During CapitaLand Investment’s Investor Day on Nov 22, 2024, the group’s CEO, Lee Chee Koon, outlined the difficulties the company had encountered in recent years. He pointed to two key factors impacting CapitaLand Investment: the sharp rise in interest rates and developments in China. The swift increase in interest rates has had a dual effect, impacting both operating income and valuations, as capitalisation rates tend to rise in line with interest rate trends.
”When we restructured [in 2021], we were hoping China would allow us to create more private funds in the logistics and business park space and asset classes at which we were strong. What has happened made it a lot more challenging to execute that [plan]. The balance sheet we inherited from CapitaLand had benefitted from the growth in China. Because of the slowdown, there are balance sheet challenges we need to deal with,” Lee said.
CapitaLand Investment is not the only real estate investment manager (REIM) grappling with challenges. Other Asia-based REIMs, such as GLP Capital Partners and ESR Group, have faced comparable operational difficulties.
In its financial and operation al statement for the nine months to Sept 30, 2024, Frankfurt-listed REIM Patrizia also highlighted the hurdles it faced since global central banks began their rate-hike cycles. It now appears increasingly probable that the European Central Bank (ECB) will pursue a path of rate easing over the next one to two years. However, economists suggest that both the Federal Reserve and the Bank of England are likely to scale back their plans to reduce policy rates.
Despite the ECB’s path of rate easing, both Europe’s and the UK’s economies remain sluggish — markets in which Patrizia maintains a presence.
“Patrizia’s financial performance for the first nine months of 2024 is reflective of the still subdued market environment. Temporary negative consolidation effects and extraordinary items impacted the 9M2024 results, overshadowing the positive effects from the cost measures that were initiated and implemented,” the group says in an update. It adds, however, that “market sentiment continues to show signs of improvement”.
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“We are facing ongoing economic headwinds, not only in Germany but in many markets across the world and geopolitical uncertainties. Both will dampen the economic recovery,” said Asoka Wöhrmann, group CEO of Patrizia. “However, looking at the overall transaction volume in Europe, we see more investment activities in the market, albeit coming from very low levels. We see a stabilisation in all major asset classes. On the positive side of market developments, interest rates are very clearly stabilising. Overall, uncertainty is fading away, which helps the mar ket recovery.”
In 9M2024 to Sept 30, assets under management (AUM) decreased by 2.3% y-o-y to EUR55.9 billion ($78.7 billion) mainly due to negative valuation effects of EUR1.1 billion during the first nine months of 2024, which could not be fully compensated by closed acquisitions for clients.
Management fees decreased to EUR171.6 million in the 9M2024 period due to valuation effects, lower development service fees for clients and the absence of client debt structuring fees, which supported management fees in the period under comparison. Performance fees fell by 42% to EUR18.2 million, driven by lower annual carry payments and fewer client sales. As a result, total service fee income decreased by 13% to EUR198.7 million.
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Net sales revenues and co-investment income were negative at EUR 4.9 million, mainly due to the earnings attribution from a temporarily consolidated at-equity investment, which is expected to be deconsolidated during the fourth quarter of the year. Patrizia expects a positive contribution to ebitda in 4Q2024 from deconsolidation.
Strategy for the future
Mahdi Mokrane, Patrizia’s Head of Investment Strategy and Research, says: “We’ve been affected by the rise of interest rates. This has hit two components of our three en gines, which were transaction fees and performance fees.”
Patrizia’s executives are taking steps to turn the company around. “We are working on two strategies. One is really to work on our cost base so that the market now knows that despite the market environment, we now have a very stable cover age ratio of our costs with our rev enues [based on] recurring income. This was not the case two and a half to three years ago,” says Mokrane.
He also says that Patrizia plans to focus on five growth areas, around housing, value-add opportunities, in frastructure, technology and M&A.
The first growth area is around the living sector. “We know there is a global housing crisis, and we’re work ing very strongly within that space in terms of our growth opportuni ties in Europe and elsewhere,” he adds. “Secondly, value-add, so creating value, and I think the example of the Pinners Hall, for example, and other initiatives fall into that category.”
In October 2024, the Far East Organization appointed Patrizia to reposition Pinners Hall, a 1993 office building in London. Patrizia plans to implement a full redevelop-to-core strategy for the site. The building offers 110,000 sq ft of space across six storeys and features a full-height atrium.
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Patrizia is working with architect Stiff + Trevillion on the project. Early design proposals focus on enhancing the building’s exter nal architecture while also introduc ing amenities like end-of-journey facilities, new terraces and outdoor spaces to support urban greening and boost biodiversity.
“It’s no secret that the office sector is experiencing challenges. Despite this, we see opportunities for value creation. Pinners Hall is now one of several office developments in Europe we are actively repositioning,” Mokrane said last year.
Other initiatives and trends
“Thirdly, we have an initiative around our new pillar of infrastructure and the convergence and intersection of real estate and infrastructure,” Mokrane says. “European infrastructure [assets] are a growth area.”
Fourth, as a REIM platform, technology can be harnessed for more efficient synergies between various asset classes, such as infrastructure and real estate.
“Finally, we have been very successful in the past of doing M&A growth opportunities selectively,” Mokrane says, citing the acquisition of Advantage Investment. In December 2022, Patrizia acquired Advantage Investment Partners, a Copenhagen-based mul ti-manager offering a range of institutional and wholesale distribution channels. Founded in 2018, Advantage’s product suite includes a club deal focused on global infrastructure equity and a series of commingled discretionary funds invested in North American private equity.
Meanwhile, Patrizia’s typical co-investment varies from 2% to 10%, depending on strategies, funds, locations and the level of risk. “This is the firm’s core investment, which itself has elements of core investments from teams,” Mokrane says.
Returns for Patrizia’s capital partners would be in the teens. “We recommend that our investors look at two or three KPIs. One would be the profit-on-cost. The profit-on cost that we typically would like to underwrite would be anywhere between 15% and 20%. Profit-on cost points to the additional capex that we are injecting into the building,” he adds.
Many of Patrizia’s capital partners from Asia have held assets for many years. “From inception to when we deliver the asset and lease it and have that jump in value, for many of our capital partners, this is the relevant return for us in terms of our incentive and where we come in and add value. The valuation could be anywhere between EUR75 million and EUR200 million in terms of the value of assets, to which we would add anywhere between EUR30 million and EUR50 million.”
Mokrane says Patrizia has seven to eight office assets that the platform is repositioning in Europe, with five of them in London. “Unique are assets where we have redeveloped or repositioned office assets over the past couple of years. The pools of capital that we have are of a different nature. We have executed separate accounts; we work with the investors because there are surprises and elements of risks that will be subsequently uncovered.”
In terms of investors, Middle East and Asia Pacific asset owners bought into assets post-GFC, Mokrane says. “If you own a great asset with great amenities in and around it, great transportation nodes, then you have options. You can decide to do a light refurbishment and maybe accept multi-tenanted buildings and then you’ll decide on a full refurbishment later on.”
For Mokrane, however, retail remains “challenged”, adding:“The two main asset classes that are very much in favour would be residential and industrial offices.” He also believes that Patrizia has a solu tion to make offices attractive. “We have repositioned our London HQ completely with a members’ club, fully amenitised for ourselves. We want to invest using technology to enable us to quickly and cost-effec tively present different options and scenarios to asset owners and to be able to execute the plan in a timely manner. You don’t want planning permissions to take forever.”
In a recent update, Deutsche Bank says Patrizia’s operational improvements (with more equity raised y-o-y) are continuously visible. “However, revenue pressure continues. Hence, cost cautiousness will still be needed. But the negative momentum seems to slow down”. Deutsche Bank has kept its buy recommendation but lowered its price target from EUR10.30 to EUR9.90.
