“Corporate finance means a lot of different things to different people,” admits Graham Barnes, senior director of CB Richard Ellis Finance. Some surveying firms prefer to call it “capital markets” or their “advisory group” and claim to have been doing it for years. But to the investment banks, the estate agents’ version of corporate finance is only partly recognisable as the craft the banks invented.
The bulge-bracket City banks have big balance sheets, of course, and can thus take on capital commitments that partnerships cannot. “If you require execution in the wider capital markets, private-equity placements or placings of listed shares, or securitisation of bonds, we can’t do that,” admits Barnes. “The equity markets are huge and the banks provide many services to them. That is where they have a clear advantage over us.”
A different service
“But we can do things that an investment bank cannot. Real estate is a market and clients need to engage with somebody deeply immersed in that market. We pick up where it is a real estate transaction that requires financing rather than a financial transaction that involves real estate.”
In the City, corporate financiers deal with mergers and acquisitions acting very much like estate agents in putting parties together. But for the surveying firms, simply buying and selling buildings remains the work of agency departments: the corporate financiers take on such work only if there are complications or complex funding is required.
Typical functions undertaken by agency financiers include project funding; advice to fund managers; the launch of indirect property vehicles; and advice to private-equity buyers. A portfolio sale might count as corporate finance; a single building would not.
Chris Jolly, managing director of corporate finance at Jones Lang LaSalle, says: “As markets have evolved, there has been less emphasis on real estate fundamentals and much more on cashflow and credit analysis to drive performance and underwrite transactions. You cannot simply view real estate as an income stream; you need a clear understanding of what drives value.”
Jolly is typical of many of those running agency corporate finance departments in that he was recruited from one of the banks. Not only are many agents’ financial skills limited, clients expect to deal with partners with proven City expertise. Property is not regulated, but by moving into the investment world the agents have had to adopt the regulatory regime of the Financial Services Authority and the panoply of compliance officers and Chinese walls it involves.
“We are FSA registered,” confirms Jolly. “We’re technically able to sponsor listed instruments but we choose not to because they need to be underwritten and distributed.”
That ability to use their balance sheets – as well as their financial reputations – helps explain why the banks have traditionally been able to charge higher fees than agents. However, Jolly says: “The gap that was there 10 years ago no longer exists to the same extent. We’ve lost work to banks that have undercut our fee twice in the past 12 months.”
But if the agents do not have the capital base to guarantee finance-raising and the investment banks cannot match the surveyors’ on-the-ground experience, there is plenty of overlap in their services where they can compete.
City investment bankers accept the estate agents’ move into their territory, but do not doubt their own superiority. “Sometimes they’re competing with us for clients, but they also often work with us,” says a corporate financier with one of the big US-owned banks in London. “There isn’t much that they can do without our help.”
If the client holds a beauty parade to choose an adviser, agencies have a chance of taking on the whole role, but frequently the bank is chosen first and it decides whether it needs an agent – usually in a subsidiary role. Only very occasionally does an agency have the opportunity to choose a bank to work with, and that is an admission that the bank can offer services that the agent cannot.
Mark Packer, head of the real estate finance team at lawyer Eversheds who has dealt with both agency and investment bank corporate financiers, says: “The agents can put things together, but they often have to go out to get them finished by someone else: they have to bring in a larger bank. But that’s equally likely with a smaller investment bank.”
Indeed, many agencies see themselves competing more with these smaller banks than the bulge-bracket houses. Barnes at CBRE says: “Very large transactions excite the investment banks, but there is a level at which they are not interested. Trying to get them to do anything under £100m is very difficult.”
Collaboration over competition
Nick Burnell, partner with Knight Frank’s corporate finance office, adds: “The bulge-bracket firms really depend on large deals. I’m not saying we’re taking crumbs from the rich men’s tables, but they are less active on £10m or £20m deals. Nonetheless, we have the capacity to raise quite large sums when we need to.
“We’re not competing head-to-head with the investment banking community. We can’t compete with them so we concentrate on our core strengths and one key differentiating factor is that because we are a partnership we are strong on relationships. We find ourselves collaborating more with investment banks: our strengths are different to theirs.”
Coffer Corporate Leisure, set up by agent David Coffer, believes it can compete by specialising purely on mergers and acquisitions in the leisure sector. “Because property is becoming a more important part of a deal there is big scope for people with a property background,” says managing director Mark Sheehan.
But Packer is not convinced that agencies are ready to take on the banks on equal terms. “It’s part of a progression of the large players in the real estate market impinging on each other’s turf, but I’m not sure if you’ve yet seen them having a huge impact on the market,” he says.
“They’re obviously building their expertise outside the pure real estate arena so there will come a point when they can compete properly, but I don’t think they’re there yet.”
