When CBRE acquired Trammell Crow Company in 2006, residential development was not part of the plan. Build-to-rent development has since grown to a third of the TCC business, and as it welcomes Telford Homes to the group, it is expanding this globally.
The deal was a shock move from the world’s largest real estate company, and it begs the question: why?
“It really starts with Trammell Crow,” says Danny Queenan, CBRE’s global chief executive for real estate investments. “We are always looking to expand TCC to other locations within the US, but we started talking about expanding internationally, because of the strength of our balance sheet and our brand, and we thought that the time was right in the cycle.”
Two years ago, with London residential sales stalling and Telford dipping its toe in the growing BTR sector, the big green machine began plotting its entrance.
“It was a strategic focus that started with the strength of Trammell Crow wanting to go international, then we focused on product-type opportunities and then Telford as a team and a company,” says Queenan.
CBRE considered a UK launch into logistics but saw the biggest development opportunity in London’s housing shortage. Similarly, it considered a handful of rival players before selecting Jon Di-Stefano’s AIM-listed development business.
Queenan says CBRE was attracted by Telford’s price point, its transition from build-to-sell to build-to-rent and the forward funding model.
After announcing the takeover bid in July, CBRE’s £267m acquisition completed last week. Telford Homes is now officially a Trammell Crow Company developer, part of the CBRE family, and a platform for further growth in the UK and internationally.
‘Ready to execute’
Telford Homes has a £1.6bn development pipeline comprising 4,900 flats, 70% of which are destined for the BTR market.
Dallas-based Trammell Crow Company, on the other hand, focuses on city centre mixed-use development. It has developed or acquired assets worth almost $66bn (£54bn), spread over 603m sq ft. Its residential arm, High Street Residential, has completed 4,822 flats at around $1.2bn, with a pipeline of 2,706 flats valued at $703m.
The Telford acquisition more than triples TCC’s BTR pipeline, with a majority weighting on London. It is a huge vote of confidence for a nascent industry, but an interesting tactic given the strength of the TCC brand.
“We thought it would be rather arrogant to just go to a world-class capital like London, which is already competitive, and put a flag down and say ‘we are here’,” says Queenan. “By going to Telford we would get right in with a pure operational capability and a team that is ready to execute. All we can do beyond that is to start to bring in TCC’s best practices and capital influences to grow it.”
By best practices, he means financial tools to analyse and select the best investments, and then also the operational capabilities to bring on institutional capital.
This is absolutely an opportunity to focus on Trammell Crow Company and Telford first, but to bring in other parts of CBRE to help it grow
“You must have an established team that already has relationships and knows the submarkets to go to in order to chase down and secure land and have that reputation to bring in the capital to build the product,” says Queenan.
Telford will retain the name and on-the-ground presence, operating within the governance of the CBRE investment committee. There are no plans to send over any TCC employees. Rather, Telford will be responsible for hunting out new opportunities and delivering CBRE’s vision for “exponential” growth.
“We want to be the best build-to-rent developer in London and continue with the robust growth that Telford has already accomplished. From there we have aspirations to intelligently and thoughtfully grow into other areas of the UK and beyond that into other parts of Europe.”
A London ‘phenomenon’
While many cautious developers tread lightly in London, CBRE has honed in on the capital as the centre of its expansion plans. Queenan says this is because the firm was drawn specifically to Telford and its capital partners. However, he notes that the biggest investments have been in the capital, and he is confident there are more to come.
He says: “We were seeing some of our institutional capital partners and competitors go in to forward fund deals because it was the only way to acquire stock, and we saw that phenomenon happening more in London.”
Earlier this year, Telford agreed forward funding partnerships with M&G and Invesco on its BTR developments. The three-year agreements will see the funds given priority to finance construction and acquire the finished apartments. With very little purpose-built stock, this model enables institutions to get their hands on grade-A products, but the onus is on them to lease it and manage the operations.
It is a very different model to the US, where TCC develops the homes and takes the risk on lease-up and exit. The so-called merchant developer will team up with an operator and sell stabilised stock that is income-producing into the institutional market.
Queenan says he likes the forward funding model and expects this London phenomenon will persist “primarily because of that massive housing shortage and the fact that London and the government needs to figure out how to address it”.
But as Telford expands, he also anticipates that there may be space to offer the TCC model, with a management platform to broaden its institutional capital base.
“Telford will have to make a decision as to whether or not we are going to build out more of our own operational capability and perhaps use CBRE, or bring in a third party,” Queenan says.
He adds that this will be a theme across the business as it grows: “Do we do more of this ourselves, do we build out CBRE to do more of it, or are we continuing to hire third parties? I see that coming.”
A holistic future
While Telford may be steering plans in the short term, in the longer term CBRE’s global network will be instrumental in driving international growth. The developer is now part of a 90,000-employee global business, providing advisory services in more than 250 local markets.
“Buying Telford to be a part of TCC is part of the plan to expand the development company and to use it as an investment vehicle for CBRE. But in doing that, you are also thinking ahead, about what it could mean for other parts of our business,” says Queenan.
“This is absolutely an opportunity to focus on Trammell Crow Company and Telford first, but to bring in other parts of CBRE to help it grow.”
So while the acquisition may have started as an expansion of TCC, in the future it will tie up with other parts of the business. It means CBRE can be a “cycle-aware investor”, balancing investments across CBRE Global Investors, TCC and its flexible workspace provider Hana, but also, these parts of the business can work together.
“CBRE GI has capital that it would love to use to forward fund future Telford deals and finished projects. Furthermore, because of the infrastructure in Europe there is a great advisory firm to help find sites, fill buildings and advise us.”
Beyond this, CBRE’s extended network of institutional capital partners are waiting with bated breath. “They too have aspirations of expanding overseas,” says Queenan. He paints a holistic vision of the future for CBRE – one where advisory, development and operational capabilities not only protect the business from market cycles, but provide a full-service solution.
This might have started in Texas, but the next stage will most certainly come from London.
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