Stability in a changing world

Alex Hayes, ‘Eurobuild CEE’: I was going to start off by asking about your property management activities.

Lauric Leclerc, deputy chief executive, BNP Paribas Real Estate: Let’s start with the bigger picture. BNP Paribas Real Estate has property management teams in 14 countries. We manage 40 mln sqm, which mainly comprises office buildings and logistics, but also a big chunk of retail in Central Europe. We employ 850 property managers across Europe and we are considered the number one player in Continental Europe. Our customers are both the biggest and the smallest companies in Europe. It’s good to have both types of clients, because due to the fact that we provide services to big companies, we have devised tailor-made services. For example, international investors and asset managers are always demanding technological innovations and this is also something that you can then offer to the local players who would otherwise not have access to such services.

I was wondering about the links between property management and facility management. First of all, can property management be seen as a stepping stone into asset management? To what extent do these services overlap?

It is true that differentiating property and asset management is far from straight forward. Obviously property managers know what a building needs, from when the most trivial problems arise in the toilets to the more complicated issues when negotiating rents with the tenants. Property management was in the past regarded as a fairly uninspiring business, but over the last 30–40 years it has become much more sophisticated. Today a property manager is able to add value to a building, to understand what a good or bad lease is, and can address vacancy issues. So there is a large tendency for property managers to offer services that in the past were given by asset managers. The only thing that property managers will never do is to buy and sell buildings on behalf of investors because this requires specific expertise. The trick is for property managers not to offer these services for free. So, in a sense, you’re right that the boundary between asset and property management has become very blurred – as a response, in fact, to the growing requirements of clients. Nevertheless, this doesn’t amount to a revolution: neither of these two types of business is going to disappear!

Would you say that property management is an entry service, through which you can get closer to the tenant and then cross-sell them other services?

Yes, absolutely. When working on transactions, very often you do one deal with an investor and then you stop. But with property management this is not possible. They might have a contract for five or ten years. So there are two main reasons why we continue to offer property management at BNP Paribas. The first is that this gives us a long term relationship with investors. Secondly, it provides us with a good base to enter new markets. We entered the CEE region by acquiring property management teams. And then we started setting up offices to enable us to gain an understanding of the local environment before we jumped to the next stage, which was developing our other businesses, such as advisory and valuation. And there’s no reason why one day we couldn’t move into property development and investment management. We’ll certainly have investment management very soon in Poland. So property management forms the fundamental basis of our expansion in Europe.

Another thing that needs mentioning is that more and more companies, especially from America, do not want to consider Europe as a multi-country geographical region. Therefore, they want an international key account manager, a contract manager who is truly pan-European. One of our new clients has signed with BNP Paribas Real Estate to have the same service in four countries and doesn’t want to waste too much time with our local teams. He just wants to consider Europe as one country. This has led us into reorganising ourselves and recruiting people who are able to talk with these investors, who are able to talk about German, Polish and French regulations and to understand what the needs of the investors are and how these can be achieved in each of the various countries. So it’s all very challenging!

Here in Poland BNP Paribas is still one of the smaller consultancies on the market. What do you see as your specific advantage over your competitors?

BNP appeared on the market later than our peers, many of whom have been here since the early 90s. One of the strengths of BNP Paribas is the complementary nature of the services provided by BNP Paribas Real Estate and BNP Bank. We can provide real estate services at the asset-level, or at the portfolio level or at the corporate level – which basically means the owner of the assets – and this can be a huge advantage for our clients. We can come in at the real estate level to sell, buy, or re-gear your portfolio, but there may also be a corporate solution involving issuing bonds or other specific financing tools. Our shareholder bank has a very strong corporate finance team specialised in real estate and we often collaborate with them. We can complement the services provided by its corporate finance department. If you work for a corporate you can work as a basic agent offering a brokerage service, or you can work for this entity with the idea that banking finance can add value, and that you are able to build this corporation’s portfolio into a REIT, put this REIT up for sale or finance the REIT. How we differ from our competitors is in the access we offer to these banking services, which gives us added value across Europe.

Earlier we talked of technological innovation. Could you elaborate on this?

For example, property management requires software designed for pan-European services. Locally we have the best tools, but these are no good when it comes to pan-European reporting. This is a challenge, but has two main aspects. The first is to buy a pan-European tool, of which there are not that many, and the other is to process the data to reformat it for every country and send it out to the client. And then there is the technology in the buildings themselves. Here two issues arise. The first is to take control of the facility managers, which means you have to connect to their building management systems. This is what we’ve done in France, where we require that the facility management companies there work with our BMS.

Are you saying you can view the data on a specific building from your head office?

Yes. We have an agreement with a technology company to use a cloud-based BMS system. It supplies data to our systems to allow us to understand the technical installations in a building and to determine the capex required. When you know what kind of fittings you have in a building, when you know its age and the maintenance needed, you are better able to draw up the capex programme. Therefore we can provide superior quality capex management, which is incomparably advanced compared to what we used to have just five years ago. This is something we’re trying to introduce at the European level, but we’re not there yet. You can also upload all the data to an internet portal, so that the users of the building can view it. Currently this exists, but it’s not as complete as we would like it to be. In France we’re developing portals on which we can make all the information about a building accessible to its users and that can also be opened up externally. Central Europe is not behind in this regard. I have seen a lot of interest for such new services and technology and have been asked by many companies to look into this.

You’re saying that one of your biggest challenges is to make these systems compatible across Europe?

Yes, and we’re going to put a lot of money into this. Millions of euros.

I’m almost embarrassed to ask about quantitative easing and low interest rates, because this is a subject has been flogged to death, but it’s still a question that needs to be asked...

It’s a well-worn topic, but it explains many things. If we compare the interest rates two years ago with those of 2007/2008, back then they were far higher. Around 400 or more basis points compared to now, when we’re almost close to zero. Europe has been through a series of political crises (Greece, Italy, Brexit and so on), but it’s now stabilising. Everyone said that Europe was going to split up, but it didn’t. It’s stronger than before and this stability is now a magnet for foreign investors. Real estate itself has for the last three or four years been a particular source of attraction, due to the sheer volume of money being issued by the central banks that has to be placed somewhere. Yields are now compressed in Western Europe to the point where it’s hard for some funds to achieve the returns they’re looking for. More and more of these funds are now being drawn to such regions as Central Europe, because yields are higher. We expect that interest rates will remain as they are until 2019 or even 2020. This is also why funds are looking at quite low LTVs. There was this tendency for LTVs to go very high before the crisis. Most of the restructuring that has taken place has been aimed at reducing LTVs, to avoid being hit by any interest rate hikes later. I don’t think there is a bubble building up and there are now safety measures in place that make any shift in the record low interest rates unlikely. We haven’t seen such rates since the Second World War, apart from in Japan.

I’ve heard the opinion that we’ve not had a bubble mainly because the banks are still being sensible in their lending.

Very true. We can see this with what’s been happening internally with our bank. We’re really cautious. This is not the behaviour we saw in 2007 in the US – or even in 1993. It’s absolutely not the same. The main challenge we face and particularly in the CEE region is the shortage of labour. There’s no baby boom generation coming of age any time soon, so in the future there will be a squeeze between the shortage of labour and low inflation. So the issue is going to be how to reconcile non-inflationary prices, changing salaries and the lack of skilled personnel.

We seem to be veering into politics...

We can look at this risk too, and the risks in our business are clearly geopolitical. Certainly what happened in Catalonia this year, for example, hurt us very much and we lost a lot of business in that region in the final quarter of 2017. It might seem that the situation there has since stabilised, but it hasn’t really, because people there still want autonomy. So this is going to be a recurring problem. It has generated uncertainty and for capital to shift to other cities. There are also geopolitical situations in the CEE region that have made investors nervous and then there’s Brexit, which raises the question of the Irish border. Fingers crossed that this won’t lead to any serious consequences.

On the other hand, from an economic point of view we’ve not had such a strong Europe for a long time, led by such a strong Germany and Franco-German alliance. This is a fact. Poland has benefitted from all this by upgrading its entire infrastructure. So Europe remains the main draw for investors across the world.

How do you see things in ten years’ time?

Co-working and sustainability will no longer be mere trends and will have changed the face of the office world. Flexi-office space is expected to amount to 30 pct of the total stock within the next four to five years. Everyone will be able to work from home in any kind of business. If you told me about home offices ten years ago, I would have told you: “We’re not on holiday. We’re here to work!” But today you see people spending an hour and a half commuting to the office. I’d prefer them to be working in more comfort at home. The office will become just a meeting place for formulating strategy – and after you’ve done that no one cares where you are. We are now designing our future French HQ. It is a place where people can sometimes come, but we’re not obliged to herd everyone into the same building. Most of the rivals of Mindspace and the Brain Embassy are not actually office space providers. They’re Coffee Heaven, Green Coffee and other such places. This is where people go and work. They have wifi and can feel as though they are in a different environment. So in the future we will need less traditional offices, while flexi-offices will become much more the norm.

Specialising in management

Lauric Leclerc joined BNP Paribas Real Estate in 2005 as the CEO in charge of property management for Europe. Since July 2014, he has held the position of deputy chief executive of BNP Paribas Real Estate in charge of property management and international advisory. Before joining BNP Paribas Real estate he was employed by Ernst & Young, Axa Real Estate and GFF Institutionnels.