David Gilbert, CEO and CIO of US investment manager Clarion Partners, tells PropertyEU why it picked Gramercy as its partner for taking on Europe.
A booming logistics market fuelled by e-commerce and a European partner eager to grow were key factors behind the tie-up, announced in April, between US investment giant Clarion Partners and industrial specialist Gramercy Europe.
‘It’s something we’ve been contemplating for a long time and the catalyst now is the strength of the logistics market,’ Gilbert says in answer to the question why Clarion Partners (AUM $50 bn) has decided to enter Europe by purchasing a majority stake in Gramercy Europe. ‘We are confident that the trends which have created outsized demands for the latest breed of logistics facilities will continue and we’d like to get ahead of that wave. This will be a very long-term commitment by Clarion.
‘Investors have asked us if we have contemplated Europe because most of them are underweight on their target for industrial, and the margin by which they are underweight is much bigger in Europe than the US. So their priority has been to increase allocations to industrial and get closer to their targets,’ Gilbert explains. ‘We haven’t seen the acceleration in rent growth in Europe that we’ve been enjoying in the US and has recently been apparent in the UK, but we have conviction that the underlying structure in the business - e-commerce most notably – is undoubtedly a global phenomenon: it’s risen dramatically in the US over the past decade or so - and the UK leads in e-commerce - but Europe lags.’
Logistics on the continent is playing catch up and Clarion Partners decided this made it the right time to get a piece of the action. Last autumn, the company’s top team flew from New York city to scout Europe for a partner, eventually identifying Gramercy Europe in London.
Accelerated growth phase
Alistair Calvert leads the firm which has been responsible for €3 bn of real estate transactions in Europe and is currently building up its fourth fund, which is forecast to close with €400 mln of equity by June. Gilbert says the connection was quickly apparent between the two companies from opposite sides of the Pond.
‘We searched for management teams with potential for great synergies, which we could help and with a similar culture to Clarion. We found all of this in Gramercy. The company has expertise in logistics and a history of providing really good returns, of being excellent investors. They have a pan-European perspective, a very strong team and a strong aspiration for growth - which is not always the case. We ran into firms which were happy with their growth - typically very large firms.
‘Gramercy is relatively early in what we believe will be an accelerated growth phase and we’re excited to have found them at this point. We can introduce them to our investors and tenants and that will accelerate their growth,’ he says.
‘It’s always hard to assess culture, but I’m confident the groups work well. We have a very strong partnership culture. About a third of our employees are partners in Clarion and enjoy some form of equity ownership. This is not common among our competitors and for us it provides a glue that’s absolutely critical to creating common goals, rewards, and encouraging people to think long term and not just about the next deal. I think it’s served us well since Clarion’s founding 37 years ago.
‘We wanted to maintain that and Alistair and the team have the same culture, so it all just seems to fit. The timing was great because they’re in the process of building a fund, so they were open to the notion of a business combination. Having sold the company to Gramercy and then undertaken a management buyout, they were perhaps surprisingly open to trying again.’
The future is bright for the company renamed Clarion Gramercy, which Calvert will continue to lead, Gilbert notes. ‘Our combination is going to be fabulous,’ he says. ‘Alistair has had a long successful career in investing. He headed up WP Carey’s network in Europe for a few years and he has a diverse investment background. As we contemplate expanding Clarion beyond logistics, I think that will serve us well.’
Planning a future away from logistics also figured in Clarion’s calculations and this echoes what Calvert has told PropertyEU about his own long-term vision. But Gilbert keeps his cards close to his chest when pressed for detail on where these new frontiers might be.
‘Right now, we are staying dead focused on logistics. Everyone in this low-yield global environment is seeking yield and real estate can play a very important role in providing it, along with stability of value, cash-flows and some equity upside. There are a lot of different routes to yield in logistics, with longer term leased assets. Primary in the US is the question of where do you find attractive yields? I think logistics is very attractive and Alistair’s expertise in evaluating longer-term credit structures in real estate could be interesting for us.’
Another compelling reason for Clarion to partner with Gramercy in Europe is the difference in the logistics market compared to the US. For example, Gilbert notes the way warehouses are sometimes referred to as ‘sheds’ on the continent, detecting a whiff of disdain for logistics as a dull, uninteresting backwater.
‘It’s interesting that logistics in Europe is suddenly seen as its own asset class or a property type, because it has been that for 30 to 40 years in the US. European investors have in our view been dramatically underweight in logistics for all that time,’ he says. ‘The potential was there, but frankly it wasn’t held in an institutional form that made it accessible. I think the ownership was institutionalised in the US much earlier than in Europe, where the private market ownership was extraordinarily fragmented. You had a number of non-institutional owners focusing in-country, but no pan-European view.
‘It’s a very good question – why are we so different? If you look at GDP, retail spend and consumption in Europe and the US, it’s apparent that the goods always made it to European consumers in the supply chain, just like in the US, but it was just enormously fragmented in terms of ownership. Secondly, the ownership of logistics assets by corporations was much higher in Europe, so there was less opportunity to buy them. Whereas in the US the vast preference of corporates is to lease, not own, because they like the flexibility and being able to respond to the dynamic needs of a global supply chain, which is changing all the time. Some of that may be tax driven: there are some impediments and differences between corporates on either side of the pond. But that’s changing rapidly. You could argue the corporates in Europe could have demanded the same flexibility in Europe.’
Consumer behaviour by millennials is helping driving change in logistics, believes Gilbert. Millennials – people who came of age around the year 2000 – generally get blamed in the media for everything from causing avocado shortages by spreading too much of it on toast, to wrecking the movie industry by shunning the cinema. But in logistics at least, millennials are helping to manifest abundance.
‘Some of this change is all about millennial behaviours,’ says Gilbert. ‘They want everything immediately and they’re unwilling to wait, so if someone can satisfy that, then they will pay more for it. It becomes a service business, where speed is more important than the cost saving.’ He also merits Jeff Bezos, the founder of online retail titan, Amazon, for re-popularising the idea – previously debunked by the Just In Time production theory – that it’s good to hold high volumes of inventory in warehouses because it speeds up delivery to customers.
So how will Clarion Gramercy harness the e-commerce mega-trend and the rocketing demand for logistics it is fuelling, to deliver returns for investors? PropertyEU understands the company will provide scalable investment product, such as closed funds with higher returns and also perpetual life vehicles. Looking at the US operation, the majority of Clarion Capital’s industrial assets sit in a single-focused logistics fund, which is around $13 bn (€11.6 bn) in gross asset size.
‘The benefit to Alistair’s team is that they can plug into our network immediately,’ says Gilbert, to whom Calvert will answer from now on. ‘We’ve got a small army of people globally who do nothing but fundraising. If we do what we do well, which is listen to our clients and then lead, we understand what their needs are and offer them investment solutions. We already have a dedicated team covering Europe, even though we weren’t investing in Europe. We will continue to scour the globe for capital and we’re expanding that team.
‘Also central to our business are the real estate consulting firms; they provide recommendations and help with asset allocation. That network has been built over a very long time, along with our direct relationships with our clients. Our individual investor relationships are highly important. It’s hard work and requires people who live on planes, but we have a large group able to do that very successfully.’
Clarion Partners Factfile
-Founded in 1982
-Assets Under Management: $50 bn (€44.6 bn)
-$752 mln (€671.5 mln) US investments since December 2018
-Serves 350 investors both US and international
-Broad strategy encompasses core to opportunistic
-Invests mainly in office, retail, industrial, multi-family residential and hotel assets
-Employs 280 people
2006: Alistair Calvert establishes ThreadGreen Partners
2014: Gramercy Property Trust buys Threadgreen, renames it Gramercy Europe
May 2018: Blackstone purchases Gramercy Property Trust
October 2018: Calvert leads buyout of Gramercy from Blackstone
April 2019: Clarion Partners purchases majority stake in Gramercy, renaming it Clarion Gramercy