The faith being placed in ASI by client investors vindicates the merger that created Europe's second-largest real estate investment manager two years ago, says Pertti Vanhanen, global co-head of real estate at the group.
It has been just over two years since the merger to create the UK’s biggest listed global fund management and investment firm.
Scotland-based Aberdeen Asset Management and Standard Life combined in August 2017 to form Standard Life Aberdeen plc with a combined €737 bn of assets under administration. The combination produced an overnight goliath with operations in 50 locations and 9,000 employees and is an entity that Standard Life Aberdeen (SLA) plc has proclaimed as ‘driven to be world class’.
Twenty-four months later, the question in real estate circles is: how is it faring?
As a result of the merger, Aberdeen Standard Investments (ASI), SLA’s asset management business, suddenly shot up the size rankings to become the second-largest European real estate investment manager of third-party assets. It manages a massive 1,600 properties worth around €49.3 bn and employs 270 investment professionals.
To explain the progress so far, PropertyEU met Pertti Vanhanen, global co-head of real estate, at the group’s London offices near St Paul’s Cathedral.
Vanhanen, an ice hockey-loving Finn, has been living in London for the past six years and runs the mammoth property investment division alongside David Paine.
He is an upbeat former Aberdeen Asset Management man who says the favourite part of his job is meeting investors, creating new business and striving for good performance. But how have things developed since the corporate announcement, we ask. ‘It has not been boring!’ he says. ‘We have a good story. Our merger and progress have been very good. The best evidence of that is that we haven't lost a single institutional client because of the merger, and we've been able to launch new products.’
Not losing a client might sound like a lukewarm achievement, but there is good reason why this is especially important. At a corporate level, the success of the overall merger has been questionable.
Overall, the group has lost billions in managed funds, group profits have slipped, the share price fell sharply in the 12 months following the deal and, on the day PropertyEU met Vanhanen, the Financial Times reported that the vice chairman of the entire company, Martin Gilbert - who founded Aberdeen Asset Management in 1983 - was to step down from the board (something the company denied, saying the report was inaccurate).
Newspaper column inches have also covered a dispute over Lloyds Banking Group’s decision to try to sever the management given by Aberdeen of Lloyds’ £109 bn (€117 bn) Scottish Widows portfolio.
AUM decline slows
However, mercifully, latest group financial results published in August suggest the rate of losing AUM is slowing. And when Vanhanen says the real estate division has not lost a single client - and indeed is in growth mode – one can understand why this is particularly gratifying.
Explaining the journey so far, Vanhanen says a lot has happened: ‘The teams came together very quickly, and it helped that myself and David had experience of mergers (see bio box). At the outset, we set ambitious targets for our real estate business to globalise and to have a more diversified offering, and also to focus on certain sectors such as the private rented sector and logistics and to promote more core and value-added initiatives in our product range.’
He continues: ‘We kept the uncertainty period for our people as short as possible. We had very open communication, and we asked fund managers, asset managers and portfolio managers to focus on performance instead of the merger. We said not to worry about any internal hassle, but to focus on the clients and deliver what is best for them.’
Four months after the merger was approved by the UK FCA, the real estate team launched Aberdeen Standard European Logistics Income investment trust. ‘It was a time when other competing products were on the market, and we were the only one who was successful to launch the product. That was a great team effort. There was trust from the market in us. Our boots-on-the-ground capability around Europe is very highly regarded, and of course the sector was right given that yield compression has been very strong,’ he explains. The firm has since invested all the trust’s capital in 16 months on €280 mln of assets and returned to the market for additional funds by issuing new share capital this year.
Vanhanen itemises further successes showing the faith investors have placed in the real estate team.
In March 2018, the firm held the first close of nearly €400 mln for a new residential property fund that subsequently reached €750 mln of assets and which could reach €1 bn in two years’ time. The company has €7.5 bn of residential property overall.
Then there has been the launch of a geared Norway balanced property fund as a sister to an ungeared fund that Aberdeen launched 10 years ago. (That older fund is just short of €1 bn; the new fund is around €100 mln in size so far.) And, its European balanced property strategy has reached the €1 bn milestone.
On the indirect property side, its multi-manager business won a global fund mandate from an undisclosed Asian investor for nearly $1 bn, just over half of which has been deployed. Furthermore, the multi-manager team won a €300 mln mandate from Swedish insurance group Folksam, extending a long-term relationship first set up by Aberdeen Asset Management.
This is European success, but given ASI’s global aspirations, what of Asia and North America?
Well, in North America a deal has been completed that was announced prior to the merger by Aberdeen Asset Management to acquire Alpine Woods Capital Investors. Alpine is a multi-asset firm with $3.6 bn of investments including real estate. The company has a closed-end fund called Alpine Global Premier Properties and two mutual property funds.
Meanwhile, in Asia, the most eye-catching development has been the acquisition this year of Orion Partners, which manages $900 mln of direct real estate in Asia for international investors. It was bought for an undisclosed fee from Orion’s senior management team and BNP Paribas Capital Partners, which owned a 24.9% stake. With an investment team in Tokyo, Seoul and Singapore (where ASI already had an indirect property team) and back office staff in Hong Kong, this acquisition is seen as a big move to expand the direct investing capability in Asia Pacific.
The company has nurtured ambitions to expand its direct real estate capability into Asia for a long time, explains Vanhanen, but the Global Financial Crisis of 2008 and the immediate aftermath of the recent merger delayed progress.
‘The acquisition of Orion is a very important step forward,’ he says. Orion already had four direct real estate products in Japan investing into the assisted elderly care sector. ‘There’s a good track record, and this is supporting our living sector focus. If you think about that, we have experience now from day care centres to assisted elderly care, micro living, student housing, and PRS. We can offer those capabilities to our clients.’
He adds: ‘It is interesting that some international investors had told Orion during their fundraising process that it was too small. Now it is part of a bigger family, at least two investors have indicated they will top up.’
In addition to the Orion platform, Aberdeen Standard Investments has formed a joint venture with Sumitomo Mitsui Trust Bank for value-added residential real estate investment in Japan and other mature Asia Pacific markets.
Separation of duties
At the time of merger, some cynics pondered whether Vanhanen or Paine would be the first to leave or be fired. However, the impression given by Vanhanen is the global co-head structure for the real estate business will persist.
‘We are like foxhole buddies!’ he quips. ‘We both recognised early on that we needed to give up something to generate more together. We split the responsibilities and have shared responsibility overall.’
Paine is responsible for the UK business and direct real estate in Asia as well as REITs, while Vanhanen is in charge of Europe including the Nordics, the Americas, and the real estate multi-manager business.
Vanhanen confesses: ‘That maybe was the toughest part of our conversation - making the split. But like I said, we have spent so much time together and we understand and respect each other. And we have good people. It is not just me and David. We have a very capable leadership team like Andy Creighton, Mike Hannigan, Kang Puay-Ju, Andy Allen, and Claire George backed up by 320 people in real estate in front office investments and back office.’
Job losses and departures have been fairly minimal because it is only really in the UK that overlaps were present. Vanhanen says that as with any merger, there are always different reactions internally. They range from those that immediately cheer ‘Let’s go, ASI!’ (Vanhanen is clearly in that camp) to those that would prefer the status quo. For those with UK-focused jobs, it has perhaps been a slight challenge given Brexit has meant a reduced focus on the country and ASI’s increased commitment to global growth.
The market perception is that Aberdeen Asset Management operated quite a decentralised model with a focus on core/ core plus strategies and boots-on-the-ground in the UK and Continental Europe, notably being very strong in the Nordics. Standard Life’s model was more centralised with Paris serving as the only Continental Europe office. It was regarded as pursuing a more value-added, IRR-driven property business for clients.
Plenty of hard work has gone into integrating both teams to produce one single investment approach.
‘We had our own styles, and neither was broken. But combining the two together has been very powerful, and a kind of differentiator,’ he says.
Vanhanen sums up the new approach as follows: ‘We are market-aware stock pickers and active asset managers with ESG fully-embodied.’
In Vanhanen’s opinion, all the effort that has gone into the entire new investment process makes it stronger than what came before it.
UK retail blot
It seems a shame that for all that work and progress, ASI has been in the property press more for the problems surrounding its UK retail investments. Some 62% of its real estate capability is in the UK direct real estate market where institutional demand has weakened due to Brexit. More specifically, 34% of its global assets are in retail – the biggest single sector. Of course, not all retail is bad per se, but the company’s UK-specific SLI Shopping Centre strategy and SLI Retail Warehouse strategy have suffered and there have been some sales.
‘What we cannot manage is the markets, but we can control and be proactive with our own actions,’ says Vanhanen. Last year the company created a working group dedicated to UK retail assets that analysed the entire portfolio, categorising risks. The group measured the impact CVAs had on rental income and what would happen if certain retailers went bust. Would there be demand for the space, and, if there was no demand, could there be an alternative use? If not, should that asset be sold?
The company has since encouraged similar analysis across all of its global markets where it owns retail property. ‘We have challenged our teams to assess whether an asset plays a role in the wider portfolio anymore.’ But ASI still will invest in retail for the right opportunity.
Despite negative headlines about its retail holdings and also about the success or otherwise of the merger at group level, it seems recruitment is not a problem.
The company has just hired a head of real estate research in the US among a high-calibre field of candidates and is looking to fill the position of head of real estate for the Americas.
IT, Brexit and fees
Vanhanen notes every company has its challenges. Perhaps the IT integration has not been as slick as it could have been. As an industry, there is pressure on fees. Brexit is an issue, and there is the retail property blot. But those outside the organisation are sometimes better able to see the bigger picture of growth and potential. Vanhanen himself seems pumped up. He loves meeting clients, is a ‘people person’ and likes going to the company’s offices for ‘town hall meetings’ to talk about the direction of the company and the growth planned for ASI’s private markets group, which he says will become more evident in due course.
He has reason to feel optimistic, citing performance to have been ‘very solid’ in one, three and five-year metrics (except for some retail). About 60% of the company’s products and mandates are performing above target.
Last year, the group hit total direct transactions of €5 bn - both buying and selling. In the UK it was a net seller and in mainland Europe a net buyer.
Vanhanen says all-in-all it is a ‘good story’. The next step is to do something big in the US and continue organic growth in Europe and in Asia. In Asia it is launching a new Winning Cities strategy. Meanwhile in Europe, there will be a European long-income fund to match the UK where it has had such a product for 16 years. A pan-Europe residential value-added product is also in the works and talks are thought to be under way with investors about a push into debt investing in Continental Europe to add to its UK offer.
‘Investors are encouraged and support our programme and our product strategies. That’s how I know that we are doing the right things. But you need to earn your credits every day, so it is hard work!’
Pertti Vanhanen biography
Pertti Vanhanen is global co-head of real estate, having been head of real estate at Aberdeen Asset Management. He has experience of mergers: in 1996, he was appointed CEO at Kiinteistovarma, a new group of amalgamated Finnish pension funds and insurance companies’ real estate management activities. Four years later, he was invited to do the same with a different pension insurance group’s real estate management activities, Ilmarinen Pension insurance. That company was taken over by Aberdeen Asset Management in 2001 where he has been ever since.
David Paine biography
David Paine is global co-head of real estate and has been with Standard Life since 1982, becoming global head of property in 2010. He too has experience of mergers, chiefly when Standard Life took over Ignis Asset Management in 2014.
ESG taken to a ‘new level’
ASI has various real estate and group-level tools for forecasting investing in real estate and other asset classes. There are different tools for the different types of mandates, but embedded within them all is Environmental, Social and Governance (ESG) criteria. ESG has become a huge factor at ASI and is something Vanhanen passionately believes differentiates the group. ‘We have taken ESG to a totally new level,’ he says.
ESG professionals sit on the real estate investment committee with the power to veto transactions. ‘We cannot buy a single real estate asset without having ESG sign-off. That’s a really serious approach. It is not like a rubber stamping. They really are part of the investment team.’ He adds they are able to add a ‘Can we?’ approach to investments when considering ESG angles to fresh acquisitions.
According to the global co-head of real estate, the company receives questions from clients all the time about ESG: ‘How do you standardise, how far do you go, do you want to only do the minimum or do you want to do more than that?’
The answer is ESG is fully integrated. The company has a new tool called the ESG Real Estate Impact Dial that has been developed with the help of external consultants to be used in discussion with clients to build a portfolio.
Vanhanen shows a whole slide called ‘Global Forces for Change’ guiding ESG prioritisation at fund and asset level. It mentions several factors such as the environment and climate (e.g. growing demand for food, water and energy, plastic oceans, crop failures, habitat loss, soil degradation, waste especially food) governance and engagement (e.g. persistent inequality); demographics (e.g. densification of cities, post-secondary education, trade liberalisation); and technology and infrastructure (including 3D printing, energy storage, cyber security and machine learning).
Six recently announced transactions in 2019
- Aberdeen Standard Investments’ European Balance Property fund acquired Torre Auditori, a multi-let office in Barcelona for €98 mln, taking the fund to €1 bn of assets. The fund has around 50 investors.
- A pre-existing joint venture with Nordic micro-living and student housing specialist Ailon Group announced a plan to deliver 5,000 units in the next three years.
- The firm’s lending arm provided £75 mln (€85 mln) to UK Reit RDI to refinance a London-serviced office portfolio.
- It sold 153-159 Buchanon Street, a prime retail-led property in Glasgow, to AEW for £33 mln (€38 mln).
- Its European Real Estate Club II sold the Ingelsta Retail Park in Sweden for €70 mln to German investor, Deka Immobilien.
- Its European Property Growth Fund agreed to forward-fund a new 43,000 m2 distribution centre in Venlo in the Netherlands.