to buy and redevelop distressed city-centre assets. For Ruimy, forthcoming foreclosures on a number of large retail groups mean there is one more area of opportunity for Aerium.


Aerium seeks to prise open London’s ‘window of opportunity’ for development

Aerium is cashing in on what founder Franck Ruimy calls a “window of opportunity” in the London development market.

“We’ve been more focused on investment properties in the past,” says Ruimy, but “in the past two years there has been no new development, as development finance is off the table. So developers have been left with projects that couldn’t break ground.”

Typically, Aerium acts as financier and ultimate owner of a project, bringing a local developer on board to build the scheme. However, in France, Belgium, Luxembourg and Switzerland it employs in-house expertise from start to finish.

In the UK, at the start of this year Aerium teamed up with Terrace Hill to redevelop 49-51 Conduit Street in the West End, an asset the joint venture bought from PRUPIM for £28m in cash.

Ruimy’s conviction about the potential of London’s development market stems from the fact that vacancy rates have fallen, but there is not much new space in the pipeline. “We expect a recovery of the economy in London’s office market, with demand putting pressure on rents,” he says.

Rents in Mayfair, where Conduit Street  is situated, have already risen from about £60-65/sq ft to about £90/sq ft, affirming Ruimy’s belief that the space Aerium is set to develop there by the second half of 2013 will be absorbed. “If we can get the building delivered in the next two years we’ll be right on the spot with timing,” he says.

Before its acquisition of Conduit Street, in July 2010 Aerium worked with developer Allied London (jointly owned by its management, Delancey and the Royal Bank of Scotland) to buy 20 Cannon Street from Japanese property company Kenedix – the first in a series of planned acquisitions between the pair.

Aerium bought the debt on the building from WestImmo at a fraction of the value at which it was booked by the bank. The vacant City office building is valued at £6m-£14m and a 12-month refurbishment has started, which will cost at least £10m. This means the project will come to the market by the third quarter of 2012.