BLUEPRINT: Down at the coalface

When Cromwell Property Group burst onto the European real estate scene in early 2015 with the acquisition of Valad Europe, few in the local industry knew anything about the Australian company that had suddenly gained a substantial pan-European platform.

The Brisbane-based A-REIT had caught on to the deluge of international money seeking to invest in real estate – Cushman & Wakefield’s 2017 Great Wall of Money report identifies $443 billion of available capital targeting global real estate, the highest level since records began in 2009 – and it was seeking its slice of the action.

“We recognized that Australia was a pretty small pond and if we were going to be able to continue to leverage the real estate skills we had, then we needed to look for more capital outside Australia and that would mean looking at opportunities to grow our platform overseas,” says Cromwell founder and chief executive Paul Weightman. “Capital is becoming more global and you want to access as many global investors as you can.”

Cromwell is listed on the Australian stock exchange with a market capitalization of A$1.7 billion ($1.26 billion; €1.13 billion). It operates a twofold business model: in Australia, it is a direct owner and developer of property, chiefly in the office sector, as well as managing several retail funds; in Europe it concentrates on wholesale fund management and is a co-investor in many of the assets that it acquires. Since its inception in 1998, the company has grown its assets under management to €6.7 billion, most of which is split roughly equally between Europe and Australia.

It began life as a syndicator of property assets before moving into the fund management space and gradually building a solid domestic business in the 2000s. However, it was the consequences of the financial crash that enabled Cromwell to step up into the local big league.

In 2006, the market was booming, but Weightman was beginning to feel uncomfortable about where things were headed. “One of the things that had a very big impact on me was going through the credit squeeze of the early to mid-1970s as a teenager,” he recalls. “I have a vivid memory of sitting there with my grandfather with a pile of debenture certificates that were going to be his retirement one day and were worthless the next.
From that, and the risk management experience we had, we learned to have a weather eye for events in the market that were likely to lead to pressure being put on people.”
Weightman took more than 20 funds with relatively high gearing, amalgamated them and stapled them to a listed management company so that Cromwell was reborn as a REIT with a fund management arm. With a single portfolio under management, that allowed the company to sell assets and reduce debt.

When the market crashed in 2008, the company was cash-rich with very low gearing, and ready to take advantage of buying opportunities created by distress. It also found a major capital partner in Redefine Properties, a Johannesburg-listed REIT. “Marc Wainer, the chairman of Redefine, was in the process of kicking off Redefine International so he came in for 15 percent,” says Weightman. “Since that time, they have been cornerstone investors in almost everything we have done.”

Redefine chief executive Andrew König praises Weightman’s acumen. “Redefine has strict investment criteria when investing into real estate markets outside South Africa. The most important being that we have a local partner whose interests, ethos and business culture is aligned to ours,” he says. “Paul Weightman and the Cromwell team are a natural fit with us, being well versed, well timed and well considered in actively managing a long-term asset class, where vision is required to be ahead of property cycles.”

In 2008, Cromwell began to search for opportunities to develop an overseas platform. Weightman had concluded that the US market was too difficult to crack because of the depth of competition, and looked instead towards Europe. The European arm of another Australian business, Valad, piqued his interest and when that ran into trouble, Cromwell made regular approaches to the owners.

Those attempts were frustrated, however, when private equity real estate giant Blackstone swooped in to buy the entire Valad business in 2011, principally with an eye to acquiring its Australian holdings. “We kept in touch and said if the business is for sale we would be interested in talking,” says Weightman. “When they took it to market we were a preferred party principally because half the guys at Valad Europe are Australian and they saw an opportunity to either go home or reconnect.”

Scaled for growth
At the beginning of 2015, Cromwell bought the Valad Europe business for €145 million. At a stroke the acquisition provided Cromwell with a substantial European asset management platform with 22 offices in 13 European countries.

“Those people on the ground in Europe are doing five lease transactions every day, so we are down at the coalface understanding tenant requirements and understanding incentives. It gives us the ability to accurately underwrite and business plan with live information,” claims David Kirkby, an Australian who heads Cromwell’s European business, a role he also performed under its former owners.

Kirkby says that typically Cromwell’s large pan-European value-add funds would produce a cash-on-cash return of 8 percent and a total internal rate of return of around 16 percent. On an unleveraged basis Cromwell targets total returns of around 11-12 percent. At the highest end of the risk and return spectrum it has generated returns of up to 34 percent IRR on portfolios of distressed assets.

The Valad Europe business was focused on transactional revenue. Kirkby says the platform bought and sold €2.3 billion of real estate last year without much effect on its overall assets under management, which is currently €3.3 billion. However, Cromwell now plans to trade less and grow the assets figure, which Kirkby predicts will reach €4 billion by the end of the year.

Intense competition means that buying core assets in Europe is an expensive business right now. Instead Cromwell aims to build up its portfolio by using its asset management capability to transform value-add real estate into stabilized core and core-plus properties that can be put into open-ended funds, thus attracting capital from across the risk spectrum. “There is a natural and complimentary fit between long term, income-focused investors and the private equity investors that the business acts for on the other side,” argues Weightman.

“The PE guys want talented asset managers who know their markets and can turn assets around quickly to stabilize them and realize value. The strategy going forward is to find a way to provide exits for the assets in a meaningful way in scale to investors that are then able to invest for the long term in the stabilized assets that we create.

The focus for us over the next couple of years is to build out those long-term, income style products that cater for the rollout of private equity funds that are coming to the end of their life, and to be the end of the pipeline for our PE investors for the assets that we have helped to stabilize.”

The first such fund was the Cromwell European Cities Income Fund, launched in November 2016 with an initial investment target of €2 billion. It was seeded with three Dutch office assets valued at €205 million that had been managed by Valad Europe from value-add through to core.

PFA Pension, Denmark’s largest private pension scheme is an initial investor. Michael Bruhn, director of PFA Real Estate, says: “We like the Cromwell European platform because it combines a depth of local experience and expertise with a cross-border asset and fund management capability, which means they are able to source and underwrite good quality deals from across the European market.”

Weightman is optimistic about the prospects for economic growth in the region: “Europe is going through a recovery. That has taken quantitative easing and a lot of de-risking at a political level, but probably, for the first time since we acquired the business, we have genuine interest in Europe as a growth story.”

Beyond investors backing the firm’s funds, that interest has extended to senior executives seeing Cromwell as an attractive next chapter in their careers. Over the past year, Cromwell’s European platform has attracted some high-profile recruits. Audrey Klein, one of the best-known names in European capital raising, has joined the firm as head of equity. Another high-profile hire, Tomas Beck, formerly of Swedish pension fund Första AP-fonden (AP1) will head Cromwell’s operation in the Nordics. “Joining a proper real estate-focused group was appealing, especially coming from the institutional side,” says Beck. “There is a true bottom-up alpha knowledge within the group. They are not capital allocators; they are property people.”

European fund manager Internos is one of Cromwell Europe’s industry peers, with €3.5 billion of assets in the region. “We are on a similar journey in that we have got quality platforms and we are now trying to harness those to get fresh capital into bigger, better, newer vehicles,” says executive chairman Jos Short. “They have good staff, good local offices, a good network and I think they could put more through that platform. They are scaled for growth.”

The wrong risks
Outside Europe, Weightman declines to comment on reports the company is looking to place $1 billion of European property into a Singapore-based REIT. However, with reference to Cromwell’s strategy in Asia, he says: “It is a natural expansion for us to access Asian capital to invest in Europe. It is difficult for us to do at the moment because there are few opportunities to do that in a diversified, liquid way. That is a focus for us.”

He also rates Singapore highly as an investment destination and expresses optimism that the prospects for the Japanese market will be boosted by the Abe government’s reforms. Other Asian markets are tougher to access due to governance and transparency issues, he says.

At home in Australia meanwhile, Cromwell is bidding to acquire the big Investa Office Fund portfolio (see panel). It has never played in the country’s retail market because of the dominance of Westfield, and Weightman is wary of a residential market heavily affected by affordability issues, but the company will continue on-balance sheet development and asset management activities in the office sector.

Weightman was proved right when he battened down the hatches before the last crash. Should he be worried about expanding into European real estate market at a period when the market appears near its peak? “There is obviously a lot of capital parked in London because it is a safe haven and it is probably not the barometer to measure activity in the market. In a lot of markets in Europe we see there are opportunities that can be justified quite reasonably and they are the sort of things we tend to focus on. We are not competing with other people just to get capital out of the door. We don’t have a lump of cash that we need to invest in a certain period because that creates bad behaviors, but there are people taking a lot of the wrong risks and they will lose money if they make bad decisions.”

Cromwell Property Group
Founded: 1998
Based: Brisbane, Australia
Headcount: over 350
Offices: 30 in 15 countries
Executive management board: Paul Weightman, CEO; Michael Wilde, CFO; Jodie Clark, COO; Damian Horton, head of property
Management board: David Kirkby, CEO Europe; Mark Schiele, CEO Oyster Group New Zealand
Assets under management: €6.7bn
Assets split by sector: Office 56.9%, retail 18.5%, industrial 14.9%, property securities/other 9.7%
Assets split by geography: Europe 49.6%, Australia 45.2%, New Zealand 5.2%
Market capitalization: A$1.7bn