A Euro-based perspective
Published: 01 April, 2007
Henderson Global Investors is one of the most significant owners of retail property with a Europe-wide portfolio of shopping centres, retail parks and outlet malls worth over £3bn. The properties are held in a number of different specialist funds, which are open to investors from around the world.
As head of property, Neil Varnham's role is to develop concepts for new funds that will prove attractive to investors by achieving benchmark-beating returns. He then oversees the fundraising process, where the concept is sold to potential investors. Once the capital is in place, the challenge is to acquire the right properties and then to asset manage the portfolios to ensure that they live up to expectations.
To date, he has launched a UK shopping centre fund that includes landmark properties like the St James Centre in Edinburgh, Princes Quay in Hull, half of Buchanan Galleries in Glasgow and a one-third stake in the Bullring in Birmingham; a retail warehouse fund and a smaller shop unit fund. And across Europe there is already an outlet fund and a general retail fund, with more in the pipeline.
As if that wasn't enough, Varnham is also responsible for all property market sectors in Italy and Spain.
The UK shopping centre fund is arguably the flagship. Launched two and a half years ago, it has 45 investors from as far afield as Australia, the US, the Middle East and Europe, and according to Varnham it is poised for a new growth spurt. "We're actively in fundraising mode," he says. "We want to become the dominant shopping centre fund at the top end of the market, and we expect to take it to £1.5bn or £2bn over the next two years. At that size economies of scale will help us achieve even better returns."
And even though capital growth has slowed from the giddy highs seen two or three years ago, Varnham is still a bull of UK shopping centres. "There's still institutional appetite for UK retail," he says. "Double-digit returns are still going to be achievable over the next five years."
To achieve this, the fund concentrates on dominant malls in major cities. "Our research shows these are low-volatility assets, and they're set to outperform," Varnham says. And development activity is going to be the key to that performance. "There are only two ways of delivering performance going forward: there's asset management or tenant engineering and then there's development. It enables you to get that extra slice of return."
With this in mind, three out of the four existing assets have big development angles: Buchanan Galleries is set to grow to a million sq ft, and Princes Quay has recently been granted consent for a 500,000-sq ft retail-led extension.
But it's in Edinburgh that the fund is involved in its biggest project. Last year it bought the St James centre and an adjoining office block in two separate deals. "We wouldn't have bought the centre if we hadn't been able to get hold of the office block as well," Varnham says. Ever since they were built in the 1970s the two have been in separate ownerships which has prevented their modernisation. "Nobody has been able to put together a cohesive strategy for the site," Varnham points out.
"We're looking to completely remodel the retail, and provide residential, a hotel, car parking and an upgraded leisure offer," he says. Injecting new retail into Edinburgh city centre - a world heritage site - has proved the graveyard of many developers' ambitions, but Varnham is optimistic. "This is real. This is deliverable and the city aren't constraining us at all. In fact they're encouraging us," he insists.
The UK retail warehouse fund stands at £1.5bn, and according to Varnham it "significantly outperformed" last year. "There are 45 to 50 investors," he says. "And a lot of people want to get in but we're not currently raising equity."
Last year it increased its ownership of the Brewery in Romford - one of the UK's top 50 retail destinations - to 100 per cent. And Varnham is especially proud of the redevelopment of the Craigleith retail park in Edinburgh, now rebranded as The Quarry. "Retailers are trading well from double height units," he says. "We'll do more of that."
In strategic terms he says the retail warehouse fund has "been degearing over the past 18 months to reduce risk. We're conscious of the need to maintain an appropriate risk profile in all our funds."
But the UK is just a small part of Varnham's remit, and he's spending an increasing proportion of his time hopping between the Henderson offices in Milan, Paris, Vienna, Amsterdam and Frankfurt. He believes this network of offices is a key advantage to Henderson. "Having people on the ground allows us to access stock," he explains, "and the majority of our transactions are off-market.
"The proliferation of funds over the past few years has drawn some justified criticism," he says. "A lot of them are just ideas and they don't have the infrastructure to invest. That just gives a bad name to the fund management industry.
"But we pride ourselves on our ability to place that money in the market, and I'm confident we will place c3bn this year," he says.
Henderson's first property venture outside the UK was the outlet mall fund, set up in 2004 to buy the McArthurGlen properties in France, Italy, Austria and the Netherlands. McArthurGlen continues to operate the centres, and last year the fund bought its first property from another source, Hammerson's B5 centre in Berlin. "We're now looking at other third-party assets," says Varnham. "The fund's fully invested and we're now looking for another c300m of equity.
"With outlet malls we're not just investing in bricks and mortar," he explains. "It's a business with retail at its core. For example, I've just come back from Roermond in Holland. Assets like that are all about how we spend our marketing budget. We're getting cuter at that and we're getting value from our marketing euro." And he asserts: "I'd happily quadruple our budget because it washes straight through to the retailers."
And he believes there are lessons that other shopping centres could learn from the outlet business. "McArthurGlen operates a retailer academy for all of its tenants. We should learn more from that skill base and inject it into other sectors and markets."
The other existing European fund is Herald, a general retail property fund that raised c450m last year, and geared that up to c1bn. Over 90 per cent of that has already been spent so Varnham is currently looking to raise another c500m. "We'll gear that up again and I expect that will be spent in the next nine to 12 months," he says.
"Herald is the first proper pan-European retail fund covering all the retail sectors," he explains. "We've bought shopping centres and retail parks in Germany, Sweden, Italy, France, Spain, Greece and Holland. That's a good spread but we'll continue to widen it out to Central and Eastern Europe and to Turkey."
Looking ahead, country-specific funds are on the agenda, and Henderson has already welcomed the decision by the German government to approve a REIT structure.
"We're looking at a number of opportunities in Germany," Varnham says. "It's become a bit of a flavour of the month but we've been there for eight years. Firstly we were exporting capital for German investors but now we're working in the domestic market."
Equally he says: "Italy's an important market to us. We've just applied to the Bank of Italy for consent to launch a c500m fund. We've already sourced the stock."
But he's very aware of the need for strong local partners. "McArthurGlen proved that Italy is a viable place to invest, but they couldn't have done it without their partner Fingen. We're working with them, too. And Turkey's another example of a place where we wouldn't develop without a local partner."
But entering new markets has not been without its challenges. "The UK market is very skilled at property management and asset management," he says. "The infrastructure is there. But in Europe there's a completely different skill base in property and generally it's a lot lower. Our challenge is to upskill those people, but that involves cultural change, which can be difficult.
"We want to achieve a level of quality across our European stock; the centre managers, the marketing people and so on. It's essential if we are to deliver the returns."