CBRE Global Investors pools its expertise

CBRE Global Investors is pooling its European expertise in a bid to tune in better to the needs of institutional investors.

After acquiring ING REIM in 2011, CBRE Global Investors shot into second place in the PropertyEU ranking of Top Investors in Europe in that same year. The real estate investment giant, which now has its European headquarters in Amsterdam, managed to hold on to that position in 2012. A year later, however, CBRE Global Investors has fallen to 6th position as legacy issues and the integration process take their toll. Indeed, assets under management have slipped further this year, from €26.9 bn at end-2012 to €25.5 bn at end-June as fund-raising initiatives remain on ice.

But a year after rounding off the integration of ING’s real estate investment management activities in Europe, CBRE Global Investors is ready to map out a new approach for its business in the region. As investors become increasingly discerning and their demands more disparate, the investment giant - with AUM of €66.5 bn globally - is seeking to streamline its offering. The aim, says CEO EMEA Pieter Hendrikse, is to bundle CBRE GI’s expertise in different areas and channel it through a single counter.

Following the ING REIM takeover, CBRE GI has built a European platform that is active in 17 countries with 580 staff operating out of 13 offices. Through ING REIM, the investment giant has gained several key Dutch and European pension funds as clients, while CBRE has brought a number of global investment mandates into the combine. But the 2008 financial crisis and its aftermath have made investors more critical and intent on developing their own strategies, Hendrikse says in an interview with PropertyEU. ‘Against this backdrop I have thought hard about what the European business should look like in 2014-2016. A key conclusion was that investors are no longer satisfied with country-specific funds alone. They want best practices gleaned worldwide.’

Fragmented market
Central to the new approach is introducing structure in a market which risks becoming increasingly fragmented, says the investment chief, who joined ING REIM in 1999 and spearheaded the growth of its European business as CEO for eight years from 2003. In the past, fund managers brought parties together which wanted to invest according to a single strategy. But under pressure from the financial crisis and changing views on the market, those interests are no longer aligned. ‘Not everyone believes in the same strategy anymore,’ notes Hendrikse. ‘Some parties want to stay in a fund while others wanted to opt out. It is our duty as an investment manager to ensure that we bring together like-minded investors to create liquidity in the non-listed sector.’

As the real estate investment industry increases in scale and globalises further, CBRE GI believes it can offer tailor-made solutions for investors through a single channel. One example is retail management. ‘We manage a retail property portfolio of €12.5 bn in Europe, which in terms of size is comparable to the biggest listed European retail companies such as Unibail-Rodamco and Corio. That offers excellent opportunities for pooling expertise,’ Hendrikse says. He acknowledges that such an approach could in some cases cost more, perhaps more than the competition, ‘but it will lead to a better performance’, he argued.

Not all products lend themselves to a pan-European approach, however. Take CBRE GI’s Dutch Office, Retail and Residential Funds which dominate the top-10 funds in the Netherlands and together manage some €5.75 bn in assets. Nevertheless, in terms of decision-making, these country-specific funds have been brought closer to the European management. Hendrikse: ‘Our Dutch organisation is now structured in such as way that the fund managers can focus specifically on fund performance and the requirements of investors while the country manager concentrates on the day-to-day running of the business. This tighter control increases the possibilities of attracting international capital. The

Dutch portfolios are in good shape; they have their challenges but there are enough opportunities.’
Alignment of financial interests is also being addressed: CBRE GI now requires the members of its European management team and board to co-invest alongside investors. ‘In doing so we underscore the fact that since the merger the performance of our funds and - by extension - the interests of our investors and fund managers are all the same,’ Hendrikse says.

Retail and logistics
A pan-European approach works especially well for the logistics sector and shopping centres, Hendrikse claims. Offices and high street retail, on the other hand, are a much more local business. But even a pan-European fund needs to lean on a local management organisation with the expertise to outperform the market in terms of yields, he adds.

Evidence of the success of a pan-European approach has been delivered by the European Shopping Center Fund over the last two years. The investors in the fund are primarily European - French, German and British - but capital has also come from the US through a joint venture with the Texas Teachers Fund in the Leine shopping centre in Laatzen, Germany. The same applies to the logistics sector, where CBRE GI currently has €700-800 mln invested in three pan-European funds. ‘This is a position we would like to expand and with the expertise we have that is something we will certainly succeed in doing. To this end we recently carried out a number of acquisitions in Poland,’ Hendrikse points out.

The European chief also sees strong interest for riskier value-add investments which require extra work because the assets are outdated or suffer from high vacancy or poor maintenance. ‘Value-add is popular with Asian and US investors in particular and we are busy developing this line of business. Our focus will initially be on London and Paris, certain German cities and, at a later stage, southern Europe.’

Separate mandates
Despite the difficult fund-raising environment - even for big players such as CBRE GI - the investment manager succeeded in securing 10 new separate accounts over the past year. Unlike traditional funds, separate mandates are tailored to the strategy of a single investor and also offer scope for smaller vehicles such as club deals and joint ventures with two or three other players. This segment will continue to grow as investors increasingly seek more control over their investments, he predicts. ‘They basically want semi-direct investments, whereby they earmark a certain amount to be invested in a certain sector. Direct mandate investors typically allocate a minimum amount of €350-500 mln for investment in a European strategy.’

The reduced confidence in co-mingled funds, one of the key casualties of the financial crisis, has also affected CBRE GI - particularly its southern European funds. The investment manager is working hard to find solutions for these problem funds, a process which Hendrikse describes as ‘extremely intensive’ and at times ‘incredibly difficult’. Problem funds, he elaborates, can contain good assets which do not exist anywhere else but which have run into difficulty because of the structure or leverage of the fund. ‘Closing down such a fund also means losing exposure to those good assets. We try to arrange things so that investors can maintain exposure to the good assets which have come through the crisis unscathed.’

While the current restructuring of the fund market offers opportunities, particularly in the separate mandate segment, international real estate investment managers like CBRE GI are feeling the heat from major private equity firms in the US such as Blackstone, KKR and The Carlyle Group. These players have also jumped on the separate account bandwagon in search of more stable income streams and real estate is one of the favourite investment classes.
Like many of its competitors, CBRE GI plans to extend the geographic focus of its funds from mature markets in western Europe (Germany, France, UK, Scandinavia, Benelux and to a lesser extent central and southern Europe) to fast-growth economies in eastern Europe and Turkey. Hendrikse: ‘Expansion to Turkey is certainly on the agenda, but because of our focus on the performance of existing funds before, during and after the merger we have paid little attention to this so far.’ Russia and Ukraine are not on the fund manager’s shopping list.

Asians and Americans
Hendrikse sees strong interest in Europe from American and Australian investors as well as from Asia where the Chinese, Malaysians, Singaporeans and Japanese are all setting their sights on the continent. At the same time, European investors are keen to move to the US, he observes. ‘The US is currently very attractive as well as being an extremely transparent and efficient market. Asia is also in demand, but you need a specialised asset manager there.’
Following in the footsteps of the Dutch pension funds, Hendrikse sees a trend among French, German and certain UK institutional investors to boost their investments in real estate, both in and outside Europe. ‘ Real estate has become a professional asset class,’ he says, noting that the sector itself is becoming more professional thanks to new tools and access to financial expertise among capital providers.

Nevertheless, he warns that institutional investors need to gain better insight into the ‘real asset’ investment category - which includes infrastructure - as well as greater awareness of real estate as an inflation hedge. ‘The decline in the number of fund managers following the outbreak of the financial crisis has led to a realisation that real estate is not a financial tool but that it is about quality of income streams and location,’ he says.

Transparency
In terms of transparency, far greater efforts are needed to make information about indirect funds comparable on a global basis, insists Hendrikse. ‘Transparency remains a key issue, and you have to make sure that the risk of it working against you is reduced. It’s something that clients demand, which is why cooperation between organisations such as INREV (Europe), ANREV (Asia-Pacific) and NCREIF (North America) is so important. We have to make the same move towards comparable best practices worldwide as we did 10 years ago at a European level.’

Judi Seebus, Editor in Chief
Paul Wessels, Senior Editor