The struggle between US rivals Insignia and CB Commercial for Richard Ellis marks the start of an American invasion that could shake the UK agency world to its core. Amanda Seidl reports.
Three of the world’s largest property groups are targeting Europe in their bids to become global providers of real estate services. CB Commercial, Insignia and LaSalle Galbreath have all declared their intentions to establish European networks through acquisition of property consultancy and management companies. And rival US giant Compass Management & Leasing – now owned by Lend Lease – has also begun its European colonisation.
The mergers of Richard Ellis UK with Insignia and Richard Ellis International with CB Commercial have been welcomed by RE directors, yet the deals mark the end of a venerable UK agency and the beginning of a radical shift of influence in the UK market. The rumour that LaSalle Galbreath is in talks with Jones Lang Wootton confirms the territorial ambitions of America’s top real estate companies, which see an opportunity to capture global contracts by offering a consistency of service across the world – the equivalent of McDonald’s in property management.
James Didion, chairman and chief executive of CB Commercial, explains: “Multinational corporations are out-sourcing an ever-larger share of their non-core activities, including real estate operations, strategic planning, facilities management and transactional management, all of which we will be well prepared for, both in functional capabilities and geographic coverage.”
Satisfying the global property management requirements of their multi-national clients is cited by the US companies as the primary motive behind their expansion plans. (See Analysis, January 31). But the UK is also seen as a under-exploited market in which to market the US “one-stop shop” property management service.
“There were no UK firms which could offer the sort of comprehensive service demanded by multinationals when we advised Bank of America on out-sourcing its property management in 1995,” explains Philip Ingelby, head of property consulting at KPMG. “Our research showed that the UK market was a long way behind the US.”
The gap in the market – and the chance to buy in management contracts through corporate acquisition – is now being aggressively filled by the US firms, which are expanding rapidly: since the beginning of last year, CB Commercial has merged with Koll, LaSalle Partners with Galbreath, and Lend Lease acquired Compass Management & Leasing as part of its $400m buyout of Equitable Life’s real estate division.
Insignia began its European invasion last September, buying 60% of Italian property management company CAGISA (Compagnia di Amministrazione e Gestioni Immobiliare) for $2.15m. Like Insignia, CAGISA manages mainly residential apartment blocks and has long-term contracts with institutional clients.
Insignia was attracted to Italy by the government’s decision to privatise the management of properties owned by government agencies, an initiative that could put thousands of residential and commercial units into the private sector.
At the time, Insignia’s chairman Andrew Farkas spelled out the company’s European intentions: “The demand for quality services, focused on asset value and performance maximisation, is just beginning to emerge in many of these countries, including Italy. We believe that, by establishing a beachhead early on and by transferring our expertise to an established organisation, we can give ourselves a material, competitive advantage as these markets heat up.”
Farkas’s words apply equally well to Insignia’s RE acquisition. But if RE UK directors Alan Froggatt and Andrew Huntley believe that London will be Insignia’s European base, they may be disappointed. The company’s managing director of international operations, Mauro Keller-Sarmiento, is stationed in Rome, and this formidably well qualified 37-year-old has been there since his appointment early last year.
A former Harvard colleague of Farkas, Keller-Sarmiento is not a surveyor – he worked as a management consultant for McKinsey & Co, an investment banker for Morgan Guaranty, and set up a South American network of retail distribution outlets for YPF, the Argentine oil and gas company.
Keller-Sarmiento is looking for ways to establish a European network, probably through acquisition. France is likely to be an early target. Interviewed by Estates Gazette in New York (see p64), Farkas confirmed Insignia’s design to buy up individual companies around Europe. “That’s what we did very effectively in the US, and we would do it over there [Europe] too,” he insists.
Insignia’s president and managing director, Frank Garrison, emphasises the company’s objectives in Europe. “We’re committed to creating an international seamless delivery system for property management services. I see us as a global, full-service real estate provider and provider of real estate financial services, including such things as mortgage banking and related services.”
It shares these objectives with its US rivals: CB Commercial, Compass and LaSalle Galbreath. In its recent share issue prospectus, LaSalle Galbreath spelled out its ambitions: “To take advantage of the trend towards globalisation of real estate capital sources and investment opportunities and the international business expansion of many of its corporate clients, the company intends to expand its existing international operations. This expansion is expected to include selective acquisitions of international real estate services companies.”
The rewards for successful expansion became clear last week when Insignia reported a 77% increase in turnover for the past year; total revenue rose to a shade over $400m; and net profit rose by 19% to $10m.
The Richard Ellis International merger will give CB Commercial a head start on its rivals in terms of numbers: the combined group will have 8,000 staff in 31 countries and be able to capitalise on REI’s contacts in South America.
But by failing to win over RE UK, it will have to build up its UK operation from the handful of directors based at Berkeley House in London.
Australian-owned Compass Management & Leasing has a different aim: it first entered the UK market to service its multinational clients, but is now looking for new business through PFI – it is part of the PPM consortium which won the DSS PRIME contract last year, beating its US rival Galbreath, which was in the unsuccessful Mapeley consortium.
Opportunities to expand
“We are looking at other opportunities to expand here,” says Jim Kohlhoff, senior vice-president of Compass, who points out that the company has grown by 15% annually for the past six years. “We see the UK as a springboard into Europe and we are talking to a number of US clients about their requirements for a single-source property service throughout Europe.”
For the UK’s traditional surveying firms, the American invasion represents a further threat to their core activities, already eroded by rival professional consultancies. “Property management is a bread-and-butter activity for most medium and large practices,” says Charles Henrique of Gooch & Wagstaff. “It’s also a useful source of other work, such as rent reviews.”
Lionel Prodgers, managing director of Chesterton’s facilities management division and chairman of the British Institute of Facilities Management, is less alarmed. “Property management in the UK is peculiar to this country because of the history of legislation and institutional involvement.”
Such national idiosyncrasies, he says, make single global contracts more complicated and less lucrative. “I’m sceptical about the scope for global or even pan-European contracts and the ability of one organisation to manage a global contract,” he says.
Prodgers is also dismissive of the American assumption that Europe lags behind the US in property management technology and techniques. He comments:”The US is service orientated, but I don’t believe it leads the world in facilities management. In the UK, there is a fusion of asset and resources management, a high level of training, and expertise in outsourcing government work through the PFI. These are highly exportable skills.”
