CBRE GI’s new man in Europe

Five years after the takeover of ING, fund manager CBRE Global Investors has a new man in Europe and the challenge of deploying capital in a low-yield environment. David Hatcher reports. Portrait by Louise Haywood-Schiefer Back in 2011, the real estate world saw a remarkable management merger – CBRE Global Investors’ takeover of ING Real Estate Investment Management. It formed a colossus with $94.8bn (£76.4bn) of assets under management. At the time, it was broadly predicted to be the precursor to a flurry of fund management M&A activity. Efficiencies of scale and the rising cost of regulation meant investment bankers were in for a busy time, or so the pub chat went. And, while there have been a couple of notable exceptions in the form of Blackrock’s purchase of MGPA and Ares buying AREA, those forecasts have largely been wrong. The relative inactivity is an indication of just how hard such deals are to pull off. Staff overlaps, displeasure among clients, and compliance and regulatory headaches over change of controls are all issues that have dissuaded potential suitors in the interim. Five years on, CBRE GI has a new man at the helm in Europe. Jeremy Plummer took over from Pieter Hendrikse in April. Its journey since the ING deal is a rare point of reference for any others considering a fund management merger as to the benefits and the pitfalls. Now, with $31.3bn of assets under management in Europe, CBRE GI is at the forefront of the region’s capital flow trends and is pushing the boundaries of efficient and modern fund management. For Plummer, this means running fewer but larger funds, being more selective about taking on separate account mandates, and streamlining advisory partners. Expect broader strategies, a more diverse collection of assets, smaller pension fund clients being shepherded into pooled funds, and the number of agents and lawyers the company uses to be cut back. “As soon as there’s been an M&A transaction, investors tend to stop committing capital; they wait and see. They’re concerned there’s going to be instability and they want that to settle,” says Plummer. “We were to some extent in the penalty box following the ING deal. We looked at how much capital we raised in the subsequent 12 months and it was way below what we would normally raise, so it stalled our growth, and then we picked up again soon afterwards.” Caution shown by investors is “quite reasonable”, according to Plummer, and CBRE GI had to work hard to persuade them to keep investing with them. “You’ve got to demonstrate that you have a stable organisation and you’re continuing to deliver on your programmes. Investors tend to be most concerned about the team of a programme in the end, so if they see that team has gone through the corporate change and got continuity, then business resumes.” With the business digested, CBRE GI has the opportunity to make hay. Its latest mantra is “simplify to grow”, which means fewer strategies or funds but those that exist are bigger. Grouping capital into bigger pots allows CBRE GI to purchase larger assets that fewer rivals can compete to buy, and manage them more efficiently. In Europe specifically, it has three broad strategies for both its pooled funds and separate account mandates: core/core+, value-add and its $15.2bn Global Investment Partners arm, which partners with local asset managers that Plummer also heads and co-founded. Pooled funds and separate accounts make up around half each of CBRE GI’s EMEA assets under management. “The ING business had 35 funds in Europe which were very granular with specific strategies. For every strategy, there was a different fund. “In the pre-crisis era, that’s what the market wanted – a Spanish shopping centre fund or a French residential fund or such like. [caption id="attachment_867562" align="alignright" width="570"] CBRE GI’s largest deals of 2016 have included the Hieronymus Heyerdahls Gate office building in Oslo for €97m[/caption] “Investors now just want simplicity and, in most cases, they want relatively low-risk simplicity as well, so there’s far more demand for a pan-European strategy than there was with the old model.” Clients are now often preferring or being encouraged to invest into co-mingled funds rather than have their accounts managed individually. This means the threshold for CBRE GI taking on separate account mandates is increasing, and some investors in co-mingled funds are investing as much as $200m. “Investors are often realising they need a bigger team to go and sift through lots of specialist strategies, and doing that doesn’t necessarily add any value. Just investing in two or three pan-European diversified funds often gets the same or a better result,” says Plummer. “If we said we weren’t going to accept any separate accounts, just pooled funds, you’d be constricting your scale and you wouldn’t necessarily afford to have the best people on the ground. “There will be investors though who are in a marginal size category where we would say, ‘Frankly, you’re going to get a better result if you go in a [pooled] fund and you’re not really big enough to be a separate account.’ So there will be some that we’ll actually need to turn away.” As a result of this trend, Plummer expects a handful of extra European core funds to emerge to join those already dominant managers. This will lead to investors that have to queue to get into the most popular funds having their heads turned and investing into emerging vehicles, as has been seen in the US. He predicts this will also lead to boutique firms picking up smaller mandates that still demand to be managed separately. [caption id="attachment_867563" align="alignright" width="300"] Waterstones’ flagship store on Piccadilly, W1 was acquired for £92m[/caption] “Investors need to have some choice,” he says. “In the longer term, the market will be stronger if there’s more than three credible propositions, and there will be. That will definitely evolve.” CBRE GI is utilising its global network to transport capital in as many diverse directions as possible and adapting as investors become more familiar with non-domestic jurisdictions. “The business, pre-ING, was predominantly US investors investing in the US and a bit internationally, and UK investors investing nominally in the UK. ING brought in a lot of Dutch investors and a more international investor base. With the continental and Asian presence, now we have a global footprint,” says Plummer. Investors are no longer meeting their stereotypes in terms of their return requirements and preferences, and the adage of US investors predominantly looking for private equity returns and Far East investors only buying core is becoming outdated. “There are clear signs of US investors having a requirement for European core, and a recognition that there’s something to be gained from diverse buying in the core sector. There are higher cash-on-cash yields that we have internationally than domestically for the US investor,” he says. “The first Asian wave of capital was kind of the opposite, looking for four or five super big assets and very London-focused, whereas the Asian capital now has definitely broadened its interest both geographically and probably in its willingness to embrace different things.” Hitting the targets With plenty of investors wanting to give cash to CBRE GI to invest, the biggest challenge is deploying it, particularly with many markets trading at record low yields because of low returns on bonds. As a result, it is expected CBRE GI will deploy around €3.5bn (£3bn)of capital in Europe this year, down from €4bn last year. With such a steamy market, the company is targeting four main areas – fortress malls, logistics, “tactical” offices and residential, including student accommodation. “We are very much focused on the fortress centres where retailers will unquestionably want to be, and that is becoming a smaller and smaller preference. The second is the big structural growth in logistics which is the flip side of the retail story, and we’re big investors in both existing assets and developed strategies because there’s just a fundamental shortage of the right product,” says Plummer. “Offices is a much more tactical view of each market rather than any structural shift, so it’s about where there is still value based on where the rent cycle is. We’ve been recently moving aggressively away from London, we’ve played Dublin as a recovery story, and we see some good value at the prime end of the Dutch market. We’ve also been big funders of student accommodation in the UK and on the Continent as a pan-European play.” Buying into assets where there is a belief that there is fundamental, structural reason will help protect managers from any economic slowdown, but Plummer admits he feels that the market in general is “late cycle”. “In the near term, it does look certainly in Europe as though there’s very little upward pressure on [interest] rates, so that’s the mindset that a lot of investors are getting into. On that basis, some of these very low yields that are being paid actually make sense for low-risk institutional capital looking for some kind of yield,” he says. The signs that there could be a slowdown coming are from the world’s largest economy and the global base of CBRE GI. “I think there are warning signs starting to show in the US and some of its real estate cycles have come to an end. We’re very definitely watching US unemployment, the capacity in the US real economy, and at what point that actually becomes inflationary, which will translate into interest rate changes in the US. Ultimately, that will herald the slowdown of the business cycle because timing in the US will basically be the timing for all of us.” As CBRE GI deploys capital in the future, it is expected it will be more selective with the advisory partners it uses. With the company steadily expanding its geographical stretch, so too will its need for its advisory partners such as agents and lawyers to match its capabilities. “We work with a huge number of outsourced service providers in different countries and I think five years from now, we’ll work with fewer,” says Plummer. “We want to have a deeper relationship with our downstream service providers, which will ultimately be a better value proposition for our investors.” CBRE GI’s merger with ING may have taken some time to digest and, for any companies looking to replicate such a deal, managing clients and dealing with overlaps is a daunting prospect. But with only the biggest firms able to capitalise on economies of scale, rival managers will surely be thinking about making similar moves.