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"The hype sometimes gets overblown in the short term. But Reits are a sensible structure" Struan Robertson, Morgan Stanley |
Morgan Stanley first established a presence in real estate in 1969 – long before its Wall Street peers. While some houses have moved in and out of the market, Morgan Stanley has stayed put and maintained a substantial and stable team – with spectacular results. Real estate is the single-largest industry group in terms of revenue for the investment banking division. Unsurprisingly, perhaps, Morgan Stanley ranked number one in the investment banking category of the Euromoney/Liquid Real Estate poll for the second successive year. "One of the reasons for our success is the way that we view the market," says Struan Robertson, global co-head of real estate investment banking at Morgan Stanley, based in London and Paris. "Until recently, many banks have looked at real estate and observed that it makes up less than 3% of the market cap of most stock markets. But we have always recognized that 95% of the real estate market is not listed and in order to engage with the whole market we have adopted a different strategy to other banks."
At the heart of that strategy is a full appreciation of the synergy between banking, investment and lending. "Partly it is a historical accident, but Morgan Stanley’s banking, investment and lending business are connected in a far more structured way than our peers," says Robertson. "That pays dividends because there may be multiple financing choices in real estate – more so than in other industries – and it has been beneficial for us to be able to offer those choices in a neutral way."
Specifically, many other banks might approach a real estate client offering to list the company through an initial public offering, securitize its cashflows or partner with it through a joint venture – with different units of the same bank pitching different solutions in order to generate revenue for their product group. "We take the opposite approach and are completely neutral when it comes to products. The client benefits because it knows the team will find the most appropriate solution for them," says Robertson.
Morgan Stanley is able to align the interests between competing product groups within the real estate group because of the way it is structured: both the lending and investment business have grown out of the banking unit and the culture remains the same. In addition, the different business groups gain financially by bringing business to the bank, even if the solution ultimately chosen is the financing solution offered by that group. More generally, the structure makes it easier, for example, for Morgan Stanley to take stakes in real estate companies with a view to a future listing.
Long-standing relationships
Morgan Stanley’s product-neutral approach to real estate has resulted in it being involved with some assets for decades. The UK’s Canary Wharf in London’s regenerated financial district in the Docklands is perhaps the most striking example of how the bank has been involved with an asset through many owners.
Morgan Stanley originally owned half of the land in Canary Wharf and sold it to developer Olympia and York in 1986. Following Olympia’s bankruptcy in 1992, Canary Wharf Group bought the scheme and Morgan Stanley was involved in its securitization, which was part of the refinancing of the project. Canary Wharf was subsequently listed by Morgan Stanley and recapitalized using special dividends before the company was taken private again in a competitive process, in which Morgan Stanley ended up with two-thirds of the company through its London AIM-listed Songbird Estates vehicle.
"Canary Wharf is notable," says Robertson, "because it demonstrates that while we are theoretically in competition with real estate development companies such as British Land and Liberty in the UK we have continued to work with them from an investment banking perspective. These companies appreciate the fact that we own real assets and understand the full dimensions of the property market."
Foreign ventures
Morgan Stanley has built a similar – if shorter – relationship with Spanish developer Fadesa. The bank originally took a 10% stake in Fadesa in 2001, later helped to list it in 2004, before selling the company at the request of the owner in 2006 and helping to finance the buyer. Morgan Stanley has developed a similar multi-dimensional relationship with Italy’s Pirelli Real Estate and has also successfully expanded the model into new markets such as Russia, where it took a 15% stake in RGI before listing the company in December 2006.
The increasing number of countries with Reit legislation is expected to drive much real estate activity in western Europe in the coming years. "The hype sometimes gets overblown in the short term," says Robertson. "But Reits are a sensible structure that can lead to more varied business models. Their real impact will be seen over the medium to long term. The holy grail in European Reits would, of course, be a pan-European Reit – a single structure that would be tax efficient across all European Union jurisdictions. It’s manifest destiny, but I’m not betting on when it will occur."
While Reits are an increasingly significant part of the real estate landscape, the market is also developing in other ways. "So much of the growth in the property sector, as in other sectors, is coming from emerging markets, including European emerging markets," says Robertson. "In these countries, development is the key driver at this stage in the cycle, with investment properties (and therefore the demand for Reit-like vehicles) likely to come later. We have seen the advent of a whole series of eastern European property developers in both the residential and commercial sectors, and we expect to see many more."