Celebrate the difference

It is 11:53 am on Friday May 9, and PERE is wandering around the 9th floor of 201 Bishopsgate in London and dictating notes into a digital recorder: “A blue-and-white deck chair with a white towel. A black Mini car. A photo of the German national football team with Jürgen Klinsmann and The Queen of England.” This is the ‘Frankfurt room’ of the new head office of TIAA Henderson Real Estate, and this reporter is describing the contents of a glass-encased cabinet filled with items donated by staff in Germany, several of which are smiling down at us from photos hanging on the wall.

The tiny blue-and-white deck chair with a miniature white towel is a tongue-in-cheek reference to how British vacationers dislike the way German nationals ‘reserve’ poolside loungers by laying towels on them at the crack of dawn. The Mini – an icon of British motoring heritage – is nowadays made by Germany’s BMW, whereas it used to be proudly made by British Leyland and Rover Group, two former bastions of UK manufacturing. There is a model of a BMW close to the Mini just to rub the joke in.

Five minutes earlier, PERE was seated in this room for 50 minutes in the company of Thomas Garbutt, head of global real estate at TIAA-CREF, and James Darkins, the chief executive of TIAA Henderson Real Estate, which is the name of the newly-created real estate alliance between TIAA-CREF and Henderson Global Investors. It was Darkins, by the way, who was responsible for the idea of giving the new headquarters some personality.

In fact, there are artifacts from countries and cities around the world where TIAA Henderson Real Estate has a presence. Turn left out of the Frankfurt room, for example, and one finds a case with a kangaroo, a wombat, a boomerang and some vegemite provided by staff in Australia. In the London display, there is a black taxi, an ancient map of the city, a red telephone box, a red Number 9 London Routemaster bus and even a late 17th century brick from an archaeological dig at the site of one of its central London office buildings. In the Madrid display, there is a pair of flamenco shoes and a tin of La Espanola Clasicas olives.

In the corridor connecting these various rooms, one passes references to China, where TIAA Henderson Real Estate is developing factory outlet centers through a joint venture. What looks like a cast-iron model of Confucius has been placed on a shelf, and there is a white plastic construction worker’s helmet with red Chinese lettering on its front and words in black marker scrawled across it. According to its display card, the helmet was used at the Italian-inspired Florentia Villages outlet center in Shanghai, which is due to be completed in May 2015. In the lobby’s ‘gallery’ area, there is a large display of that project as well as other models and a shelf upon which a red Ferrari is placed because the firm’s European outlet mall fund developed the first bespoke Ferrari factory store.

Indeed, between announcing the roughly $71 billion global alliance in June 2013 and its official launch on April 1 this year, TIAA Henderson Real Estate has spent a large amount of effort on presentation. Slick corporate brochures have been printed to introduce the platform and showcase staff. It contains investment case studies ranging from an office project, 40 Leadenhall Street in London, to the centre:mk shopping mall in Milton Keynes. From Continental Europe, there is information about McArthurGlen Castel Romano Designer Outlet in Italy and Parque Miramar in Fuengirola, Spain. One also can read all about Silk Road Holdings’ Florentia Villages in Guangzhou and Shanghai.

The forward to the brochure talks about ‘Our philosophy’ and lists a series of corporate catchphrases. Among them are “excellence not ego,” which is attributed to chief operating officer Mark Wood, as well as “Our people make our business” and “Creating tomorrow’s world.” There also is a video booklet involving interviews with key members of staff, including Garbutt and Darkins, to add to the information flow.

Meetings and events have been taking place. Not long ago, investors gathered at these offices, and soon a reception will be held for real estate brokers and journalists. Last night, there was a reception for staff and, for the first time, their partners. Some key TIAA Henderson Real Estate folk recently headed off to Newport Beach, California, for a retreat to meet the US staff and work on the game plan going forward. From there, Garbutt and Darkins were off to Asia.

Making history

The TIAA-CREF and Henderson alliance has created a standalone business with $22.6 billion in real estate assets. For TIAA-CREF, it has added to its $48.2 billion in real estate assets under management, giving it some $70.8 billion of overall real estate AUM. Already a large player in real estate, TIAA-CREF now is an even bigger player.

Speaking about the alliance, Garbutt explains that it did not happen in one ‘big bang’, rather it was the product of various conversations. “We felt like we were looking in the mirror,” he says. “We at TIAA-CREF had a prominent platform in the US, whereas Henderson Global Investors was very prominent in Europe and Asia. If you look at the combined real estate skills in those geographies, we can offer so much more for our clients together than separately.”

It is true that, in real estate, fund managers have entered into mergers or sold stakes in themselves to grow and offer better choice and coverage to investors. That, in the opinion of its leaders, also is the case here. Lurking in the background is the danger for mid-sized managers if they don’t offer a holistic global solution to investors. “We came to the conclusion that going at this together was a much better proposition for our clients than going at it separately,” Garbutt adds.

Of course, history is littered with examples of failed mergers in all industries just as much as there have been successes. Sometimes, mergers have failed because of a culture clash, but Garbutt and Darkins are adamant that the ‘philosophy’ of the two organizations was outstandingly similar. That being that “it is all about people and clients first.”

An additional stimulus for the deal came from TIAA-CREF having an internal client, its general account, which possesses a “robust appetite” to invest in real estate globally. Indeed, Roger Ferguson, TIAA-CREF’s president and chief executive officer, is pictured and quoted in the new corporate brochure for TIAA Henderson Real Estate as saying: “This partnership enables TIAA-CREF to further expand its capabilities into new markets as we continue to grow our asset management business globally.” 

It is worth considering that investors were not consulted before the merger was announced. That was done to adhere to non-disclosure rules. Henderson Global Investors is a public company listed on the London Stock Exchange and TIAA-CREF is a very large US insurance and retirement products group, and neither could talk about the merger. That was “not easy,” according to Darkins, but he notes that all investors subsequently signed up for the new joint venture once the process got underway, which was “an outstanding result for us.”

Darkins adds: “You always approach clients with your heart in your mouth, but the combination of reputations and financial strength meant people saw the logic of what we were doing.” By way of example, at TIAA Henderson Real Estate’s recent event for clients, the firm polled the guests of the benefits for the merger. The top answer was “expanded global reach.”

Hard work starts here

That all sounds great, but now the hard work truly begins. The joint venture is in a very different phase of its life compared to one year ago, and Darkins describes it from the perspective of a client like this: “Okay guys, lovely proposition. We read the menu, it looks incredibly appetizing and we love the sound of these dishes. Now, please go back into the kitchen and deliver.” His analogy draws smiles and laughter from Garbutt.

Indeed, TIAA Henderson Real Estate must start showing the tangible benefits of the alliance to investors, which can be accomplished through product launches. That is what was talked about in Newport Beach, when US employees of TIAA-CREF met with senior figures from TIAA Henderson Real Estate. It was all about the pipeline and ideas.

Neither man wanted to give too much away yet, but Garbutt says one plan is to roll out a global real estate debt fund platform. That effort would begin with a fund focused on the UK, and the firm already has hired three professionals with strong track records in the industry. It does not wish to compete with banks by offering finance for the ‘crème de la crème’ assets with relatively low loan-to-value ratios. Instead, it is looking at different types of assets with higher loan-to-value ratios across the UK market.

Besides catering to fixed-income real estate demand, the new company clearly has designs to build up in the Asia-Pacific region, where the business currently employs 12 staff and has just $589 million in assets. Indeed, the travel itinerary for Garbutt and Darkins was to next fly out to Beijing, Tokyo and Singapore and meet with people that want to meet with TIAA Henderson Real Estate.

Just prior to the announcement of the alliance last year, TIAA-CREF had invested in an asset in Singapore. More recently, just two weeks before this interview, TIAA Henderson Real Estate announced that it had taken over the management of TIAA-CREF’s venture with Australia’s Mirvac Group, from whom it acquired 50 percent of a 204,000-square-foot development at 699 Bourke Street in Melbourne. A payment of A$73 million is due upon completion.

Meanwhile, TIAA Henderson Real Estate is looking at further opportunities in Singapore. Giving no names away, Darkins says the firm had approached a very large Singaporean organization and the president of that company, who “never wants to meet,” wanted a meeting. “Either we are about to be hauled over the coals, or we actually have done something right and the proposition is good,” he quips. 

The world is not enough

Post-merger, TIAA Henderson Real Estate can now boast a presence in Beijing, Singapore and Sydney, and there are plans for a Hong Kong office as well. In Europe, it has offices in London – the global headquarters – plus Frankfurt, Luxembourg, Madrid, Milan, Paris, Stockholm and Vienna. In the US, TIAA-CREF has real estate staff in Boston, Chicago, San Francisco, Charlotte, Newport Beach and its North American headquarters at 730 Third Avenue in midtown Manhattan.

TIAA Henderson Real Estate already offers investors an array of products and structures, which ought to attract any type of client. It offers co-investments, joint ventures, advisory and discretionary separate accounts, club deals and pooled funds. Indeed, around $1.6 billion of equity was raised last year for third-party products.

The platform presently provides a lot of ‘sector-specific capabilities’ and ‘balanced’ products, though none of them are opportunistic by definition. In Europe, it offers such strategies as core UK shopping centers, a value-added multi-sector fund, a real estate debt platform, core German retail, an indirect property fund of funds, value-added central London offices, core UK retail warehouses, value-added UK outlet malls, value-added European retail, core German logistics, value-added European outlet malls, French logistics and European logistics. In Asia, it operates a fund of funds and a value-added multi-sector capability.

Meanwhile, in the US, it offers access to value-added student accommodation, value-added multifamily housing and a core multi-sector fund.

Since the merger, the platform has received several stamps of approval from investors. For example, AustralianSuper, the A$75 billion Australian superannuation fund, has just chosen the firm for its emerging central London office property investment strategy. The mandate follows the appointment of Henderson Global Investors last year for its entry into the UK shopping center sector, which completed an initial £270 million acquisition in December.
An abiding question then: What do investors want and why should they invest in property?

Real estate owners – especially managers of assets for third parties – find it easy to answer this question. For them, it seems that property as an asset class is ‘attractive’ in almost any economic cycle; only the reasons change. That is not to say that real estate investment managers don’t believe what they are saying. It just means they find something positive to say.

For example, investors globally are asking what happens when interest rates rise. “I think property actually stacks up pretty well when one looks at what the future could be,” Garbutt says. “In many markets, I think you will see that the driver for rates going up is actually robust economies, which is going to help drive rental rates and our asset class will hold up well.”

Darkins elaborates: “While we see the yields coming down towards record lows, they still are relatively attractive compared to bond yields. Investors, such as sovereign wealth funds or high-net-worth individuals, also are looking for protection, and property traditionally has provided them with that. If there is one thing we have learned in the financial crisis, it is that you cannot think in your own bubble. When you look at the relative attractiveness of property to other asset classes, you can understand why so much capital has flowed here.”

A people business

When it is all said and done, real estate is a people business. “At the heart of it, it is all about people,” Garbutt adds. “We are successful if we create the right space for people.”

That is funny because, 10 years ago, Garbutt would have said technology was going to drive the disaggregation of people. Instead, people now are craving urban centers. “If anything, technology has driven people to want to be closer together,” he explains. “The key is to buy the right assets in the right market that allow you to ride out the cycle. If you get that wrong, your assets are going to suffer.”

Turning his attention to the people now working at TIAA Henderson Real Estate, Garbutt says: “The differences are the great thing. Success has the same definition – it is about satisfying the clients’ needs. We celebrate the differences among our staff, and it works.” The deck chair with a towel and the Mini made by BMW seem to suggest as much. Now, the mission is to take those differences and deliver to investors.


This interview appears in the 2014 Investor Perspectives supplement published alongside the July/August issue of PERE