Copyright: David Lawson – Property Week 2000
Losing one senior manager could be considered a misfortune: losing several in quick succession seems like carelessness. UK managing director Malcolm Naish is leaving LaSalle Investment Management less than a year after Philip Gadsden and Duncan Owen struck out on their own. Before that senior executives in Paris and Frankfurt were headhunted by rival fund managers. Meanwhile, global income fell 22% to $19.1m (£13m) in the first three months of this year.
Is the biggest transatlantic property merger of the late Nineties coming apart at the seams? Sceptics who predicted that linking Jones Lang Wootton’s traditional real estate skills with LaSalle’s American pizzazz would never last are having a field day. So why does European chief executive Jeff Jacobson look so relaxed, lounging in his dress-down gear on a hot Friday afternoon at LaSalle’s London HQ?
Doom-laden quarterly figures are quickly dismissed. ‘Revenue in the UK is rising,’ he insists. Ironically, this is because income from good old traditional management of separate accounts has not been affected by the global downturn, which has taken a toll on the incentive fees used in other parts of the world.
Staff changes are also part of the usual cut and thrust in this sector, he says. Wizzkid Gadsden wanted to run his own, smaller outfit. Naish has nothing but praise for LaSalle, pointing out that after more than 20 years with JLW and the new firm, he felt like a new challenge.
Jacobson is happy to dispel whispers about a clearout with an invitation to see the number of grey heads still in place upstairs. But he says that is not the real test of success. ‘Ultimately, it is whether we hold onto clients,’ he insists. Sceptics predicted they would leave in droves, frightened away by newfangled US methods. In fact new ones have arrived, taking funds under management to almost £8bn.
The biggest, Coal Pension Funds, which has been the bedrock of LaSalle’s business in the UK since before the merger, is happy enough to have just renewed the contract on its £2.7bn portfolio without even going out to tender. Perhaps more significant, however, is that many funds are accepting a switch to ‘newfangled’ management.
The traditional UK system of running separate accounts originated as an added service to transaction work. ‘It is a flawed model,’ says Jacobson, relying on cross-subsidies rather than as a standalone profit centre. It also does not fit the modern market. Property needs to be treated the same as equities and gilts, he says, typically through a fixed fee topped by performance bonuses.
The coal fund has always been operated that way but around a third of all clients have now been migrated to this kind of approach, which is the norm in mainland Europe and the US. At the same time LaSalle has been looking for more discretion in management, and payment via asset value rather than task-related turnover.
So the UK traditionalists are accepting US techniques. Not that Jacobs believes LaSalle is a US firm. Only four of more than 140 staff are American, he says, and more than half LaSalle’s assets are in Europe. He expects most of the firm’s growth to come from this side of the Atlantic over the next five years.
That might not look obvious with the fall-off in current revenue but he points out that partly reflects how high profits went a few years ago when the market was boiling in mainland Europe. Returns on latest ventures in France are also being held back until the last building in one major venture is sold. Then a ‘big lump’ of profits will roll in.
But this could pale beside new business Jacobs is aiming to develop. In yet another irony, he wants to export the UK system of separate fund management to mainland Europe. Most institutions have dabbled in pooled funds but some are now looking at going it alone. Jacobs is itching to talk about a massive separate account that could emerge soon but it is still too early to reveal the details.
In the meantime, investment interest has concentrated on LaSalle’s second pooled fund, Euro Growth II, which aims to invest Eur500m across half a dozen countries. Two suburban office buildings in Paris have just been acquired for Euro90m. But this still looks modest compared with the firm’s global role as a leading player in co-mingled funds.
Jacobs admits he is ‘disappointed’ at the failure to match rival managers in developing indirect property funds. LaSalle has had some success with partnerships such as the link with io on industrial property. A residential fund is also in the pipeline. But Jacobs says it is difficult to interest institutions in blind funds and LaSalle doesn’t have its own big portfolio to kickstart such vehicles. But he is not writing them off. ‘Maybe we have not tried hard enough. Maybe we need a few new people,’ he says.
Another disappointment for those expecting a new approach to investment, mingling shares and direct property, must be the Amsterdam-based division. This is picking up business: one European institution has just signed a Euro85m mandate. But the Euro500m total portfolio is small change compared with $4bn of securities managed on the other side of the Atlantic. The difference is that the US has a massive market in real estate investment trusts while the European list of public property companies is not just small but shrinking as companies go private.
Buying property directly also has its problems. Jacobs sees real estate continuing to outperformed equities, with total returns of around 8%-9% over the next few years but the underlying market remains soft and finding the right material will be ‘challenging’. Favourites targets for investment are retail warehousing, infill industrial and provincial offices. Getting those at the right price could be difficult, however. ‘There is a lack of appropriately priced assets,’ he says. ‘It is a great time to raise money for real estate but a poor time to buy.’