F&C expands property business
UK funds house F&C Asset Management will merge its property business with a London-based specialist to create a £8.5bn (€10.7bn) company focused on the UK and Europe, in a deal that comes after months of falling property values and investment returns in the UK and concern that European markets could follow suit.
According to a statement published today, F&C will merge its £5bn property arm with Reit Asset Management, which manages £3.5bn of assets. F&C will own a 70% stake in F&C Reit Asset Management while Reit's owners will hold 30% of the new business.
The agreement comes after almost a year of negative total returns in the UK's property market. For the 12 months to the end of May, total returns in the UK property market stood at -12.9%, according to the Investment Property Databank. Total returns turned negative last September for the first time in 15 years, and have been negative for every month since.
European markets are also the object of concern. A research note by Morgan Stanley analysts last month said property markets in Hungary, Poland, and the Czech Republic will be hurt by the global credit crunch, though Russia is relatively protected from the downturn.
F&C's property business looks after £5bn in the UK and Ireland, of which £4.2bn is in the UK. Reit's £3.5bn of property assets are primarily in the UK and Germany, along with other assets in Europe and India.
F&C will pay Reit's owners Leo Noé and Ivor Smith £25m in cash and £35m in loan notes under the deal, which states that their 30% stake could increase to 40% by the end of 2014 if the new business meets performance targets.
Noé, who owns 75% of Reit, will be executive chairman of the new company, and Smith will also hold a place on the management team. Nick Criticos, head of UK retail and investment trusts at F&C, will be chief executive. Kevin McGrath, a principal at Reit responsible for acquisitions and disposals as well as marketing and strategy, and Paul Herrington, managing director of F&C Property Asset Management, will both be managing directors in the combined business.
McGrath said that the deal was under discussion for a year. He said: "The deal is not a result of the times we are in. It is part of Reit's long term strategy to grow substantially. It is a coincidence in terms of where the market is now."
Alain Grisay, chief executive of F&C, said in a prepared statement: "This transaction is consistent with the development of our multi-specialist business model and the strategic direction of our three year plan. It will increase our geographic scope, widen our product range and deepen our expertise in property asset management which is a core long term asset class for our clients."
A spokesman for F&C added that the deal is long term, and that Reit's biggest client- Trafalgar Overseas Limited - had committed to paying base management fees of £14m for the next five years, subject to performance targets being met.
The deal depends on the approval of F&C’s shareholders, but Friends Provident and Eureko, which own a combined 62.5% of the asset manager, have already agreed to vote in favour of the deal, according to F&C. Corporate finance boutique Fenchurch Advisory Partners is advising F&C on the deal.
Friends Provident, which owns 52% of F&C, said in January that a strategic review had led it to put the asset manager up for sale. An F&C spokesman said that negotiations are ongoing with interested parties.
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