ANALYSIS: Cornerstone becomes a major force in German property

The takeover of German asset manager Pamera has put London-based Cornerstone on a stronger footing in the leading real estate market in mainland Europe.

The move comes just four years after the firm set up a base in Europe through the acquisition of UK-based Protego,

Cornerstone - a subsidiary of the Massachusetts Mutual Life Insurance Company (MassMutual) – operates as an independent real estate investment manager with more than $44 bn (€32 bn) of assets under management globally. Of this, €1.5 bn is in the UK, Germany as well as the Nordic region. The focus is on retail, office and industrial properties in Europe, although the company is increasingly looking at alternative sectors.

On 10 July Cornerstone Europe announced it was acquiring Berlin-headquartered Pamera Asset Management, adding €1 bn of German real estate to its assets under management. The move is an important milestone for the company which is seeking to establish itself as the 'go-to' firm for international equity attempting to access European property, and equally importantly, for German and European investors looking to the US and Asia.

Commenting on the transaction, Charles Weeks, CEO of Cornerstone Europe, said: 'We intend to grow Cornerstone’s investment management platform in Europe and the acquisition of Pamera complements our existing operations in the UK, Nordics and Netherlands.'

The Pamera deal instantly adds 38 professionals spread across offices in Berlin, Frankfurt, Munich, Hamburg and Düsseldorf, Weeks added. ‘We were keen to establish a relatively substantial platform in Germany because of the way the market operates – it is polycentric - you therefore need to have a spread of offices across Germany rather than be operating from Munich and investing in Hamburg, or Berlin investing in Munich. I think it is also very important that you have Germans in Germany – to an outsider it’s a vey opaque market.’

Pamera was established by Christoph Wittkop, Gunther Deutsch, Lars Borghaus and Maximilian Isenberg in 2010 and its partners in German real estate deals include Tristan Capital Partners and Patron Capital. While many of its domestic peers focus on core property, Pamera operates in the core to value-add space and has also operated in the opportunistic arena. Weeks: 'This provides a huge opportunity for us to create interesting investment products for domestic investors in Germany; to capture international capital flows looking to invest into Germany, and in addition capital flows from Germany into international markets – capital flows going in all directions.’

CONSOLIDATION
The Cornerstone Europe story began in January 2010 when the US arm acquired Protego. UK-headquartered Protego was established by Weeks, Iain Reid and Hugo Llewelyn in April 2004 and had 30 staff in the UK and Continental Europe when the buy-out took place. Weeks was later appointed CEO of the combination.

'Protego was a small independent investment management business not dissimilar in some respects to Pamera, and a lot of parallels have been drawn between the two,’ Weeks said. ‘We collectively decided to sell Protego to Cornerstone as It had become obvious to us that there was more consolidation going on in the market, particularly as a reflection of the global financial crisis, but also I think there is a kind of migration of investors towards engaging with a smaller number of larger managers, and in particular with managers that have global scope.’

OTHER MARKETS
Now that Germany is part of the Cornerstone fold, thoughts inevitably turn to France, Europe's third largest market, but one where Cornerstone doesn't have 'boots on the ground'.

‘France, Italy and Spain are markets we are interested in - it’s possible we may look at more organic growth as opposed to an acquisition of a business,’ Weeks said. However, a Pamera-type acquisition is not likely, he added. ‘I would be less comfortable with having 38 people in France than I would in Germany. We are definitely keen to set up operations in those markets but they are likely to be more modest in scale.’

INVESTMENT STRATEGY
Cornerstone is also mindful of opportunities in the recovery markets of Spain and Italy. Currently, though, opportunistic money rather than solid fundamentals is driving those markets, Weeks said. ‘You have to be very patient with capital and not compete with some of this hot money flooding the market at the moment.'

He continued: ‘I think you have to be local in terms of representation and if an equity investor, you have to be looking at lot sizes below the competitive element of the market. We may be looking at lot sizes of €25-75 mln; that would be perfect for us whereas for many of these larger operators – particularly the big opportunistic funds – these lot sizes would be too small for some of them to be bothered with.’