Rodamco – when one became four
The European economic recovery has been good news for most people, not least property fund managers.
In the mid-1990s, demand for office space – the staple of many European property funds – was so low that many property-oriented professionals despaired that the market would ever recover.
But not long afterwards, Europe’s economies started picking up and employment rates started to rise. Property vacancy rates are now hitting levels of 1%–2%. Analyses based on employment growth and current vacancy rates seem to indicate that planned new office space will not meet projected demand over the next five or so years. So the outlook is promising.
One company well-placed to take advantage of any future movements in the market is Dutch giant Robeco. Its property company, Rodamco NV, announced in March its intention to demerge, into four entities, each with its own geographical focus. From July, Rodamco North America NV; Rodamco Continental Europe NV; Rodamco United Kingdom NV; and Rodamco Asia NV were set up, all managed independently.
Predictably, increased shareholder value through greater transparency and future growth was part of the reason for the move, but Rodamco’s board also felt the demerger would encourage the various management teams to adopt a more entrepreneurial approach and give them greater flexibility to use their companies’ share capital to finance any acquisitive urges.
But such a rationale does not explain the board’s decision to create only four entities from the monolith. Jan de Kreij, formerly a managing director of Rodamco and now chairman of the board of management of Rodamco Continental Europe, explains: “To be successful in the property fund_market, you need a critical mass and the credibility that brings. If you are investing internationally, you need to be big; small operations don’t work.
“We felt all these markets were large enough and had sufficient potential for these four new companies to retain a critical mass. I don’t think any other company could split in this way because they are not large enough to survive.”
The question of whether size matters is one that many commentators believe will be resolved by a round of property fund mergers, fed, in part by real estate holding spin-offs via large, non-property-focused concerns . Italy’s insurance company, INA has already done this. It has been predicted that within five years, only 10–20 property companies will be left in Europe, with around $5bn (E4.8bn) the minimum portfolio size. While many reject the figures used as unrealistic, few deny it could happen.
De Kreij limits the likelihood of it emerging as a trend to the retail, and, to a certain extent, office sectors, saying: “Many of the tenants themselves are merging and amassing more bargaining power, which puts them in a better position to take the best locations. These are usually owned by the largest companies, so the retail sector may see more consolidation, with pan-European, multi-location deals coming out of this.”
Not everyone, however, would welcome this, as the resultant reduced universe would not be large enough to cater for all investors’ requirements. ABN AMRO’s Jeppe de Boer says: “Institutional investors don’t want this. They prefer a sector focus and a geographical focus. They like to make their own decisions when it comes to diversifying, so they prefer to pick three or four localised property fund stocks.” It seems the Rodamco demerger may be seen as a step in the right direction by many in the institutional market.