Investors suspicious of real estate advisor mergers

Copyright: David Lawson appeared Property Week 1998

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Is the issue of co-investment by a new breed of property adviser being blown out of proportion? Some of the agents involved certainly do, pointing out that it played a relatively tiny part in their decisions to link with cash-rich US groups.One of their major clients, Alastair Ross Goobey, chief executive of Hermes, obviously doesn't. He voiced strong reservations about the trend last week and others have admitted similar worries.

'As an investor, I am not entirely happy using agents when they are investing increasingly on behalf of third parties,' Ross Goobey is reported to have said.

But not everyone is as downbeat, nor are worries confined to money. On the surface, it seems all about cash. Partners in each big agency have been generously rewarded by joining US partners and co-investment with clients has been raised as a major motivation for signing away independence.In fact, if there was any doubt that property is a people business, it should be dissipated by the underlying reaction by clients, which tends to concentrate as much on fears about who they will be dealing with as the money those people may be making elsewhere.

On the anti side is Richard Pardoe, head of property a Scottish Life, who finds co-investment very worrying. He favours niche surveying practices anyway, because he is always suspicious of conflicts of interest. 'Frankly, I don't believe in Chinese walls,' he said. 'Any that do exist are due to incompetence.'

The culture, on the investment side particularly, is all about gossip. It is in the very nature of agents to pass on information in return for information. Unlike the culture in investment banks, in the property world the trading of information is all important, he says.

At the other extreme is Stephen Smith of AXA Sun Life Properties, who says he has no real problem with these trends. Mergers could be good for the sector by creating critical mass among advisors and it should be possible for surveyors to divisionalise in such a way to reduce conflicts of interest, he says. 'It is no different to the investment banks. Proprietary trading is no cause for concern, provided its properly segregated.'

In between lie a broad swathe who either shrug off co-investment or appear to be debating with themselves the merits and disadvantages of this sudden change in approach. 'We accept the pressure for globalisation because the world is becoming a smaller place,' says Stuart Beevor, property director at Legal & General. 'It is not clients' jobs to tell advisers how to organise their business.

'There must be an element of concern about co-investment by advisers. But providing they are open about it and we can see there is no conflict then it will not bother us.' At the end of the day, quality of service is the important factor, he says, bringing out the fact that who fund managers deal with face-to-face is more important than corporate moves behind the scenes. 'If they do not provide what we need, we will vote with our feet.'

Much of the concern may be because the various roles of agents are being blurred. David Hunter of Argyll Property Asset management says that for this reason it would be wrong to condemn the moves outright. Investment managers will need to co-invest, he says. This is an American tradition. But for an agent to co-invest is rather more hazardous and raises questions from client along the lines of: ''Do you only invest in deals you really like?

'I endorse some of what Ross Goobey said. Where agents are co-investing you could easily find conflicts,' he says. But Ian Watters, a director of MEPC, points out that that the idea of co-investment is not new. This is a return to 30 years ago when agents often took a slice of the action in exchange for fees. In fact some surveyors privately believe they should return to such a role.

'You hear the argument that lawyers and accountants are not asked to co-invest but they get fat rewards charging by the hour,' said one. 'We are paid by performance, so why not share in it?'

Again, this blurs the issue for fund managers. The Prudential was impressed by the success of incentive payments to advisers in its foray into the US over the last couple of years and is understood to be considering using similar methods if further overseas investments materialise. But it has little interest in co-investment. 'It's not important to us,' says Martin Moore, head of Prudential Portfolio Managers Property. 'If something were worth investing in we would go for it 100%.

Where advisers do get involved in other ventures, he is not particularly concerned - provided conflicts do not arise. 'We don't expect it to be a major feature of the market here,' he says. 'I'm more ambivalent than Alastair.'

Alan Froggatt, who helped spearhead the link with Insignia, is grateful that some investors are proving so sanguine in public and is bemused by any antipathy. 'The main reaction we have had from clients is whether we feel comfortable in the new partnership,' he says. 'They want to ensure that the people they deal with will stay around.'

Both Hillier Parker and Healey & Baker have stressed that co-investment was not a motivation for merging with US groups CB and Cushman & Wakefield. Robert Farnes, joint head of Hillier Parker, points out that a week before the deal was signed CB executives were taken around 17 top funds, developers and retailers for their approval. Their main concern was for continuity of service. 'They wanted to be sure of dealing with the same teams - and that is what has happened.'