A big deal in its native US, real estate debt intermediary HFF has opened in London. Daniel Cunningham examines its potential impact on Europe
The first HFF office outside the US is located on a cobbled mews tucked behind restaurants and boutique shops in London’s Marylebone area. It is perhaps a quirky setting for a commercial real estate advisory business.
“We are aiming to be a disrupter,” explains office co-head Michael Kavanau, as discussion of the choice of office space slips into an explanation of the UK and continental European business plan.
HFF is a big name in the US, but an unknown quantity to many in Europe. The firm aims to leverage the cross-over between three business lines: investment advisory, headed by former CBRE agent Jamie Pope; corporate finance and investment banking, led by former Bank of America Merrill Lynch banker David Church; and debt advisory, led by HFF veteran and former Chicago office co-head Kavanau.
HFF entered the UK through its January 2017 acquisition of niche advisory Leon Partners, which was founded in 2015 by Church and former BAML colleague Raj Somchand. In the debt space, its arrival illustrates a gradual shift in the market from lenders and borrowers dealing with each other directly to becoming more of a US-style brokered sector.
Europe’s brokerage community is growing, one institutional debt fund manager observes, before adding that there is a clear stand-out party in the space when it comes to mandates of a meaningful size – Eastdil Secured. The New York-headquartered, Wells Fargo-owned ‘real estate investment banking firm’ has been in the UK since 2017 and really began to make its name in 2011. Most regard Eastdil as the firm that has brought large-scale debt brokerage to the European markets.
“For a deep-dive analysis of the market, there are not many parties,” the debt fund manager comments, “that is probably why HFF is coming in. As the scale of Eastdil’s deals grows, there is a need for advisors to handle the £50 million debt requests; advisors that lenders are willing to talk to.” Another alternative lender adds: “From a borrower perspective, it’s getting harder to figure out the market and from our perspective there’s a lot the broking community needs to figure out about how debt works – it’s still a developing part of the ecosystem in the UK market. There’s a need for greater transparency.”
To Kavanau, who has 30 years’ experience in the US, Europe provides a significant opportunity: “The market’s shortfalls are not dissimilar to those of the US, historically. The US was reliant on direct lending for so long that people did not have to get particularly creative around finance.”
The presence of brokers will eventually alter the way borrowers raise capital, Church adds: “There will be a change in market perception as sponsors let firms like us do the hard work for them. As they give brokers a try and see the results, that’s how the market will build,” he adds.
In the US, HFF arranged $40.7 billion of debt in 2016, second only to Eastdil, which arranged $41.1 billion, Mortgage Bankers Association figures show. The average deal size last year was $35 million, Kavanau says, although addressing the perception of HFF as a mid-market specialist, he adds that his last four deals before he left Chicago were all $100 million-plus.
“It’s a very competitive business in the US and [HFF] provides formidable competition,” comments Brian Stoffers, global president of debt and structured finance for CBRE Capital Markets, based in New York. From starting out as correspondents for insurers, the large US brokers vastly expanded their lender relationships with the emergence of the country’s CMBS market, he explains, leading to a thriving advisory sector. Despite their similarities, business models vary across the US property debt advisory space, he says: “We are a full-service firm whereas HFF is capital markets.”
“I’d view HFF coming to Europe as a positive,” adds Stoffers. “It further establishes the notion of intermediaries in the debt markets.”
Figures on the size of Europe’s brokered real estate debt market are not available, but would pale in comparison with the US.
“This market reminds us of the US about 20 years ago, when it was not heavily brokered in the institutional space and there was a big direct banking market,” comments Kavanau. “If the banks got a deal from a broker, they immediately threw it in the trash can because they thought it was a bad deal. Now, everybody understands the value proposition of a broker. Our view is the US is very smart at certain things – capital formation, being creative around financial services – so the idea that the US is a precursor to what the UK and Europe will look like in a few years is not a huge leap of faith for us.”
Is HFF late to the party, seeing as its most obvious rival, Eastdil, has been active in Europe for several years? “We thought about [opening in London] in 2012, but we still felt we had the opportunity to build out offices in the US, with a better risk-adjusted return for our investment. We opened very successful new platforms in Denver, Philadelphia and Austin, Texas,” says Kavanau.
“Culture is everything to us, so we’re very cautious and methodical about how we build the business. Clients kept saying they’d like us in Europe as they were investing more there. We knew they’d support us so we started the process in earnest.”
“Eastdil came in as an initial disrupter and credit to them, did a fine job,” he adds. “They’re our biggest competitor in the US. We share a lot of clients, but we think we do things in a different way. It is clear to us that this market is ready for disruption if it’s done at a really high level.”
The client list has included North American private equity firms and real estate owners including the likes of Blackstone, Lone Star, Starwood and Brookfield, plus insurers including PGIM and MetLife, Kavanau says. The list of top clients overlaps with rival advisory firms in the US, he explains.
A crucial aspect to HFF’s US business model is the interplay between capital in the investment, debt and wider capital markets. “The model in the US is that the three business lines create outsized returns for clients and the company,” says Pope.
On the debt side, in the eight months since HFF has been on the ground in Europe, it has arranged three deals with a total of £75 million. A £500 million-plus portfolio refinancing deal is in the works, with around six mandates at various stages of marketing. A key hire was made in May with former Cushman & Wakefield debt specialist Edward Daubeney poached, and a prior recruiting of Claudio Sgobba from JLL. The immediate strategy is focused on London and Dublin, with occasional forays into continental Europe including Paris, Germany and the Netherlands for the time being.
“We can operate across the whole capital structure from low-priced senior debt to joint-venture equity, to David’s business of buying and selling corporate vehicles and Jamie’s advisory business of buying and selling assets,” Kavanau adds.
HFF handles both buy- and sell-side agency business, although the partners highlight the firm’s independence. “It is hugely important to us that we are independent; we are free of any of the conflicts that are very apparent in other business models,” says Kavanau.
On the investment banking side, one of the opportunities is acting for clients that are not being served by the established banks. “Many of the investment banks are just not set up to cover real estate any more, the public sector is too small and deal sizes don’t often match the banks’ aspirations. If you are out of the flow of deals you are less relevant to your clients. We are very much in the flow, right across the capital structure,” explains Church.
“In terms of the investment advisory business, life is becoming more and more sophisticated with clients demanding a far more comprehensive service across the capital structure,” adds Pope.
Some argue that the reduction in deal flow across some European markets means that brokers are competing for a slice of a smaller pie. “An average broker is going to lose market share in that kind of a market, and a great one will make market share,” argues Kavanau. “HFF has lived through four major credit cycles and we have come out of every one stronger. We’ve got great traction and the first six months in Europe doesn’t feel like we’re entering a slow market.”
As for where he sees HFF’s London business in coming years, Kavanau explains that while the US operations have consistently moved towards being an institutional business, the middle market remains very significant. “We’ll do a lot of strategic advisory work. I don’t think we’ll be able to put in a box what the business looks like.”
HFF has a lot of work ahead to embed itself in the European markets and replicate its success in the US. As firms including HFF aim to export the US brokerage model to Europe, however, the role of advisors could become embedded.
HFF in the USA
Officially known by its initials, Holliday Fenoglio Fowler was founded in 1974 and has 23 offices located across the US. The firm is one of the major real estate consultants in the US, with a focus on capital markets. On the debt side, it started out as an intermediary for insurers and as the CMBS market exploded it evolved to originate loans for a wider variety of lenders.
“We realised that there was much more connectivity between capital than between real estate services. If someone is looking at capital they might want a solution that could be debt, equity or investment banking,” says Michael Kavanau. “We were very forward-thinking in combining our investment business and investment banking and fundraising businesses earlier than our competitors.”
HFF and its predecessor companies came together in 1998 and have closed more than $611 billion across more than 22,300 transactions. The firm’s aim is to be a ‘one-stop shop’ and highlights its offer as investment banking and advisory, investment sales, loan and distressed assets sales, equity and debt placement and commercial loan servicing.