Top 100 Real Estate Investment Managers - Leaders of the pack

Brookfield, CBRE Global Investors and Blackstone top this year’s survey. Christoper O’Dea looks at the stories behind their growth

Brookfield Asset Management is the largest real estate investment manager in the world, according to IP Real Estate’s Top 100 survey, followed by CBRE Global Investors and Blackstone. The narratives behind these three behemoths are distinct, demonstrating that there is more than one path to global predominance.

Brookfield has more than 100 years of history, but has renewed itself in recent years. CBRE Global Investors – born out of the industry’s first major post-2008 merger – is targeting tailored solutions for big clients on a global scale. Blackstone, a household name in private equity, has found success in growing its real estate operations, spreading its roots into an ever-wider span of markets and strategies. 

Brookfield: marrying scale with hands-on expertise
By spinning off Brookfield Property Partners and subsequently merging Brookfield Office Properties into the new listed company, Toronto-based parent Brookfield Asset Management has created a €92.1bn real estate investment company focused on generating returns through an operations-oriented approach that Brookfield CIO Brian Kingston calls “hands-on real estate”.

Brookfield is known for acquiring high-quality assets and increasing cash flows through a combination of lease renewals, redevelopment and increasing occupancy. “We like to buy core assets on an opportunistic basis,” says Kingston.

Office property is the largest part of the portfolio, generating $170m (€132m) of the $217m in fully diluted funds from operations, Brookfield Property Partners reported for Q2 2014. Key assets in North America include the World Financial Center in New York, now called Brookfield Place, and Bank of America Plaza in Los Angeles. There are two primary ways to unlock value, Kingston says – acquiring an asset at a favourable price, or being able to operate it more efficiently. The company realised that to maintain that strategy it would need the ability to bid on properties where there was little competition – and that meant big deals.

So the underlying goal of the reorganisation was to allow Brookfield to mobilise large pools of capital – including both institutional and public-market funding – on a consistent, predictable basis. “We don’t want to buy quality property at a quality cap rate,” says Kingston. That means “pursuing large-scale acquisitions where there are fewer competitors”, he says.

But you will not find Brookfield bidding for trophy towers in gateway markets. Kingston cites Brookfield’s leadership of the $8bn recapitalisation of General Growth Properties in 2009, which gave Brookfield a significant position in a retail platform of high-quality regional malls at a substantial discount to stabilised net asset value – properties that Kingston estimated would trade at a 4% cap rate today.

For much of its history, Brookfield entities invested with partners, often using its balance sheet as the anchor for transactions. But the partnership model “limits how quickly you can move, and the size of transactions you can pursue, because you don’t know how much capital you’ll have at a given time”, says Kingston. The company launched its first fund 20 years ago to start formalising those partnerships, and today the company has achieved “size and certainty of capital”, says Kingston. Brookfield Property Partners is the listed entity that taps public retail capital, while Brookfield’s flagship global private fund taps institutional capital. The Canadian parent of Brookfield Property Partners, Brookfield Asset Management, owns about two thirds of the company. The arrangement provides investors access to core, value-add and opportunistic real estate strategies. “We’re focused on growing our relationships with key investment partners across the globe who are interested in directly investing significant capital into the real estate sector alongside us,” says Kingston.

Brookfield’s investment team includes about 250 professionals dedicated to sourcing and executing acquisitions. They work in synergy with operating teams that provide detailed market and property-level expertise, rounding out Brookfield’s hands-on approach. Operating personnel are “heavily involved in the underwriting process,” says Kingston. This gives the investment team “better information, and better confidence, about the assumptions about leasing, refurbishment” and other strategies for increasing cash flow from assets. Perhaps most importantly, the operating executives also act as deal scouts. “More often than not, they source some of our best ideas,” says Kingston.

Increasingly, the best ideas for Brookfield arise outside the US. About a year ago, Brookfield embarked on an expansion in Europe, seeking specialist office and retail property businesses to serve as platforms for acquisitions. It is also moving into industrial and warehouse markets, acquiring London-based Gazeley from Dubai World as the anchor for that effort. The European push is a major new venture for Brookfield, whose assets are concentrated in North America. At present, its activity is focused on traditional high-end projects – it is building two towers in the City, and owns 20% of Canary Wharf.

“There’s a significant need to de-lever” property companies in Europe, says Kingston. But the unexpected strength of Spain’s sovereign debt market and a flood of global capital into Spanish property shows why Brookfield is seeking to find deals with few competitors. As Brookfield says, “these things can change very quickly”. 

In May, Brookfield Property Partners realised a $43m gain on a $320m debt investment in the Spanish office company Immobiliaria Colonial. With institutional partners, Brookfield had acquired $1bn of debt at an average 12% discount to face value. “When we made this investment, beginning in late-2013, our strategy was to lead a recapitalisation in which we converted our debt into an equity stake” in Colonial, says Brookfield Property Partners’ Q2 report. “However, valuations in Spain have increased to levels at which we did not believe we could earn our targeted returns,” Kingston says. A competing consortium acquired Colonial and repaid the debt at par plus accrued interest. While the company would have preferred to hold, “overall we were very happy with the IRR”, says Kingston. “No one ever went broke taking a profit.” 

With several institutional partners in April, Brookfield invested approximately $346m of equity to acquire a portfolio of six office parks in India that were majority owned by Unitech Corporate Parks (UCP), an AIM-listed entity. Primarily located in the National Capital Region and Kolkata markets, the parks total 16.8m sqft. The office parks that are in operation or under construction, totalling 13.8m sqft, are approximately 73% leased predominantly to multinationals based in Europe and the US. Shareholders of UCP, which owns 60% of Unitech, approved the transaction over the summer. “This was quite a complex transaction,” says Kingston, “involving the privatisation of a public company [UCP] and negotiating a settlement with a lender with a 40% interest in the project that had foreclosed.” And with a 15% cap rate, the deal meets Brookfield’s goal of buying core assets at an opportunistic price.

Brookfield is heading into 2015 with tempered optimism. “It’s always a good time to buy real estate,” says Kingston. “The challenge is to decide where.” The Unitech deal was attractive in part because India is out of favour with many institutional real estate investors. “There’s a lot of capital out there and it’s very competitive,” says Kingston. 

CBRE GI: analysing markets, tailoring mandates
There are many paths to investment success. The one CBRE Global Investors has chosen is to integrate its intensive real estate research with its deep understanding of the needs of major institutional investors. “We just know real estate,” says CEO Matthew Khourie. Khourie knows the business from the ground up, having previously led investment and development in the south-east of the US for CBRE’s development unit.

A significant portion of the $92.8bn in assets under management is in the form of separate accounts tailored to client-specific mandates. Members of the investment team, which numbers about 1,000 professionals, are on the ground in 21 countries around the world, arguably giving the firm the broadest coverage in the business. Investment analysis is supported by a dedicated team of 25 real estate researchers, and investment strategies in 27 countries cover the full risk spectrum. “We map expected returns in each country and product type with a series of risk measures for each strategy,” says Khourie.

The result is a series of vehicles in which CBRE customises investment strategies across geography, risk-reward parameters and sectors. In the US, for example, the US managed-accounts acquisitions team buys office, industrial, multifamily and retail investments on both a direct and joint-venture basis. Investments are made in high-quality core, core-plus and value-added properties, with the primary focus on office, industrial and multifamily properties in major markets with strong economic fundamentals.

Strategic Partners US, for instance, is a series of fully discretionary, closed-ended investment funds that pursue value-added and opportunistic investment strategies in major and secondary US markets. Strategic Partners US employs a focused investment strategy – to purchase, reposition and sell institutional-quality real estate in select US markets. Founded in 2000, Strategic Partners is operated by a 25-member investment team that has completed more than 160 investments totalling over $14bn.

In late-2010, CBRE Global Investors strengthened its investment expertise, appointing an independent investment committee member for the Americas. That role is filled today by Alice Connell, a former managing director at TIAA-CREF. Connell provides an “objective third-party perspective as she assists in evaluating and approving major investment decisions for investment vehicles, including the Strategic Partners US”, according to the announcement of her appointment last year.

While the revenue of CBRE Global Investors makes up close to 6% of the total of parent CBRE Group, being part of the world’s biggest real estate company is a positive. “CBREGI benefits from having a parent company, CB Richard Ellis, which is one of the largest real estate services organisations in the world,” according to a memo from Hewitt Ennis Knupp to the board of trustees of the San Diego City Employees’ Retirement System (SDCERS). “This relationship allows CBREGI to stand out from its peers,” the memo says. “The firm is able to access the larger parent for services, deal sourcing, and market intelligence.”

The direct investment business is composed of $16.6bn in the US, $35.8bn in EMEA, and $2bn in Asia, according to CBRE’s September investor presentation. Global Investors also has a securities business – CBRE Clarion Securities – which manages $25.4bn in listed issues across three real estate strategies and two infrastructure strategies.

The business is rounded out by CBRE Global Investment Partners, the recently renamed multi-manager business, which now concentrates on joint ventures, co-investments and secondary-market limited partnership. 

CBRE Global Investors raised approximately $3.2bn of new equity capital in the second quarter of 2014, bringing the total at the middle of 2014 to $4.4bn – nearly matching the $5bn raised last year. In June, for example, the firm said it had secured commitments of up to $470m targeting opportunistic investments in China.

One key initiative is the ongoing fundraising for CBRE Strategic Partners US Value VII, a non-core, diversified fund that will focus on the conversion of under-managed or distressed assets to core assets, while also focusing on preservation of capital, according to SDCERS in March. Fund VII is targeting $1.5bn in commitments. Pension funds that have reportedly invested include a commitment of up to $35m from the Illinois Municipal Retirement Fund, which has committed up to $155m to other CBRE funds, a $40m commitment from the Kansas Public Employees Retirement System, and a $20m commitment by SDCERS.

As important as funds are, winning cross-border separate accounts will make an increasingly large contribution to the firm’s progress. Even as capital-gathering was under way for Fund VII, CBRE Global Investors was adding mandates, including a $169m mandate from Korea Post to acquire a trophy asset in Chicago. A number of large Asian insurance companies earlier this year awarded the company a €145m discretionary mandate to build a portfolio of core and core-plus real estate in Europe and the US. The mandate engages the broad platform, targeting both debt and equity investments across 25 markets in the UK, US, France and Germany. “Development of our separate accounts platform in all global regions is an important strategic focus for us,” says Khourie, “with a particular emphasis on cross-border capital”.

It has been a strategic priority since the firm’s direct business platform won its first global separate account in October 2013, a €500m mandate for global investment from Bayerische Versorgungskammer (BVK), Germany’s largest public pension group with more than €60bn AUM.  Norman Fackelmann, head of real estate investment management at the Munich-based public pension group, wants the global separate account to complement the fund’s core portfolio and diversify its exposure to the asset class by targeting property types across geographies, capital structures and risk profiles.

While the essence of separate accounts is to reflect client-specific needs, some general trends are emerging. “Many of the US institutional capital sources are trying to move up the risk curve,” Khourie says. Most pension funds in the US are seeking a total return of about 8%, net of fees, and “it’s hard to get that kind of return if you stay in a strict core space”, he says. The price of many core assets, especially in US gateway markets, has been bid up so much that pension funds are unable to compete in the sector as effectively, so they are looking to core-plus and value-added opportunities in the US and Europe, where real estate is in an earlier stage of recovery, he says.

As for Asian investors, those from Japan, Korea and Malaysian, are “really interested in current yield – that’s their most important metric”, says Khourie. “They’re looking in some EU markets, and also starting to move to next-tier markets in the US, which offer core opportunities at yields of 100-150bps better than in richly-priced gateway markets. EU capital sources in the past 12-8 months have started investing again after a multi-year slowdown, he says. Many major capital sources have been “fairly hesitant to lay out big new capital investments”, and the debt crisis left its mark on the property investment sector. While looking at strategies ranging from core to value-added, the Europeans remain cautious. “They really want to see moderate leverage in transactions,” says Khourie – typically no more than 35% to 40%.

But one trend is clear. “In every region of the world we see major capital sources allocating more to real assets – that includes real estate and infrastructure,” says Khourie. He expects CBRE Global Investors to deploy a near-record amount of capital this year – perhaps as much as $9bn. Major US institutional investors such as pension funds are raising allocations to real assets from less than 10% to between 10% and 15% of their assets. “That’s a pretty sizable dollar volume,” he says. In Asia, institutions have typically had much lower allocations. While many will still have less than 10% of their assets devoted to real estate, they’re catching up, with many ramping up by two to three percentage points. “The Japanese are just starting to stick their toe in the water,” says Khourie. 

Blackstone: peerless scale puts the company in fast lane
Blackstone now manages more than $81bn in real estate assets, and since the financial crisis has deployed more than $34bn in invested and committed capital. In its eight flagship funds raised since 1991 – totalling nearly $32bn – Blackstone Real Estate Partners, (BREP), has produced a 17% net internal rate of return. This does not include BREP’s regional funds, co-investments, and the $9bn managed in Blackstone Real Estate Debt Strategies vehicles. The debt investing business, BREDS, was formed in 2008 to capitalise on opportunities as banks retreated from providing real estate debt.

The composition of Blackstone’s real estate assets has changed dramatically since 2007, reflecting the firm’s ability to adapt to market conditions while maintaining performance. According to the firm’s June Investor Day presentation, in 2007, it managed $26bn in three segments – BREP, BREP Europe and co-investments. By 2014, the business encompassed six channels, having added Asia funds, the debt business and, most recently, a core-plus strategy. The latter marked Blackstone’s entry into the biggest part of the institutional market. During that period, the mainstay BREP funds declined from 85% of Blackstone’s real estate business to just 53% of AUM.

Distributions to real estate limited partners are on the rise, and Blackstone expects them to accelerate. It made $932m in Q1 2013, $7.3bn in the whole of 2013 and $2.1bn in Q1 2014. The BREP business is sitting on $21bn in unrealised portfolio gains that are concentrated in public holdings and an office portfolio in liquidation. In September, Blackstone also took the first step towards realising gains in its industrial portfolio, filing registration documents for an initial public offering of Indcor Properties, a unit formed in 2010 that owns 110m sqft of industrial space and is expected to reach an $8bn valuation.

All this is managed by a team of 270 investment professionals located around the world. Decisions are made by one investment committee that oversees a process that has been in place since the firm started investing in real estate. In the “highly iterative” approach, each deal team gets advice from Blackstone’s senior investment professionals as transactions develop, so proposals have been substantively vetted by the time they reach the investment committee. This avoids having the investment committee send deals back for further negotiation – or worse, accepting deals with less-than-optimal terms. “Investment teams show up with a deal fully baked,” the source says. “A memo doesn’t get dropped on a desk on Friday for a meeting on Monday where the committee says ‘OK, but we wish we had better terms’.”

Blackstone has bought numerous operating firms in order to secure exclusive control over operating partners. Blackstone opts against the joint venture approach often used in major deals, the sources say, because in JVs “you control their staff”. Blackstone uses a private-equity style approach in real estate. “Rather than working with a series of partners, they only work with Blackstone.”

Analysts say that real estate is one of the main alternative asset classes in which Blackstone has built a business of scale. “Blackstone is unique among publicly traded alternative asset managers in that it has scale across multiple key asset areas,” including real estate, according to a recent research note on Blackstone by Morningstar analyst Stephen Ellis. With access to more than 1,300 limited partners and more than 900 investment professionals, “Blackstone is nearly always a contender for new assets,” he says. Morningstar says 60-70% of Blackstone’s limited partners invest in more than one fund, and about 20% invest across all four major Blackstone divisions, a sign of a very strong cross-selling platform. And because of the broader scale of Blackstone’s operations, “the firm is able to better anticipate limited partner desires, and develop or acquire new strategies ahead of peers, as well as put more money behind their best investments due to idea sharing”.

That awareness was instrumental in Blackstone’s launch of a core-plus strategy in 2013, which some analysts say has already garnered $2bn and could grow to $100bn within 10 years. The core-plus strategy was a response to a client that asked the firm to adapt its expertise in opportunistic investing to the core space. Blackstone has a track record of creating global-scale investment firms, having spawned BlackRock as a risk management and fixed income shop, which is now the world’s largest money-management firm.

A multiplicity of client connections positions the firm to survive what Morningstar says will be a sharp culling of manager rosters. “Institutional investors, particularly pension funds, are generally seeking to cull their list of private equity managers, by two thirds in some cases,” says Morningstar. “Blackstone is typically one of the few managers left standing.” More broadly, a strong track record and availability on investment platforms raise barriers to entry. “In some ways,” says Morningstar, “we think Blackstone is becoming a close substitute for the IBM of the industry, where no one was fired for allocating capital to the company.”

Investors are likely to allocate significant capital to Blackstone, says Morningstar. “We expect Blackstone’s total assets under management to increase to over $450bn by the end of 2017, and close to $500bn in 2018, thanks to the firm’s ability to inbound new capital with aplomb.” There are risks, including several that arise from the real estate business, which “subject it to the risks inherent in the ownership and operation of real estate and related businesses and assets” – primarily illiquidity.

But perhaps more than most traditional real estate managers, Blackstone’s roots in private equity give it an edge in dealing with a major shift that is roiling the investment world – the demise of financial engineering as a sure path to strong performance. “Increasingly, the bulk of value created by private equity funds is through operational changes rather than multiple expansion or incremental leverage,” says Morningstar. Blackstone employs numerous industry captains to quickly and effectively drive operational changes, which “ensures that it can take advantage of the very tight windows that the equity and credit markets offer up for realising investment gains”.

President and COO Tony James is widely acknowledged as a skilled executive and one of the contenders to take over once Stephen Schwarzman retires. “James has been very influential in terms of providing a robust managerial structure as well as creating the firm’s executive committee,” says Morningstar. The result is that “Blackstone’s aggressiveness and size – over $270bn in assets under management – leave it one of the best-positioned alternative asset management firms.”

Blackstone has obtained more than $150bn in new capital since 2011, more than its next-four-largest peers combined, in spite of industry pressures on fees and longer-than-expected time frames for raising capital for new funds. Morningstar says the company’s success at developing new strategies to drive new inflows is impressive: “More than $120bn of its total AUM is now allocated to strategies that didn’t exist at the time of its 2007 IPO.”

Among those are numerous real estate strategies, including the recently launched core-plus strategy, and secondary fund trading activity. Blackstone’s Strategic Partners unit, which it acquired from Credit Suisse in 2013, expects the secondary market for limited partnership interests in private equity funds can double over the next several years, and real estate will play a major part in the expansion of the market. 

Secondary private equity is a niche, inefficient market where current transaction volume represents less than 2% of global private equity exposure, says Blackstone. The firm estimates that the potential supply of saleable limited partnership interests that have not been realised is between $1.5trn and $2.5trn. Strategic Partners expects that transaction volume could reach 4% of global exposure over the next few years, which would result in between $60bn and $80bn of secondary trading, up from $30bn to $40bn today.

The firm increased its focus on real estate secondaries investing this summer with the addition of Mark Burton as principal. Burton will spearhead deployment of the final tranches of the $211m Strategic Partners Fund V RE. The plan is to launch a sixth real estate secondary fund.

The expansion of strategies is a major reason why Morningstar views Blackstone’s real estate segment as a key contributor to its “wide moat” rating, the research firm’s parlance for high barriers to competition. “The company’s scale in this segment is such that it alone, among its peers, can purchase entire real estate portfolios (or REITs), which gives it access to better investment opportunities than its rivals, which can typically purchase only single buildings.”

Scale gives Blackstone “an edge in situations where distressed sellers are looking to offload a real estate portfolio rather than engage in selling off assets one at a time”, Morningstar says. Two transactions that demonstrated Blackstone’s ability to cut deals that no one else could were its 2007 purchases of Hilton – recently taken public – and Equity Office Properties. Both deals – at $27bn and $39bn, respectively – were “far larger than any other peer could pull together for a real-estate-based transaction”.

With Equity Office Properties, “the firm had the relationships in place to offload $27bn in assets within weeks of the deal closing, immediately earning a solid return”. Morningstar projects those relationships will help Blackstone survive the increasing competition for real estate assets, by allowing the firm to leverage “close contacts with real estate buyers that peers would find nearly impossible to duplicate”.

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