Editor’s choice: Money to burn

The ink was barely dry on my last editorial when a press release came into the PropertyEU inbox vindicating my key thesis that the Australians as well as ECB president Mario Draghi are back.

On Tuesday, Australia’s Cromwell Property Group announced it has acquired Valad Europe from senior management and US alternative asset manager Blackstone for €145 mln. While the new owner is different, the deal represents a complete return to Valad Europe’s Australian roots. Valad Europe began life in 2007 when Australian-listed Valad Property Group entered Europe with the acquisition of the Teesland/iO Group fund and asset management group. Blackstone acquired Valad Property Group in 2011 when the Australian operations were in difficulties, and Blackstone and senior management of the strong European business then jointly transformed Valad Europe into an independent company.

Under the wings of Blackstone, Valad Europe has developed further into a diversified European investment manager managing €5.3 bn of assets across 13 European countries. The company offers a successful, value-add property funds management platform with scale across a number of geographies and sectors, according to Cromwell’s CEO Paul Weightman. But while Cromwell believes the business is a ‘strong cultural fit’, in Australia the deal has ignited a discussion in the country’s leading financial press on a ‘sense of déjà vu’. In the final years of the real estate boom through to 2007, Australian real estate developers and fund managers scoured the world for acquisitions but were forced to retreat to their home base after paying steep prices that went sour when the global financial crisis hit.

While Martyn McCarthy, executive chairman of Valad Europe, said he was pleased to have in Cromwell a long-term capital partner who is committed to funds management, financial analysts in Australia have been more critical. ‘A lack of opportunities in Australia is not a good reason to go offshore,’ according to Macquarie Securities analysts Rob Freeman and Paul Checchin. Freeman and Checchin warned that the deal had introduced currency risk in the exchange rate between the Australian dollar and the euro. On the other hand, the sum paid by Sydney-based Cromwell for Valad Europe was not as steep as the prices some Australian property companies were forking out in Europe before the crisis. Deutsche Bank analysts Ian Randall and Jason Weate told The Australian newspaper that the deal had been done at 6.4 times forecast earnings for the 2015 financial year, against multiples of 8.5 to 12 times for platforms acquired by GPT, Stockland Group and Goodman Group between 2005 and 2007.

GLOBAL ADVENTURES
Australian analysts will no doubt continue to keep a close eye on the global adventures of their home-grown quoted real estate companies. But there is no doubt that more Australian property companies and investors will follow Cromwell’s lead. And in all fairness to my fellow countrymen, a sizeable number of the Australian investors this time round are significantly more conservative than the listed funds of last time. Moreover, Australia may be a big country, but with a population just above 23 million, it remains a small market.

As David Kirkby, chief investment officer of Valad Europe, told PropertyEU in an interview this week, the Australian real estate market is very sophisticated and highly institutionalised with huge savings and pension investment capital that needs to seek good investments more broadly across the world. We have also seen this with the big Dutch and Canadian pension funds that similarly have to fish in a small pond in their home markets.

One institutional investor that has already made the plunge into European waters is AustralianSuper. Last year the €52 bn Melbourne-based superannuation fund appointed Rockspring Property Investment Managers for a new direct office and retail property investment drive across continental Europe.

AustralianSuper, which owns A$6 bn (€4.1 bn) of real estate assets predominantly located in Australia, is planning to diversify its portfolio and to carry out a ‘significant’ investment programme abroad over the next five years. But only after monitoring European markets closely over the last few years, its property head Jack McGougan said at the time.

AUSTRALIANSUPER IS HERE FOR THE LONG TERM
And there are no plans to dip into the market and quickly get out again like Sydney-listed property giant UGL which recently spun off its property advisory unit DTZ to a joint venture led by US private equity giant TPG Capital. AustralianSuper entered the UK retail property market in December 2013 when it acquired a 50% stake in centre:mk in Milton Keynes for £270 mln together with TH Real Estate which manages AustralianSuper’s UK shopping centre strategy. The Milton Keynes shopping centre was AustralianSuper’s first direct investment for its European property portfolio. Since then AustralianSuper has mandated TH Real Estate to manage its emerging central London office property investment strategy.

AustralianSuper plans to significantly grow its global property investment portfolio over the next five years, McGougan, said: ‘We are now ready to establish a long-term presence through directly investing in the region.’

Cromwell was not the only Australian company to hit the headlines this week. In a report in Dutch financial daily FD, Australian shopping centre giant Westfield was cited as an obvious takeover candidate for European retail giant Unibail-Rodamco. Europe’s largest listed commercial property company with €35 bn of assets is certainly in good shape. Earlier this week, the Paris-based company reported net profit increased by 8.3% to €1.07 bn in 2014 from €986 mln a year earlier. But while a low cost of debt and impressive rises in rental income lifted last year’s result, analysts at Dutch merchant bank Kempen & Co believe the company may be hard put to achieve its targeted earnings growth of 5-7% a year exclusively from organic growth in the coming years.

MERGER SPECULATION
According to Boudewijn Schoon, an analyst at the bank, the highest rent levels have already been squeezed out of most of the group’s retailers, leaving little space for aggressive rises in the future. To accelerate growth, Unibail-Rodamco may also seek to launch new shopping centre developments. ‘But that’s not nearly as easy as in 2007,’ Schoon said. ‘Recently opened centres like Aeroville to the north of Paris seem to have struggled to develop into strong shopping destinations. This is partly due to the stagnant market with increasing competition, including the internet.’

To keep up the pace of growth, Unibail-Rodamco may rely on mergers and acquisitions only, the analyst added, pointing to the recent merger between Klépierre and Corio which has shaken up the industry. ‘I think there’s quite some pressure on Unibail's management to do something in that direction.’

Westfield, a $28 bn listed retail specialist with activities largely concentrated in Australia and the US and part-owned by the Australian Lowy family, is the merger candidate most mentioned by Unibail's shareholders, according to Schoon, who stresses that there is no concrete indication that the group is already engaged in takeover negotiations. ‘It's a good match. They focus on the same type of major shopping centres and would provide Unibail-Rodamco with access to the US. That would make the company a major international player.’

The question is how much value Unibail-Rodamco and Westfield can add to one another, he added. In terms of value, both companies are trading at a premium, giving sense to a potential share swap. A tie-up between Unibail-Rodamco and Westfield would make Klépierre’s acquisition of Corio – aimed at creating the second-largest retail specialist in Europe - look undersized. But of course the speculation may also lead to nothing.

Whatever the outcome, Unibail-Rodamco’s management would be well-advised to take heed of the words of CLSA analyst Sholto Maconochie who commented on the Cromwell-Valad Europe deal this week. ‘Acquiring from Blackstone is like acquiring from the Lowys,' he said. 'It’s normally a great deal for the seller.’

Judi Seebus
Editor in chief