Savills IM’s Jeffrey: There will be more industry consolidation

Savills Investment Management’s chief executive officer, Alex Jeffrey, expects to see further consolidation across the global real estate fund management industry – for both debt and equity businesses – as larger asset managers acquire smaller market players to expand their expertise.

The London-headquartered real estate manager, which has €24 billion of assets under management across Europe and Asia, led by example last year when it completed the acquisition of DRC Capital – a debt fund manager which was formed in London in 2012. The business, now known as DRC Savills Investment Management, is among Europe’s most experienced non-bank real estate lenders, investing in commercial real estate debt across all major sectors.

Speaking to Real Estate Capital Europe, Jeffrey said he believes more corporate acquisition activity is happening across the industry as real estate acquisition, management and loan underwriting is becoming increasingly complex.

“Both on the equity and debt side, the process [of investing in real estate] is becoming more intensive and requires significantly larger resources than was ever the case,” Jeffrey said. “Firms getting bigger also enables them to spread the cost of that expertise across a wider pool of assets under management, therefore keeping fees low for the benefit of clients.”

Smaller, more niche operators will not, however, fall by the wayside, he believes. “Many of them will continue to thrive if they have strong expertise. But some of them will look to partner up with the larger players because they will not be able to handle this increasing weight of responsibility,” he added.

Fruitful marriage

Another element of industry consolidation is managers opting to operate equity and debt strategies.

“There are increasing combinations of firms that are becoming providers of both equity and debt,” said Jeffrey. “We see very strong synergies between the real estate debt and equity side.”

He added that Savills IM believes lenders in the real estate space need to understand the ownership of assets.

“You have to underwrite the investment as if you are going to be an owner because that could be one of the outcomes – it is not the one you plan for, but it is the one you need to be ready for,” said Jeffrey.

“We believe that debt platforms being part of organisations that have broad real estate networks and capability means they have got a much greater pool of knowledge to draw upon. This underpins the whole rationale to bring the debt and equity side of our business together – a key driver behind the consolidation, and I think you’re going to see much more of that.”

Sector focus

While Savills IM is not currently active in North America, venturing into US territory might be on the cards in years ahead.

“We don’t have any immediate plans for expanding into North America, but we would not rule it out,” said Jeffrey. “This year, we see plenty of opportunity to grow our business in Europe and Asia, [as we identify] a wide range of attractive investment opportunities and a lot of investor interest.”

Across the company’s target markets of Europe and Asia, it is witnessing continued investor demand in industrial and logistics – with Jeffrey citing the most interesting opportunities for both debt and equity investments being in the ‘mid-box’ segments such as urban and last mile, logistics, light industrial estates and coastal storage sub-sectors.

“European industrial logistics offer strategies that include big boxes, but obviously those have increased in price dramatically,” he said. “The benefits of continuing to focus on that sector are not driven purely by cyclical economic fundamentals, but it is also about structural growth.”

Structural growth stems from the urbanisation trend which is putting pressure on land values in and around cities across Europe, he continued. “Very similar trends are at play in Asia-Pacific as well, which is actually a less mature market, so there are arguably greater opportunities there for development and redevelopment,” he added.

Another area the firm finds compelling is residential. “This space offers investors diversification because it’s not particularly well correlated with commercial and offers durable income streams. It’s not as cyclical as commercial sectors. The sector is much less mature as an institutional investment proposition both in debt and equity terms than it is in other parts of the world like, like North America.”

There is a range of different types of residential investment that can deliver strong returns including multifamily, student housing and senior living, he added. “Different locations, each of those have varying importance, but overall, we’re seeing a lot of opportunities here. The most important factor is demographics.”

Urbanisation and the growth of single-family rental is creating greater demand particularly in Europe and Asia. “Where construction has not kept up with that demand, it is pushing up house prices and rents and creating a significant affordability problem in most cities. And so, to identify the right opportunities in the right locations and be sure that the projects are designed correctly incorporating ESG are the primary considerations, with which there are attractive returns to be achieved for both debt and equity investors,” he said.