While supply & demand dynamics seemed more balanced than in Infrastructure, European Real Estate continued to attract increasing levels of both equity and debt capital. The lack of directional consistency in Europe’s economic outlook and the geopolitical uncertainties of Ukraine and the Middle East did little to deter strong demand for core assets and also secondary assets with good income quality. As interest rates fell during the year investors increasingly sought to lock in the positive leverage on income they could extract from the high positive gap between core asset yields and debt costs. We can’t recall a period during the past 25 years where such a meaningful positive gap existed for a sufficiently long time to allow investors to build income-focused portfolios of geared, core assets for long term hold. We expect this trend to continue in 2015 and to be a key contributor to capital value growth for core and good quality secondary assets with strong income profiles. However, in our opinion, the continued bullish performance forecasts in the real estate investment markets do not take into account the fragility of the occupational markets across most European countries, and renewed economic weakness could derail the predictions.
During 2014, we continued our selective and cautious investment approach of investing in, stabilising and repositioning, previously under-capitalised assets located in the larger, robust economies of the UK, Germany and France, with a view to selling the resulting core properties back into mainstream, yield-seeking investment markets. The success of our strategy in Europe is evidenced by our successful capital raising for our third European value-add fund, raising £475m (US$750m), giving us aggregate investment capacity in excess of US$1.5bn. Nearly half of the capital is already committed with the first exit planned for Q1 2015. The assets we acquired during 2014, mostly secured in off-market transactions, are typically in the US$100–150m gross asset value range and capable of conversion into core or high quality secondary institutional assets. The pipeline of transactions for which we have secured exclusivity suggests that we can continue to put capital to work on attractive terms in 2015.
Early in 2014 we made our third exit from our first China RE fund, realising over US$200m from the sale of our 50% share in a mixed-use office and retail project in Guangzhou. Further realisations are in progress and we anticipate to have repaid in excess of 90% of the invested capital before this summer. Despite adverse headlines on slowing economic activity, we see lower growth as more sustainable and the Chinese authorities’ determination to eliminate corruption as very positive steps for a more transparent long term investment in this country. As a highly experienced manager of real estate in China with over US$1bn of equity deployed since 2007, we remain convinced that the market still offers value, with particular opportunities at present to invest in mezzanine structures given the economic backdrop and policy responses.
The imbalance between investor demand for infrastructure on the one hand and supply of good investment opportunities on the other has become even more pronounced this year as the global universe of investible assets cannot keep pace with the level of capital committed to the asset class. Preqin estimates some US$100bn+ of dry-powder in unlisted funds alone and a research project we conducted last autumn highlighted that the weight of capital looking to be deployed in infrastructure assets had built up to a level of 14x the annual long term average of new investment into the sector. Institutional investors are increasingly struggling to identify adequately priced investment opportunities.
As one of the largest and most experienced market participants (the 10th largest manager of infrastructure assets globally and the largest in Europe according to PEI Media), InfraRed continues to prioritise pricing and transaction structuring discipline over growth. Nevertheless, we continue to deploy capital selectively, leveraging our reputation for reliable project delivery. We often seek the more complex, less competed transactions which are typically beyond the capabilities of less experienced investors. The two listed infrastructure funds we advise and source investment for (HICL Infrastructure Company Ltd (www.hicl.com) in social and transport infrastructure and The Renewables Infrastructure Group Ltd (www.trig-ltd.com) in renewable energy) also continue to deliver strong performance, despite the competitive environment, supported by their stable, long-duration cashflows. Renewables infrastructure is one of the most rapidly growing segments of the infrastructure asset class due to the long term structural changes in the power market, especially in North Western Europe, and we expect to remain at the forefront of this trend in both the private as well as the listed market.