With the European real estate market back on track in terms of investment activity, brokers are shifting the goal posts.

With the European real estate market back on track in terms of investment activity, brokers are shifting the goal posts.

When brokers avoid the question of whether it’s a better time to be a buyer or a seller, you know that the good times have returned. Indeed, investment volumes across Europe were up significantly in 2014 and with just one exception all the players surveyed for our annual brokers ranking increased their share of transaction activity. They are also upbeat about prospects for the current year. ‘The pie is growing everywhere and we aim to take market share in line with that growth,’ commented Mark Ridley, CEO of Savills EMEA, in an interview with PropertyEU.

Appetite for commercial real estate in Europe remains very strong, according to Martin Samworth, CEO of CBRE. ‘The fundamentals for real estate as an asset class are sound and running yields remain attractive relative to other asset classes. This is quite a good time for real estate. We’re seeing an improving debt environment, low interest rates and a sustained flow of international capital.’

But Samworth rejects the notion that the real estate market is moving in the same direction as in the boom years of 2006-2007. ‘It’s not 2007,’ he argued in an interview with PropertyEU. ‘The market today feels very different. If you look at the capital stack, we’re seeing a much higher proportion of equity going into acquisitions and more balanced investment strategies generally. The fundamentals are also different. In the coming year, there’s a strong likelihood that there will be an increase in occupier activity and we’re seeing little oversupply in many CBD locations. We’re (definitely) at a different point in the cycle to 2007.’

The market is also becoming more sophisticated in terms of investment platforms and packages, he added. ‘Investors are buying real estate in a different way and they’re seeing it being packaged in a different way too. They are looking at real estate from different angles and that requires involvement from different departments to holistically provide better services and bring a deal together. More and more, we’re seeing the need to understand the financial structure of an individual asset, how to optimise the capital structures and the sale of the property. We need to offer a range of specialists, not just somebody that has a particular competence.’

Equity raising had 'phenomenal' year
Since the outbreak of the crisis, CBRE and a number of other players including JLL and Cushman & Wakefield have beefed up their corporate finance divisions to tap into this growing demand and the opportunities arising from unravelling real estate debt portfolios. And as some of the larger US investment banks have retreated, newcomers like Brookfield and Eastdil have moved into Europe to offer their capital market expertise on the back of their successful platforms in the US. So far, however, their numbers have been limited in Europe, leaving the field relatively open to the traditional real estate brokerages that have adapted and moulded their business models in anticipation of this new phase in the cycle.

While a lot of legal issues still need to be resolved in the UK and Europe, opportunities are growing for advisory services in equity raising and the creation of new funds and vehicles as well, Samworth noted. ‘Equity raising within our real estate finance business had a phenomenal year in 2014 and we’re seeing increasing diversity in terms of investors, not just from London but also Asia.’ The ability to tap into existing relationships is incredibly important in this context, he added. ‘The way business is done is global, that’s what we’re seeing more and more. Investors want the best services and insight, and existing relationships are becoming increasingly important.’

In mid-2014, Cushman & Wakefield scored a major coup by recruiting seven partners from Catella Corporate Finance in Sweden to bolster its capital markets presence in Sweden and the Nordic region. No other property adviser had until then taken over such a large capital markets team in Europe since the outbreak of the crisis. The loss was a blow to Catella’s business, the company’s Swedish head Johan Ericsson conceded. ‘They were a very good and very strong team. But in December last year, we had a replacement team in place. We will be a competitor in 2015 for sure.’

Despite the loss, 2014 was a very good year for Catella, both in Sweden and across Europe, he added. ‘We have a 24% market share in Sweden and remain the market leader. On the sell side, we turned in a slightly higher performance than the year before. We expect to remain market leader. We have a strong position and 2015 started quite well for us.’ Following the changes in its corporate finance team, Catella’s focus will be slightly different, Ericsson said. ‘We will focus more on capital market oriented projects like capital raising, launching companies on the stock exchange and linking up the equity and debt side of the market. The focus will be a bit less on traditional sales mandates.’

Financing used to be the domain of the investment banks but that is softening as other entities move into the market, he noted. ‘Financing is becoming more competitive, but there is room for advisers like us to play around and provide services. Most of our competitors run around the property, they focus on letting, valuation, and the buy and sell advisory side. There are not so many firms that question how a deal should be financed or structured in terms of ownership and provide services from the debt and equity side.’
Catella also has investment banking capacity thanks to an accredited banking unit it has built up from scratch. Ericsson: ‘We have already been raising capital and can act with full responsibility in dealings with the stock market. That is not what the average adviser does.’

Prospects for that side of the business are good, Ericsson said. ‘The Swedish stock market is booming. There’s a huge demand from non-traditional real estate investors. There’s a lot to do in that sector and it’s less competitive than the sell-side advisory business.’

JLL & CBRE lead the pack
While Catella has ambitions to grow its advisory business in Germany and France and has teamed up with Strutt & Parker in the UK to exchange market information and work on projects together, it remains a dwarf compared with the two giants in the business CBRE and JLL which have successfully diversified other sides of their business in recent years and are enjoying double-digit growth figures. In terms of turnover, the pair have raced ahead of the rest of the pack and are almost three times as big in terms of investment transaction volume in Europe, our latest brokers’ survey shows. ‘Ten or 15 years back, the pack was much, much closer,’ noted Christian Ulbrich, CEO of JLL EMEA. ‘The companies in the middle will have to take a decision on whether they compete for a position at the top or whether they go in another direction.’ Ulbrich expects to see increased M&A activity in the course of 2015. ‘Consolidation is a healthy and normal development in an industry that is incredibly fragmented and driven by small companies. Fragmentation is not good for clients. We need more consolidation to improve the quality that the sector can deliver to clients.’

Change is certainly in the air. In late February, Cushman & Wakefield – a steady third in our ranking but more than two-and-half times smaller than JLL and CBRE in terms of European transaction volume – announced that its owner, the Italian Agnelli family, has appointed Goldman Sachs and Morgan Stanley to find a buyer. The firm is currently the largest privately owned commercial real estate agency in the world and is keen to keep the business private and avoid a merger with one of its listed peers or a sale to a rival agency. Some market pundits are betting on a buyer from the private equity universe with a possible bolt-on acquisition in Asia where the firm is weaker than in Europe or the US.

C&W would not be the first global real estate advisory firm to trade hands in the past 12 months. Just last month, DTZ merged with rival Cassidy Turley in the US, backed by a consortium comprising global private investment firm TPG Capital, Asian alternative investment management firm PAG Asia Capital and the Ontario Teachers’ Pension Plan. The merger creates a global top-three CRE services company with $2.9 bn (€2.5 bn) in annual revenues.

News of C&W’s possible sale also comes as rival Colliers braces itself for a spin-off by its Toronto-based parent group. FirstService Corporation unveiled plans earlier this month to list Colliers International as an independent, publicly traded unit. Like Cushman, Colliers is eyeing a position in the top three worldwide and has also seriously tried to expand its presence in the UK, the jewel in the European crown. But the plan to spin off Colliers International as an independent, publicly traded unit will give the firm more financial room for manoeuvre and enable it to ‘take advantage of internal growth opportunities and industry consolidation in an industry where brand and global capabilities are key competitive advantages’.

Dance floor
Other candidates are also jockeying for a place in the global top three. ‘There’s always a lot of speculation in this industry about who will marry who,’ one source told PropertyEU. ‘There are lots of singles trying to make a couple.’ One former wallflower that has reappeared on the dance floor with a new stride in its step is DTZ. Just under four years ago, the company was forced into the arms of Australian engineering conglomerate UGL after it was rejected by a French duo comprising the company’s then owner SGP and BNP Paribas Real Estate.

But its fortunes have changed since its takeover by a private equity investment consortium backed by Texas-based TPG Capital, PAG Asia Capital and Ontario Teachers’ Pension Plan. Earlier this year the firm announced that it is now operating with US broker Cassidy Turley as a single global firm following the completion of the acquisition of Cassidy Turley by the consortium.

Like Cushman & Wakefield and Colliers International, DTZ is now also claiming a ‘global top-three’ position following the merger of the two firms. Clearly the firm is moving in the right direction again and, significantly, it has a strong financial base to oil the next chapter in its history.

‘I am very grateful to UGL,’ one senior UK director told PropertyEU. ‘They got us from a place that wasn’t so good to a much better place. UGL people are process guys. They brought in discipline, systems and control. What they did was sensible, they consolidated and polished the business and reorganised it into separate businesses. Some of those measures were painful, but in hindsight I think people will say this is what we needed in those straitened times. They put in systems and money when nobody else would.’

Another ‘joy’ of the UGL piece is that the Australian owners brought in a large facility management business with €1 bn in turnover. Meanwhile the new owners have given DTZ ‘independent governance, a strong capital base and the speed-to-market of a private company’, DTZ’s CEO EMEA John Forrester said. ‘We now are expanding on our global capabilities and our strategy is to grow better, not just bigger – converting new capabilities into strategic advantages for our clients and exciting professional opportunities for our people. With new ownership we will be able to offer these clients a global full-service company, but with the client experience of a smaller, more nimble and more tenacious organisation.’

Another stalwart that has survived the recession and is now seeking to join up the dots is Savills. The company is renewing its focus on its pan-European activities, the company’s head of EMEA Mark Ridley said. ‘We are growing fast in the UK. We already have 94 offices there and we now want to grow our European business significantly. The opportunity is there. We anticipate very strong growth in our European network. This is the right time to expand.’

Upgrading skills
Savills was already in expansive mode before the crisis broke out but the subsequent downturn threw a spanner in the works. The company has not stood still in the intervening period, Ridley said. ‘In the past few years, we have worked on upgrading skill sets and moving the right people in the right positions. And we have realised substantial growth in the countries where we already operate, in particular the Netherlands, Belgium, Germany, Ireland, Spain and France.’

Even in the recession, Savills took on more recruits, Ridley added. ‘We wanted to come out of the recession fitter than before with a comprehensive package of services.’ A wholly-owned listed company, Savills is now seeking to expand its business in Italy, Poland and the Nordics. The focus is on a multi-service offering, Ridley said. ‘Where it makes sense, we will offer a blend of consultancy services and property management alongside transaction capability.’ Ridley is not ruling out acquisitions. Financially, the company is in good health, he noted. ‘It’s a much better picture and we have been generating positive results. We can now look at developing the business.’

Judi Seebus
Editor in chief