SPECIAL REPORT: Savills’ quantum leap

Justin O’Connor, the chief executive officer of Cordea Savills, the real estate investment management business of London-listed property services group Savills, has plenty to say. 

Thankfully, with gagging restrictions lifted following the release of Savills’ full-year results last month, in which the £1 billion (€1.4 billion; $1.48 billion) market cap firm announced it was buying investment management rival SEB Asset Management, he is now free to speak about it.

That comes as a relief as talk of the transaction, which will transform Cordea into one of the world’s biggest real estate investment management businesses with more than €17 billion of assets under management across Europe and Asia, has done the rounds on Europe’s real estate rumour mill for almost half a year. News of the deal surfaced at the EXPO Real conference in Munich last October, but because of listed company reporting restrictions, O’Connor had to keep schtum about it.

Now, with shackles off, he talks excitedly to PERE about what the €21.5 million acquisition means for Cordea. In one fell swoop, the firm has more than doubled its AUM, has doubled its headcount and has become a meaningful challenger for business in Asia, the world’s growth region, to boot. 

He has multiple messages for the market, perhaps the most salient being that Cordea, or Savills Investment Management as the business will be known once the transaction completes by the third quarter this year, is by no means done growing. “I’d like to say that in the next five years we’d be over €20 billion of assets under management,” he declares. 

Perhaps he’s talking off-script, but it isn’t long before the missing, and biggest, piece of the jigsaw, the United States, figures in the conversation. “Absolutely, we have a longer term strategy to be in the US, both in terms of raising and deploying capital. Raising capital from the US will happen before we make inroads. We’ll purse that in the shorter term. In terms of deploying capital, it depends on the success of integrating SEB and then the actual opportunities available for entering the US market.”

But he confirms: “We’re monitoring what is available in the US. We need to because good opportunities don’t come along often.”

Beyond personnel synergies 

We’re getting ahead of ourselves. O’Connor’s primary concern is integrating the two offices, Frankfurt and Singapore, of SEB, with the 12 offices of Cordea. 

The conjoined business will have approximately 280 staff after the 148 from SEB bolster Cordea’s 135, and, though the vast majority of SEB’s assets and staff are in Europe, O’Connor insists there is minimal overlap between the two businesses. As such, he expects personnel ‘synergies’ only likely to be found in areas such as IT, marketing and research.

Nonetheless, he admits staff assessments are required between now and when the deal completes: “We’re very much at the stage of understanding what everyone is doing. But on the face of it, there doesn’t look like any real overlap.”
Less certain is what the senior management structure will look like when the ink on the deal is dry. “I remain as CEO,” confirms O’Connor. Accordingly, SEB’s current chief executive officer, Barbara Knoflach, will leave in the course of the transaction. She has already lined up the global head of investment management role at BNP Paribas Real Estate Investment Management, another real estate investment management business owned by a property a property services business. 

But the other key roles are yet to be determined. For instance, O’Connor would not confirm there would be heads of Europe or Asia roles. “In terms of the management structure, we’ll be announcing that following completion,” he said. “At the moment we need to be making sure we’re putting together the right integration plan, the right organisational structure for the combined business.”

One senior man that O’Connor wants to stay is Chua Choy-Soon, the ex-GIC Private executive currently in charge of SEB’s 9-staff, €2 billion AUM Asia business. “I hope so. He’s a really good guy. Our intention is to retain people.”
Chua’s Asia platform actually was an important component of Cordea’s decision to pursue SEB. Though dwarfed in scale by its European business, O’Connor regards SEB’s Singapore presence as the ideal stepping stone to growing a business that can challenge the existing pan-Asia competition. Cordea’s building in Asia actually started prior to the SEB deal. In 2013, it acquired a small Japanese property fund manager called Merchant Capital and last October, Cordea opened an office in Hong Kong.

“We’re really building out our coverage in Asia,” notes O’Connor. “I like Asia as it offers many different markets with many different characteristics. It is less homogenous than Europe and Europe is not exactly homogenous. So there’s lots of different investment profiles for investors.” He adds: “Also, we’re going to see over the next few years a number of those markets will become more institutionalised and that will increase the investment universe for investors.”

O’Connor harbors ambitions for Cordea to have “in the region of €4 billion or €5 billion” of assets over the next “few years” in Asia. By his reckoning, that would see the firm reside among the top 10 or so real estate investment managers in the region.

Then comes the US. Says O’Connor: “My hope is we’ll be there in three years. But that will be dictated in terms of how fast we move in Asia to an extent and the actual opportunities in the US.”

He is confident, however, that when the time does come to expand stateside, there will be both resources and strategic support from parent company Savills, which itself expanded to the US last May with the acquisition of Studley, the leading US independent commercial real estate services firm in a deal valued at as much as $260 million.
It is unlikely the acquisition of a real estate investment management business in the US would command such a fee. O’Connor admits the cost would unlikely even rival the €21.5 million Savills is paying for SEB. But he says: “We have good backing from the PLC in terms of how and when we do it.”

Catalysts and reactions

Cordea’s agreement to buy SEB was the result of a sales process run by financial advisory firm Lazard and SEB’s own SEB Corporate Finance division. As far as O’Connor is concerned, SEB was keen to streamline its business activities to its core Nordics markets, across business lines. In its official communique, Fredrik Boheman, head of SEB’s German business, describes the offload as “a fundamental repositioning in response to market developments.” 

One unnamed European capital advisor says SEB became less enamoured with the real estate investment management business after its German open-ended fund business, which today controls €6 billion of its €10 billion of assets, became subject to a BaFin-controlled formal liquidation, expected to complete by the end of 2017. “That meant fee-take was falling way rapidly,” he said.

“For Savills, it gives them depth in the German market and, as a sideshow, Savills can help with sales from the open-ended funds,” he added.

A European real estate fund manager, also talking on condition of anonymity, was also concerned about the platform’s income. He says: “The key about the price is the real AUM, how sticky is it and what is the fee schedule attached to that AUM.”

Another European manager adds: “For them, strategically it’s quite an interesting move. Having said that, it’s also quite challenging as you have a lot of liquidating funds and assets.”

But he says, scaling up via acquisitions like this is one of few options for investment managers in the small to middle tier of managers in the market. “You either bulk up or you become an also-ran. Savills have a decent platform around the continent. What they haven’t got is scale so this will give them that.” O’Connor retorts: “I think we’re leaving the squeezed middle and are now in striking distance of the top tier.”