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TIAA-CREF Venture with Henderson Shows Size Matters in Real Estate

The deal, which creates a $20 billion manager, also reflects a growing desire for global scale in real estate investing.

A new real estate joint venture between U.S. money manager TIAA-CREF and the U.K.'s Henderson Global Investors reflects growing pressure for consolidation in the property management sector, where investment opportunities are increasingly global in scale, industry analysts say.

Under the deal announced in late June, TIAA-CREF will merge its European real estate investment business with Henderson's European and Asian property businesses. The new entity, named TIAA Henderson Global Real Estate, will manage some $20 billion in assets. It will be owned 60 percent by TIAA-CREF, a $520 billion manager of retirement assets for the academic community, and 40 percent by its U.K. partner, which manages a total of some $70 billion ($106 billion) in assets.

In addition, TIAA-CREF will acquire Henderson's $2.5 billion U.S. property business, giving it a total of $43 billion in domestic real estate assets. TIAA-CREF is paying Henderson £114 million as part of the deal.

The deal's announcement came one month after the world's largest asset manager, $4 trillion-in-assets BlackRock, disclosed that it would purchase private equity property investment advisory firm MGPA for an undisclosed price. The consolidation trend, although still in an early stage, says a great deal about the state of the commercial real estate investment market.

"We expected there to be some consolidation after the downturn and, more specifically, after we had recovered a little from the downturn," says Allison Yager, Atlanta-based principal and global head of the real estate boutique at Mercer, a consulting firm headquartered in New York.

"Ten to fifteen years ago you could be a small real estate firm and survive by raising a small amount of capital to invest," she says. "That's just becoming more and more difficult. Now, the larger markets — New York, D.C., L.A., San Francisco, London, Tokyo — are the ones where you're really going to make money, and in those markets the assets are just more expensive. If you want to have the capabilities to invest there, then you're going to have to have a larger amount of capital to invest."

The need for global reach is also fueling the push for consolidation in property investment, Yager adds. "While everyone was hit in the downturn, the recovery has been very different in the U.S. versus Europe," she says. "Companies want to be able to take advantage of the different economic investing environments that you find across the globe, since one may be in favor when the other one's not; and that way they can have a more robust platform and invest more continuously in different regions."

Avery Robinson, a vice president in the real estate consulting group at San Francisco–based Callan, echoes the view that money managers are seeking to offer more global opportunities to their clients. "In the cases where we've seen [consolidation], we've seen it to be a complement," he says. "For example, one group may have a good hold on U.S. investors, but they have limited international capabilities, so they'll merge with a group that maybe does have international capabilities and sell the international product to the U.S. investor base. That gives [them] the opportunity to cross-sell new products to [their] existing base."

Tom Garbutt, head of TIAA-CREF Global Real Estate and chairman of the new company, says worldwide reach was a key motivation behind the deal. "We really view it as this global alliance we've created that we think can serve clients extremely well all around the world," says Garbutt, who in his new role will be based in New York, although the new company will be based in London. The venture will have some 200 employees in 11 offices across Europe, Asia and North America.

In addition to its sizable starting point, the new venture can expect to receive an additional $1.5 billion from TIAA-CREF to invest in European and Asian real estate over the next few years, executives say.

Yager and Robinson add that the instances of consolidation also provide further evidence supporting the argument that investors are long past their skittishness around investing in commercial real estate. Robinson points to the high global interest in U.S. core real estate funds as another measure that highlights this shift.

"There are actually waits to get into these products," he says, referring to U.S. core real estate funds. "Three years ago there were waits to get out." Although Robinson doesn't know whether the TIAA-CREF-Henderson venture reflects a specific view of the U.S. real estate market, he adds, "They wouldn't be doing this if they felt this wasn't a sector where they would receive investor attention."

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