Consolidation now

It's as though an arms race has begun. Huge corporations are now striving to become even bigger. And all this is being done in the shadow of growing economic problems. In a year's time the property market will have taken ?on a completely different face

Radosław Górecki

The last few months have proved that the global property market has well-and-truly entered a new consolidation phase. ?It seems like a week cannot pass by without rumours or leaks about the possible mergers or acquisitions of large companies. On the one hand, there is the fighting over acquiring companies that manage significant property portfolios. On the other hand, the consultancy world is also changing. There have recently been some major transactions in this industry - and more are bound to come.

Some grow, others disappear
"Such a transaction is an opportunity that happens in the industry only once in a our lifetime," declared Brett White, president of the management board of CB Richard Ellis, after the company acquired three subsidiaries of ING Real Estate Management. ING REIM Europe, ING REIM Asia and Clarion Real Estate Securities, which were absorbed by CBRE at the beginning of the year, had assets under management worth EUR 44.7 bln. Interestingly, CBRE did not stop there. The company immediately announced that it was planning to buy out more companies. Some said that it had its eyes on King Sturge. And this was when Jones Lang LaSalle, who had had an offer for the ING companies rejected, entered the game. The US stock exchange listed consultancy eventually reached an agreement with the partners of King Sturge, and as a result, a merger was announced on the last day of May this year. Under the deal, King Sturge was effectively sold to its American rival for GBP 197 mln. The 43 European offices of King Sturge (including 24 in the UK) will now operate under the Jones Lang LaSalle brand. The scramble for large property portfolios and attractive companies is also occupying the big, international developers. American warehouse developer ProLogis has been in the news for carrying out a couple of spectacular transactions recently. It managed to close its merger with AMB Property Corporation, as a result of which the new company - Prologis - became the owner or investor of properties and development projects with an area of app. 55.7 mln sqm in 22 countries. The value of this portfolio is estimated at app. USD 46 bln. In the meantime, ProLogis was embroiled in a pitched battle over retaining control of ProLogis European Properties (PEPR), which has an asset management portfolio of 232 buildings in eleven countries in Europe, after Australian competitor Goodman and APG of the Netherlands launched a bid to take control of PEPR. However, ProLogis refused to back down, taking out a loan of USD 732 mln (EUR 500 mln) with JP Morgan Chase & Co. to buy up the shares in PEPR needed to see off the takeover bid.

More transactions to come
Such large-scale mergers and acquisitions mean that the balance of power on the market will change radically. And in the wake of these deals, the real estate sector is now awash with rumours.DTZ has officially announced that it is considering accepting an acquisition offer from BNP Paribas. "What we are seeing with the recent mergers is the continuation of a global trend. Regional businesses like King Sturge understand that fewer and fewer clients control more and more of the money and they are demanding an integrated global service. The regional businesses simply cannot provide that service and will start to lose their market share quickly," believes Hadley Dean, managing director of Colliers International in Poland. It is also the case that there is currently a lot of competition on the property market, in a sector that is very fragmented. "Frankly speaking, I am a little surprised that this situation has prevailed for such a long time. I expect to see a lot of mergers by the end of the year. The last crisis caused many companies to struggle with the new situation on the market. However, the others strengthened their positions and are getting ready for acquisitions," comments Colin Waddell, managing director of CB Richard Ellis Poland. Similar views can be heard from the heads of rival consultancies. "After a recession, when the market is rejuvenating, a lot of interesting chances arise for quicker development. Besides, more and more companies are operating on a global scale. And companies such as ours have to respond to that. So integration is a natural result of this process," adds John Duckworth, managing director for the CEE region at Jones Lang LaSalle. "There is no hiding the fact that the crisis weakened a lot of companies. Some of them have disappeared from the market, others have been sold. Companies that have managed well or even strengthened their positions during this difficult time are now exploiting this situation. So the process that we are observing right now is something that naturally occurs," adds Philip Dunne, the European president of ProLogis.

Hunting time
Unsurprisingly, the chief execs of the companies which have carried out mergers are excited. All of them emphasise - almost with one voice - that the transactions are good both for their companies and clients. But is this really the case? Not entirely. Consolidation processes are by no means simple affairs. Many people employed by merged or taken over companies are justifiably worried about their positions, but nobody wants to comment on this on the record. However, it is clear from the conversations we have had with agents working in consolidated companies that not everybody is looking forward to the future. To put it bluntly, many people are afraid they will lose their jobs. "And this provides an opportunity for the competition. In one way big mergers weaken the potential of the joint companies for a while. People are no longer able to focus on acquiring or servicing clients, and instead start to think about which boss to please in order to improve their chances of keeping their jobs. I will not hide the fact that there have already been a few people calling me and asking about the possibility of employment," the head of one of the big agencies told us, who wished to remain anonymous. What do the representatives of King Sturge and Jones Lang LaSalle have to say on this issue? People make up the value of our companies - and this should be remembered. If we wanted to get rid of them, we would also lose our positions," claims John Duckworth. And as Jason Sharman, partner and managing director at King Sturge adds: "Our strategy is not to reduce staffing levels. We want to strengthen our position across the whole region. I think that a new opportunity is opening up for many people working in King Sturge to acquire new experience in the global company that we have now become," he says.

Looking for niches
Global mergers will influence the situation on the CEE market. Despite the fact that the share in revenues from this region does not make much of an impression on the balance sheets of global corporations, they are still markets with good prospects ahead of them. By taking over King Sturge, Jones Lang LaSalle has entered South East Europe "The merger has created exceptional opportunities for us, particularly in the case of Slovakia as well as in countries in the South East Europe region - Croatia, Serbia, as well as the other countries in the former Yugoslavia. This is possible because of the strong position that King Sturge attained in these countries," says Tewfik Sabongui, managing director of Jones Lang LaSalle in Prague. However, the competition has not gone to sleep. The fight for smaller markets has already started. Experts claim that smaller, niche companies are also being targeted by large international companies. Their acquisitions would make it possible for the bigger players to penetrate regional markets in a more effective way and to build a strong position on these markets. This is why it came as no surprise to anybody when CB Richard Ellis announced that it was taking over a Czech shopping centre management services company recently - Euro Mall Centre Management, which operates in Poland, the Czech Republic, Slovakia, Latvia and Lithuania. The portfolio of facilities managed by the company includes 40 centres.

In the shadow of the crisis
What does the near future hold in store? Further spectacular acquisitions and fights over the management rights to big property portfolios - this is what the next few months will be like. And after that? "It will not be easy. Unfortunately we are standing at the threshold of the next wave of the global crisis, which this time will affect Europe to a greater extent. The problems of Greece have even brought the future of the single European currency into question. This creates a dangerous situation for the whole real estate sector. It is also worth remembering that many mergers and acquisitions take place with the help of loans worth millions of euros. In three or four years' time they will have to be re-paid. Will they be able to do this? This question is still open," says the head of one of the big consultancies, anonymously. Despite this, the bosses of companies which have carried out the acquisitions seem to be in a better mood, at least officially. "Rumours that the merger will be very difficult are unsubstantiated. I can't see that. On my return from regional offices in the CEE region, I can say that there is a lot of enthusiasm among the teams. The vast majority of people have a very positive approach. But it is important for us that our employees understand that we have not bought a company which is just a piece of paper. We have taken over a company where real people are working - high class specialists," argues John Duckworth. Who is right? Those who are predicting a double-dip and troubles ahead for the merged firms? Or those who have strengthened their positions against all the odds? We can only wait and see what the real answer is, and take all the opinions being expressed today with a good pinch of salt.