For professional investors only, in Switzerland for Qualified investors only – not for use by retail investors or advisers
Aberdeen European Balanced Property
Fund’s 10th Birthday
March 2017
Avenue Montaigne, Paris
During 2016, we celebrated the 10th anniversary of the Aberdeen European Balanced Property Fund (AEBPF). The Fund was incorporated in
September 2006 and completed its initial fundraising at the end of 2007. A decade on, the Fund is flourishing with an asset base of almost €700
million and 35 institutional investors from across the globe. The Fund invests in core office, retail and industrial assets across seven Eurozone
member states and has established a strong performance record. Over the last year and five years, as well as since inception, AEBPF has
outperformed IPD’s Pan European Property Funds Index (PEPFI) for Balanced Funds. It has outperformed by 1.7% over the past year, 1.4% per
annum over five years and 2.2% per annum over 10 years. The Fund has also delivered a consistently high income return over its duration. In the
last five years, its distribution yield has averaged 4.8% per annum, compared with the IPD PEPFI average of 3.3%.
Designed for institutional investors, AEBPF is an open-ended, core fund that invests in the Eurozone. The Fund’s strategy is to screen, invest in
and manage those individual assets that we believe will provide the greatest opportunity to meet its long-term return target while avoiding an
excessive risk concentration. The Fund is balanced by risks, not by adhering to country/sector index weights. The Fund takes calculated risks in
assets where we have high conviction, such as Avenue Montaigne, for example. The Fund does not engage in speculative property development
and pursues active management during the holding period to enhance performance in a controlled fashion. Its long-term average return target
comprises a (cash) dividend return target of 4.5% per year and a total return target of 6.5% per year. The IPD PEPFI Balanced Funds Index is used as
a performance comparator.
In this special paper, we look at some of the Fund’s milestone transactions. We also examine five key investment lessons we have learned over the
past 10 years and five themes that we expect to be crucial over the next 10.
Milestone transactions
Asset
Comments
GERMANY, Munich,
Bayerstrasse 25
office property
This office property – acquired by AEBPF in 2011 – is located in Munich, one of the strongest office markets in
Europe. The multi-tenant, corner block building of 5,347 square metres (sqm) is highly visible and located directly
opposite the central station, within walking distance of the inner city with all its amenities. The ground floor is
leased to Hypovereinsbank and the six upper floors to the local municipality. We have received several unsolicited
bids for this prominent building from potential investors. Recently, we took advantage of the ‘hot’ market and
decided to sell the asset in February 2017 for €38.9 million, 121% above the acquisition price in August 2011.
BELGIUM, Olen,
Lammerdries
shopping park
An off-market deal with a developer in 2012 resulted in the acquisition of a newly built shopping park in Olen,
35 kilometres east of Antwerp. The success of the park since opening can be explained by its strong dominance
in the affluent catchment area, thanks to its size (32,205 sqm) and the highly diversified tenant mix (food and
non-food). Anchor tenants include Albert Heijn (supermarket), Decathlon (sports,) Krëfel (electronics) as well as
restaurants on the central square and ample free parking. We added value to the asset by extending Decathlon,
and there is further potential to generate higher footfall by expanding another retail unit and replacing the
existing tenant with three retailers. Since acquisition in May 2012, the property value has risen by 29% as at
the end of December 2016.
FRANCE, Paris,
avenue Montaigne 2
retail unit shop
Avenue Montaigne is well known as the luxury retail street in Paris and experiences strong demand
from high-end retailers. At time of purchase in August 2009, this property was heavily under-rented.
Through active asset management, we were able to replace the two tenants with strong anchors, Armani and
Davidor, at significantly higher rents and with longer leases. A strong appetite among investors for this kind of
trophy asset resulted in bids at a yield of 3% and a sale price in February 2016 of €79.0 million, 251% above the
acquisition price of €22.5 million.
FRANCE, Paris,
rue Réaumur 49
office property
This fully renovated office building with retail on the ground floor is located in the Third Arrondissement of Paris –
an attractive area mixed with offices, retail and residential. The building is very accessible as it is located opposite
a metro station and has underground parking. A durable income stream with a record of limited vacancy makes
this an attractive investment. Since acquisition in March 2007, the property value has increased by almost 22% as
at the end of December 2016.
2
Aberdeen European Balanced Property Fund’s 10th Birthday - March 2017
Five lessons we have learned over the last 10 years
1.Leverage is the biggest risk
• The impact of leverage on property returns far outweighs the impact
of asset specifics.
• The risk of substantial loss of capital is high, while servicing debt
weighs on income returns.
• Precisely timing the market becomes even more vital when using
leverage, and the experience of the last 10 years suggests that very
few investors are able to do so.
• Greater use of leverage, which is equally pro-cyclical because of
loosening credit conditions, swells investment demand and rapidly
pushes pricing higher. This inevitably puts the equity component of
an investment in greater peril over the long term (chart 1).
• We purposefully keep AEBPF’s leverage low (with a target of 25%
and current level of 13%).
Chart 1: Impact of leverage on standard deviation
Standard deviation
12
(2002) Portugal
(2000) Norway
(1998) France
(1995) Netherlands
(1999) Finland
(2001) Spain
(1996) Germany
( 1987) Switzerland
(1983) UK
(2003) Italy
(1984) Sweden
(2000) Denmark
(1987) Ireland
-2
-1
0
1
Advantages of retail
2
(%)
3
4
5
6
BUT
• Beware structural change due to
• History of outperformance
online retail
• Less volatility
•
‘Experience’/’destination’ retail and
• Retailers are intrinsically linked to
‘convenience’ will still do well,
specific locations, ‘prime pitch’,
beware of the rest
thus assets have marked durability
• Lower rate of depreciation and capital
expenditure
10
8
6
4
Note: Date in brackets indicates index start date.
Source: MSCI 2016. Countries must have historic data for 10 years or more.
Past performance is not a guide to the future.
2
0
Chart 2: Offices have a track record of underperformance
Outperformance of retail versus offices since index start date to end
2015 (%)
0
5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90
Loan-to-value (%)
Source: Aberdeen Asset Management February 2017.
2.Treat offices with caution
• Historically, offices have tended to underperform in almost all
European markets (chart 2).
3.Income is key
• Over the long term, direct property, as measured by the Investment
Property Databank (IPD), has offered a relatively high and stable
level of income return (yield) compared with government bonds
and equities.
• Investors tend to underestimate the capital expenditure required and
the depreciation on office assets, while overestimating rental growth.
• The capital return for direct property is volatile and tends to be
only marginally positive in the longer term (chart 3). As highlighted in
the introduction, AEBPF has consistently delivered a higher income
return than its competitors. Over the past five years, its distribution
yield has averaged 4.8% per annum, compared with an IPD PEPFI
average of 3.4%.
• Rental growth can be strong during periods of economic growth,
but can fall sharply during periods of economic weakness.
Chart 3: Income and capital returns, IPD pan-European Annual
Universe, 2001-2015
• In addition, the office sector is typically volatile, so risk-adjusted
returns are even lower.
• Vacancy also tends to be much higher than in other sectors, with the
sector vulnerable to speculative building booms.
• AEBPF has an underweight position in offices.
• We have avoided particularly oversupplied markets, such as
the Netherlands and southern Europe.
• We have also avoided the out-of-town office sector,
which experiences minimal supply constraints and much higher
vacancy rates.
• We prefer flexible, accessible, centrally located office stock, such as
the Munich and Paris examples mentioned in the introduction.
These have performed well for the Fund.
%
15
10
5
0
-5
-10
-15
01
02
03 04 05
Income return
Source: MSCI, February 2016.
06
07
08 09
10
11
12
13
14
15
Capital growth
aberdeen-asset.com3
4.Importance of high-quality property – weeding out
the poor-quality stock
• Given the pronounced range of performance at asset level (chart 4),
we focus on good stock selection rather than broad, countryaggregate views.
• We focus on what we can buy – individual assets – rather than what
we can’t.
• We have carried out a property-by-property appraisal of AEBPF’s
retail assets to ascertain their ability to withstand the online threat.
We have disposed of any assets that we do not view as wellpositioned in this regard.
Chart 5: Structural changes will polarise the retail sector
But ‘convenience’ and ‘destination’ are best able to withstand
such change
• Quality for us means assets with durable income streams, long-term
potential for income growth and a cash flow that is sufficient to
compensate for underlying risks relative to the asset’s price.
Online threatens
‘routine’
Diverts retail sales and importantly retail services
Chart 4: Good stock selection takes precedence over country
aggregate views
Total return 2015 by percentile rank (%), Europe
BUT success in
%
40
30
5.7%
spread
20
AND
53.7%
spread
10
‘destination’
‘Flagship’, ‘showroom’, prime locations
that offer experience/entertainment a ‘good day out’ will not go out of
consumer, retailer or investor demand
0
-10
-20
Source: Aberdeen Asset Management, September 2016.
95
UK
75
France
50
Percentile
Spain
Sweden
25
Norway
5
Denmark
Source: Aberdeen Asset Management, MSCI, December 2016.
Past performance is not a guide to future results.
5.Position retail portfolios to withstand the online threat
• Given the profound structural changes occurring in retail, it is vital to
position retail portfolios correctly. ‘Destination’ and ‘convenience’
locations continue to deliver strong performance, while the rest are
likely to struggle.
• Dominant locations, such as the best high streets in major cities,
continue to perform well with rising rents. These offer a broad range
of fashion brands in an attractive environment with restaurants to
increase dwell time. Consumers are increasingly likely to require
‘justification’ for paying higher prices in stores that offer ‘an
experience’, while the very best high streets and regional
destinations are still able to provide this.
• We also like convenience retail, specifically dominant, well-located
retail parks with a food anchor and a fashion offer. These parks also
benefit from lower rental levels and more efficiently sized units than
city centre retail units. With the growth of internet retailing, retail
parks are particularly attractive for ‘click and collect’, aided by their
accessibility and free and plentiful parking. We believe retailing at
transport hubs will continue to perform well too.
• We avoid shopping centres that do not dominate their catchment,
and secondary retail pitches. Retail spending is migrating to
dominant locations and the internet. Secondary locations will suffer
as a consequence, as retailers increasingly rationalise portfolios.
4
‘convenience’
Transport locations and convenience
(food anchored) district and
neighbourhood centres can thrive
Navigating
structural
changes
Aberdeen European Balanced Property Fund’s 10th Birthday - March 2017
How has this learning been implemented?
The lessons learned and the greater focus on risk in our investment
process have led to a restructuring of the property portfolio and a
significant reduction in overall risks. This is summarised in the table
below, which shows the status of the Fund and portfolio as at
September 2016 compared with 2014. The number of long-termhold assets has increased sharply, while lease lengths have been
extended and vacancies have been reduced. Diversification has
improved, too, while borrowing has reduced to 13%.
Portfolio quality improvements
End 2014
End 2016
46%
95%
WAULT (yrs)
5.1
7.0
Vacancy rate
5.3%
2.4%
157
169
5
7
Average lot size (€m)
18.8
27.5
Leverage
30%
13%
Percentage share long-term hold assets
Number of tenants
Number of invested markets
Five things to look out for in the next 10 years
1.The growth of winning cities
Chart 7: Increasing need for logistics in the multi-channel retail world
More demand and more bespoke, which is limiting speculative
development and pushing up rents.
• Despite Europe’s relatively flat population-growth projection,
some European cities are projected to grow very rapidly – by as
much as 30% by 2030 (Chart 6).
Initial distribution
• Some are particularly successful, attracting international labour
and capital as well as experiencing strong growth and rapidly rising
affluence.
• Such cities usually have excellent infrastructure, quality of life,
investibility and transparency. The very best also have an element of
supply constraint, whether physically or because of planning
controls, and can deliver particularly strong performance.
Suppliers
Re-distribution
of stock
Returns
processing
32%
30
Source: Aberdeen
UK Asset Management,
France 2016.Spain
25
22%
22%
22%
18%
15%
15
15%
14%
13%
5
0
India
Mexico
Brazil
China
Europe
Paris
Frankfurt
Munich
Amsterdam
Helsinki
London
Copenhagen
-1%
Stockholm
Denmark
• We cannot envisage what will be achievable in 10 years’ time. But we
know that technology has the potential to have a transformative
effect on the way people shop and do business.
• Retailers will innovate and use technology to their advantage;
landlords must adapt and offer the flexibility that retailers will
increasingly require.
7%
Oslo
Norway
• Technology is at the heart of young people’s shopping habits.
14%
13%
10
-5
Consumers
3.Technology will not stand still
29%
20
Collection
points
Retail outlets
Projected population growth 2010-2030 (%)
35
Regional Distribution
Local distribution
& parcel services
• Rapid population growth and increasing affluence create strong
opportunities, particularly in the retail, residential and logistics
sectors. Please see our paper ‘Winning strategies for winning cities’
for further details.
Chart 6: Strong population growth in Europe’s leading cities
Winning cities attract strong inflows of population, both nationally
and internationally.
Returns
Source: United Nations 2014, World Urbanisation prospects, ‘How to Invest in Global Winning Cities’
Aberdeen Asset Management, August 2014.
2.The logic in logistics
• The growth of e-commerce is causing a structural change in
the sector.
• Logistics portfolios are arguably becoming more important than
store portfolios for retailers.
• This involves the development of giant new distribution hubs for
‘pure play’ online retailers, as well as new distribution facilities for
successful multi-channel players who are restructuring their logistics
portfolios into a smaller number of larger hubs.
• As well as new distribution hubs for the strongest ‘pure play’ and
multi-channel operators, we also like distribution units and parcel
hubs in supply-constrained urban areas where competition from
other land uses is strong (chart 7).
• These offer the potential for durable income, with higher rental
growth given strong demand and restricted supply, as well as a
long-term opportunity in terms of development/conversion to
higher-value uses.
• Technology has a condensing effect on products and function –
there is a good chance it will do the same to occupied floorspace.
• Positioning retail portfolios correctly has never been more important.
4.The rise of residential
• The demand fundamentals for private rented residential are very
positive, given strong population growth in certain European cities
in particular (chart 6).
• Increasing migration, later marriage, shrinking household size and
the cost of buying in some markets are also driving demand for
private rented property.
• Supply is constrained. Development levels have not been able to
keep up with demand growth.
• Planning constraints, such as green belts around cities and the
preservation of historic areas, are a key reason behind subdued
residential development levels throughout Europe.
• The lack of bank funding for new developments and rising
construction costs (given rising land prices and higher sustainability
standards) are also inhibiting new developments.
We expect the private rented residential sector to become an
increasingly important part of portfolios across Europe. While it is
well-established in markets such as Germany and the Netherlands, it is
becoming increasingly common in the UK.
aberdeen-asset.com5
Chart 8: The housing shortage – an increasingly political issue
across Europe
Chart 9: The age quake – distribution of wealth is a major issue
Wealth continues to shift to older generations. They are less
technologically minded and spend less on retail.
Older
demographic
Net wealth
Net wealth
Younger
demographic
g power
Spendin
Lower %
spend on
retail
Impact of
technology
Source: Various newspapers, February 2017.
5.The ‘age quake’
• The demographic tectonic plates are shifting; the distribution of net
wealth is substantially different to 10 years ago, and wealth transfer
is ongoing (chart 9).
• Younger people are increasingly burdened with higher housing costs,
increasing debt burdens from further education, higher unemployment
and weaker wage growth than older generations have experienced.
• Older generations have enjoyed high growth in net wealth over the
last 10 years, particularly in housing. They have benefited from the
central banks’ quantitative easing policies, as well as higher
employment levels and more generous pensions schemes.
• Are retail destinations positioned for those with the money to spend?
• Younger consumers have different spending priorities and habits,
too; they prefer to spend on technology, in particular.
• Given their relative wealth, older generations are more likely to
spend on leisure activities; care homes and assisted living will also be
a priority later in life.
6
Aberdeen European Balanced Property Fund’s 10th Birthday - March 2017
Drag on store-based sales
Source: Aberdeen Asset Management, November 2016.
Summary
AEBPF has recently celebrated its 10-year anniversary. Over the
past decade, the Fund has flourished, grown and outperformed.
The Fund has consistently outperformed its peers over all time
periods since inception. It has also delivered a consistently
higher income return than its competitors. The quality of the
portfolio has been improved over time. The retail assets most
vulnerable to the online threat have been removed from the
portfolio. We have been selective in the office sector, with its
history of volatility, high capital expenditure requirement and
underperformance. We have focused on flexible, centrally located
stock rather than purpose-built and out-of-town offices, which
are much more vulnerable to capital expenditure, vacancy and
depreciation. We have positioned the portfolio to take advantage
of the growing importance of logistics given the growth of online
retail. Finally, we are conscious of the danger of high leverage,
which in our view is one of the biggest risks investors can take in
property. We have positioned the portfolio with leverage of just
13%, with a long-term target of 25%.
Contact details
Should you require any further information, please contact the relevant representative from your region:
Robert Matthews
Global
+44 131 528 4328
[email protected]
Michael Dinsdale
UK and Ireland
+44 131 528 4116
[email protected]
Ibtissem Sfaxi
France and the Middle East
+44 20 7463 6146
[email protected]
Lina Alvemur
Nordics
+46 8412 8026
[email protected]
Jonathan Matson
North America
+1 212 776 1175
[email protected]
Sin-Niew Loh
Asia Pacific
+65 6395 2441
[email protected]
Important information
For professional investors only, in Switzerland for Qualified investors only – not for use by retail investors or advisers.
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This document is for information purposes and should not be considered as an offer or solicitation to deal in any of the investments mentioned herein.
This document is not intended for distribution or use by anyone in any jurisdiction where such distribution, publication or use would be prohibited. The information, opinions
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Property is a relatively illiquid asset class, the valuation of which is a matter of opinion. There is no recognised market for property and there can be delays in realising the value of
assets. The capital value of investments and the income from them can go down as well as up, and an investor may get back less than the amount originally invested.
Past performance is not an indication of future results.
Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future.
Professional advice should be obtained before making any investment decision.
© 2016 Aberdeen Asset Management PLC. All rights reserved.
121027050 04/17