KKR and DIC Bundle German Real Estate Interests to Create

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Volume 7, Issue 129, February 3rd, 2015 KKR and DIC bundle German real estate Inside REFIRE interests to create sizeable new force REFIRE is a specialised report focused on providing market intelligence and back- In a number of statements last year about the future of Germany’s list- ground analysis to finance professionals ed commercial real estate sector, Ulrich Höller, the head of the listed in German and continental European real Frankfurt-based DIC Asset AG forecast a likely wave of consolidation in estate investment. the sector, similar to what the German residential sector is experiencing.

Whatever your particular area of speciali- Höller was likely speaking with an in- SEB in further portfolio sell- sation, we think you’ll find timely, incisive sider’s understanding of how such steps off, NorthStar enters Europe information within our pages, helping to in- would be realised in practice. Earlier this The big news around the turn of the year form you of the key deals, the numbers, the month Deutsche Immobilien Chan- was the December acquisition by US REIT markets, the players and the people. cen (DIC), one third owner of DIC Asset NorthStar Realty Finance of a €1.1bn of- AG and likewise headed by Höller, an- fice portfolio from Frankfurt-based SEB The areas we focus on are: nounced that it was partnering in a new Asset Management. This was the Amer- investment vehicle with prominent US ican group’s first foray into Europe and US Funds in Europe private equity firm KKR to invest in Ger- they have topped that off with a further European REITs many’s office and retail sectors. The new deal worth reportedly €500m see page 2 German Real Estate Finance company, GEG (German Estate Group), German Non-Performing Loans (NPLs) is likely to become a significant investor Trouble ahead for German Retail Property Funds in German commercial property. closed-end funds with Swiss Mortgage Securitisation GEG will invest its own capital as well borrowings CMBS/RMBS as third party money, and will be KKR’s The recent revaluation of the Swiss Franc Privatisations sole route into German real estate. The versus the Euro will cause mayhem for Refinancing primary focus will be core property, but it countless German closed-end property Euro-zone Property Financing will also invest in riskier assets and proj- funds, according to a new study by the ect developments. Berlin-based rating agency Scope. At REFIRE has an extensive network of con- The new group will be headed by the very least the forecasted yields for tacts in the field of continental European Höller, and will see Deutsche Immobilien numerous funds who took out Swiss real-estate finance, which enables us to Chancen, which is backed by investment Franc-denominated loans see page 6 bring you the latest and most relevant news. companies and insurance firms, trans- However, we always want to know more ferring its operational business to GEG, Climate for financing in Ger- about what’s going on in this dynamic sec- including about 40 professionals who many hits record high tor, so make sure your company is keeping will continue to manage its major current The FAP-Barometer, now well-estab- us informed of your moves. Send your me- project developments MainTor in Frank- lished as a German index for measur- dia communications to news@refire-online. furt and the Opera Offices in Hamburg. ing the real estate financing climate, com for our consideration. Höller will resign as CEO of Deutsche showed it highest-ever reading for the Immobilien Chancen Group, but will re- first quarter of 2015, indicating that the main as head of DIC Asset until the end environment for financing commercial CONTENTS in this Issue: of 2015. DIC Asset manages more than property has never been as goodpage 12 €3bn in assets for itself and third parties DEALS ROUNDUP / from page 3 in a fund division launched three years AIM-listed Summit Germany EDITORIAL / page 4 ago. It posted FFO figures for 2014 of raises €120m in share placing REPORT - /ROUNDUP page 10 €48m, up 5% on 2013, while buying Summit Germany, the AIM-listed and UPCOMING EVENTS / page 29 property assets for €180m and selling Guernsey-headquartered specialist for PEOPLE…JOBS…MOVES / assets worth €162m. German commercial real estate, has SUBSCRIPTION FORM / page 34 In a statement, Deutsche Immobilien raised €120 million by issuing 171.4 mil- Chancen said, “GEG will be an active lion shares at 70 euro cents each in an investor across the core sector, oppor- oversubscribed placing with see page 8 2

...... DEALS ROUNDUP

tunistic transactions with appreciation he added. GEG will also seek €50m-plus REFIRE potential, and development transac- developments, including high-end resi- Real Estate Finance tions. GEG will invest its own capital and dential, in the 10 largest German cities. Intelligence Report Europe third-party money.” “We will start slowly this year but we’re “The creation of GEG is a continua- seeing offers already coming in.” tion of KKR’s commitment to German Operating Office investments, having built a successful REFIRE Habsburgerallee 95 investment track record, with more than Germany/Open-ended funds 60385 Frankfurt am Main, GERMANY $4.4bn of equity deployed in 15 Ger- SEB in further giant portfo- Tel: +49-69-49085-785 man companies since 1999,” the state- Fax: +49-69-49085-804 lio sell-off, NorthStar enters Email: [email protected] ment said. It is also an important step Europe for KKR’s real estate platform which has Managing Editor: committed over $1.6bn of equity to 26 The big news around the turn of the Charles Kingston Tel: +49-69-49085-785 deals worldwide since its launch in 2011. year was the December acquisition by Fax: +49-69-49085-804 In the first phase DIC will hold a 75% US REIT NorthStar Realty Finance of Cell: +49-172-8572249 majority of the new business, but KKR a €1.1bn office portfolio from Frank- Email: [email protected] says it plans to acquire further shares furt-based SEB Asset Manage- Subscriptions: in the medium term and become a 50% ment. This was the American group’s Tel: +49-69-49085-785 joint partner. A report in Reuters suggest- first foray into Europe, and they have Fax: +49-69-49085-804 Email: [email protected] ed that KKR plans to topped that off with a fur- pump at least €5bn “The creation of GEG ther deal worth reportedly Advertising: over the next five about €500m from Ger- Tel: +49-69-49085-785 is a continuation of Fax: +49-69-49085-804 years into the Ger- KKR’s commitment to man insurer Provinzial Email: [email protected] man office and retail German investments, NordWest. segments. having built a success- The deal made head- Editorial Advisory Board: Klaus H. Hausen Ralph Rosen- ful investment track lines both because of its Colm O’Cleirigh, B.Arch.Sci. berg, KKR’s global record, with more than size but also for its com- Margarete May, Rechtsanwältin head of real estate, plexity, spanning seven David Scrimgeour, MBE $4.4bn of equity de- Christian Graf von Wedel commented: “With ployed in 15 German different countries and Glenn J. Day FRICS this new platform, we companies since 1999,” tax regimes, and the fact Andreas Lehner will be able to accel- that, in comparison to Stefan Engberg, MRICS erate our access to investments in Ger- earlier large-scale deals, there was no Publisher: many across the risk spectrum.” ‘volume discount’ given the size of the REFIRE Ltd., At a press conference in Frankfurt two portfolio. Additionally, the sale went 49 Sandymount Avenue, Ballsbridge weeks ago, Ulrich Höller said that the through including an asset management Dublin 4, Ireland listed DIC Asset AG, primarily respon- mandate for the seller, which is unusual. sible for asset management, would not The structured sale by SEB Asset Real Estate Finance Intelligence Report Europe initially form part of the new GEG vehicle. Management, which is in the process (REFIRE) is published 22 times a year, at the beginning and in the middle of each month, with “DIC Asset is not part of the deal as re- of unwinding its international German two holiday breaks. REFIRE is editorially inde- turn expectations from the US were too open-ended fund, involves 11 ‘Class A’ pendent of any selling or investing institutions. In- high. However, joining may be an option European office properties are in London, formation contained in REFIRE is under copyright protection and is based on sources believed to for the future as consolidation will be a Paris, Hamburg, Milan, Brussels, Rotter- be reliable, though their complete accuracy can- major theme in the overall commercial dam, Amsterdam and Gothenburg. The not be fully guaranteed. Neither the information real estate market going forward.” portfolio consists of 186,300 sqm with contained in REFIRE nor the opinions expressed therein constitute or are to be construed as con- As for GEG’s investment strategy, said a well-diversified mix of market leading stituting an offer or solicitation of an offer to buy Höller, GEG will focus on investments in tenants and includes high-profile office or sell investments. REFIRE accepts no liability trophy assets above the €80m mark and, buildings such as Condor House and for actions based on the information herein. investing alongside other institutions, on Portman Square House in London, Dre- © 2015 REFIRE Ltd. opportunistic investments – as soon as hbahn/Dammtorwall and Valentinskamp that market picks up again in Germany, in Hamburg, Issy-les-Moulineaux in Paris 3 www.refire-online.com

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...... EDITORIAL

Pressure to invest is helping investors to overlook Berlin’s politics

There’s no stopping Ber- cation, is spreading its tentacles At the heart of these changes is lin. Scarcely has the city out beyond the central districts of the still-prevalent belief among hand- announced new political Mitte, Friedrichshain-Kreuzberg, out-hardened politicians that Berlin is a measures designed to make Prenzlauer Berg, and Pankow, city of renters, and that housing has tra- investment in Berlin property to allegedly protect tenants from ditionally been protected, if not outright even more restrictive, than in- greedy landlords. subsidised. The real estate industry ternational investors vote Ber- Even within these desirable counters with the argument, the new re- lin to be the most attractive living areas, more and more strictions are robbing willing tenants of property market in Europe. neighbourhoods are falling into the right to buy their own apartment and The annual study of Eu- the clutches of local politicians, thus to build some even modest wealth ropean markets carried out by con- intent on currying voters’ favour. In their for their own retirement. sultants PwC and the Urban Land sights is the key issue of the status of At most the new laws might protect Institute has just seen Berlin displace a building, whether it is designated as 10% of tenants living in such protected last year’s incumbent Munich from a ‘rental’ property or whether its units housing, goes the landlords’ argument. the top of the list, relegating the Ba- may be ‘privatised’, or sold as condo- Hardened privatisers, such as Jürgen varian capital to 11th place thanks to miniums. Kelber of Dr. Lübke & Kelber, or Jaco- excessively high prices. Berlin jumps A decree by Berlin’s senate is about po Mingazzini of Berlin’s Accentro Real to the top, ahead of Dublin, Madrid, to enshrine a host of new restrictions on Estate, part of the listed Estavis group, Hamburg and Athens in the Pwc/ULI landlords into concrete law. The lawyers point out that, at from €1,500 per sqm, Emerging Trends 2015 list. are licking their chops at the potential property in older buildings is half as Berlin has its attractions. Its future to file charges on behalf of the state, or cheap to buy as in newly-built housing. looks bright, its economic fundamen- maligned landlords, or both. Investors, So preventing tenants from buying tals are improving, and it’s cheap by be warned. properties where they have spent years the standards of other European cities Because yet again, excessive med- and want to remain, simply narrows sup- – despite a rise in apartment prices of dling is certain to awaken the ghosts of ply and drives the price of the property 13.8% last year, according to Immobil- unintended consequences. As if small- up, currently by at least 10% a year, ac- ienScout24. That’s after rising 15.1% er landlords weren’t being faced with cording to local observers. This all plays and 16.9% in 2013 and 2012 respec- enough restrictions with the impend- further into the hands of the big profes- tively, along with corresponding rent ing rental freeze, or Mietpreisbremse, sional landlords, rather than the much increases of 5.4% last year and 8% they are now being effectively prevent- more typical small landlord, whom expe- annually before that. ed from making improvements to their rience shows has been much more mod- While investors are determined to properties, such as adding an extra est in driving through legally permissible drive Berlin’s prices up to a par with bathroom, extending the balcony or rent and ancillary charges than the ‘face- other German and European cities, the even polishing up the building’s façade. less’ corporation. forces of resistance to higher rent lev- About 10% of Berlin’s apartments While the mega-mergers such as els and further gentrification are also now fall into the category of Milieus- Deutsche Annington’s takeover of gathering strength. Legislation to cap chutzgebiet, covering about 300,000 Gagfah, and Deutsche Wohnen’s swal- rents is well advanced, as is a change people across 21 designated areas in lowing of GSW Immobilien grab the in the law as to how brokers are rec- the city, but the number is rising fast. headlines, the thousands of smaller ompensed for their services, both of Much faster, in fact, than the number of landlords whose motivations are more which are designed to protect tenants Berlin apartments whose status man- geared to providing a decent yield and from the ravages of the marketplace aged the change from ‘rental’ to ‘condo- an adequate pension are being thwart- and ensure that the red teeth and minium’, with that number doubling over ed by ‘well-meaning’ politicians at ev- claws of capitalism are held safely at the last four years in a bid to stay ahead ery turn. It is a credit to Berlin’s pop- bay outside the front door. of the politicos. In 2013 nearly 10,000 ularity that investors are still flocking Now the so-called Milieuschutzge- Berlin apartments were granted this to put their money down, without real- biet regulation, a local ordnance de- status – with the corresponding ability ly understanding what the politicians signed to ensure that the character to charge an adequate rent for a much have in store for them. of a Berlin neighbourhood remains improved dwelling. The new laws are unthreatened by encroaching gentrifi- designed to drastically limit this figure. Charles Kingston, Editor 5 www.refire-online.com

and Maastoren in Rotterdam. deal. NorthStar said it anticipates an ini- will see us continuing to offer attractive The average age is eight years and tial leveraged yield of 13%. The price core and value-added products to the in- the portfolio is currently 93% leased with reflected the book value of the assets ternational investment market.” a weighted average remaining lease term in SEB’s books, in which the 93%-let The deal was obviously not a one-off of six years, including periodic rent re- portfolio was held across the German – albeit on a major scale – for NorthStar, views. Prominent tenants include BNP open-ended fund SEB ImmoInvest, as who are clearly intent on kicking off their Paribas, Cushman & Wakefield, Char- well as funds SEB ImmoPortfolio Tar- European engagement with a wide foot- tis Europe, AIG, Barclays, Invesco UK, get and SEB Global Property. print. Although still unconfirmed, several Ernst & Young and Deloitte. About 50% SEB will retain an interest in the port- reports suggest that NorthStar has paid of the rent from the portfolio comes from folio through its asset management man- between €450m and €500m for the so- London and Paris. date for the properties and hence has an called Trias portfolio owned by insurer The sale was to NorthStar Realty ongoing interest in adding value to the Provinzial NordWest, in a structured bid- Finance and Cale Street Partners, a assets. SEB’s CEO Barbara Knoflach ding process. London-based real estate finance and commented, “The huge interest shown The Trias portfolio is spread across investment firm backed by sovereign by global institutional investors shows nine European countries and includes wealth capital which will provide part of that we were offering a very attractive in- 260,000 sqm office, retail, hotel and lo- the financing and helped to source the vestment product. Our portfolio strategy gistics properties. The assets, including

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properties in London, Paris, Berlin, Ma- between 2010 and 2014 undergoing a major facelift and drid and Lisbon, have been asset-man- it averaged 1.25. The modernisation that will ensure it aged by IVG, Deka and Internos. current exchange rate is remains a landmark for years to nearly parity. come. As LTV covenants The “Silberturm”, or Sil- Germany/Closed-end funds at many of the funds ver Tower, (pictured, left) near Trouble ahead for German are now likely to be Frankfurt’s main railway sta- closed-end funds with breached due to the tion, once the headquarters of Swiss borrowings strengthened Swiss the now-disappeared Dresd- currency, triggering the ner Bank is now in the proud The recent revaluation of the Swiss Franc right of lenders to de- ownership of an investor group versus the Euro will cause mayhem for mand more security, led by South Korea’s Samsung countless German closed-end property liquidity at these funds SRA Asset Management. funds, according to a new study by the is likely to come under The 166-metre tall building Berlin-based rating agency Scope. At severe pressure. The immediate effect of was sold by IVG Institutional Funds for the very least the forecasted yields for this will be to block dividend payments an unnamed price (but thought in Frank- numerous funds who took out Swiss to investors, while potential payouts are furt media circles to be around €450m). Franc-denominated loans are heading diverted to the minimum liquidity re- The current tenant of the property’s 32 for a disastrous plunge, the agency says. serves to satisfy bankers. This will cause floors and 50,000 sqm isDeutsche Bahn, The prospect of German closed-end many funds to collapse, says Scope. along with its in-house IT service provider funds having to force-sell many of their Another factor threatening the viability DB Systel. Deutsche Bahn’s lease con- assets is a distinct possibility, the agen- of many funds is the parallel need to se- tract remains unaffected by the change of cy says, where fund initiators borrowed cure a new tenant lease agreement after ownership. in part in the Swiss currency (CHF). The ten years. Refinancing can then prove A separate adjoining property with good news, says Scope, is that of the doubly difficult, as the security for any 22,000 sqm, housing “board and execu- 600 closed-end funds it monitors, only new lender is now further endangered. tive headquarters” and likewise leased to 10% or 60 funds took out exposure to Should funds find that their liquidity re- Deutsche Bahn, is part of the Samsung the Swiss currency, although using the serves are not sufficient to bear the brunt ensemble. Commerzbank, which swal- loans for investing in assets in the euro- of the new currency repayment burden, lowed rival Dresdner Bank several years zone. the result will inevitably be a wave of ago, sold the property to the IVG consor- CHF loans taken out by closed funds forced sales, concludes Scope, without tium in 2012. between 2004 and 2006 amounted to naming any of the funds most likely to The American group Hines acted as €1.3bn, and Scope estimates that the be negatively affected. “We are currently investment manager for Samsung and will amount of debt of that outstanding is scrutinising the particular situation of in- handle asset management for the proper- around €1bn. Given that the loans were dividual funds”, say the analysts. Given ty, which holds a DGNB Silver status after mainly of 10-year duration, that would that last year again saw at least a third its complete refurbishment in 2012. see most of them looking for loan exten- less new closed-end property fund is- Meanwhile, IVG Immobilien AG, sions around about now, which Scope sues than the previous year, this latest which emerged from a self-managed in- describes as “an extremely unfavourable blow comes at a tough time for German solvency last year after a process which starting position for imminent discus- fund initiators. had seen it go from Germany’s largest sions about new loans.” property company to de-listing from the During the years 2003-2007, borrow- stock exchange - while wiping out share- ing in CHF for closed end funds was very Germany/Acquisitions holders – said that it now DOES intend popular, given that interest rates on the IVG sells Silberturm to Sam- to retain ownership of IVG Institutional Swiss currency were at least 150 basis sung, cancels Squaire sale Funds, which manage about €11bn of points lower than in the eurozone at the European office, retail and logistics prop- time. This helped fund initiators to raise It’s one of the most prominent buildings erty across numerous separate funds. the prospects of higher dividend pay- in Frankfurt, starting life as Germany’s (IVG itself has €3.5bn of assets under outs. In the years 2003-2007 the average tallest building and changing hands sev- management across Germany). This is Euro/CHF exchange rate was 1.57, while eral times over the last few years, while in contrast to earlier statements by the 7 www.refire-online.com

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company, which had said earlier it was Germany/Listed companies ing have a lettable area of 58,000 square looking for a buyer for the funds group. AIM-listed Summit Germany metres, have multiple tenants, an occu- Another about-turn by IVG is the halt- raises €120m in share placing pancy rate of 91% and an annual rent ing of its ongoing efforts to sell its co- income of €5.6 million. It said it expects lossal flagship “The Squaire” property at Summit Germany, the AIM-listed and to complete the refinancing by the end Frankfurt Airport, which houses tenants Guernsey-headquartered specialist for of February. KPMG, Deutsche Lufthansa and two German commercial real estate, has separate Hilton Hotels. IVG stopped the raised €120 million by issuing 171.4 mil- sale after bids from international inves- lion shares at 70 euro cents each in an Germany/Financing tors fell short of its valuation of €700m. oversubscribed placing with existing and Study calls for more support A number of bidders, including Chi- new institutional investors. for traditional German RE na’s second largest insurer Ping An, the The German commercial real estate financiers Qatari sovereign fund, developer Tish- company said it will use the money to fi- man Speyer,and private equity groups nance property acquisitions, joint ventures We carry a number of articles in this is- Blackstone and BlackRock, were invit- and co-investments as it moves towards sue about engagements from either new ed to revise initial offers, but these too its target of building an internally-man- or existing debt providers in real estate were rejected. IVG most recently had The aged portfolio worth more than €1 billion. financing, moving into to areas of lending Squaire valued in its books at €807m, but “The company is currently exploring a that would typically have been provided analysts consider this now to be closer range of attractive acquisition opportuni- by the traditional banks and focused real to €700m ties and will seek to complete a number estate financiers (see articles on Caerus, Instead, in somewhat of a surprise of them using the proceeds of the plac- BVK and VGV). move, IVG has arranged a new €470m ing,” it said. A new study just released by the In- five-year loan from Bank of America “Demand for the properties of the stitut der deutschen Wirtschaft (IW) in Merrill Lynch to cover holding on to the company and its subsidiaries continue Cologne in conjunction with the Verband 80%-let property, which apparently still to be strong and are increasing with the deutscher Pfandbriefbanken (vdp), the provides a well-above-average yield for increase in rental income and occupan- association of German Pfandbrief-issuing IVG. According to CEO Ralf Jung, in a cy. The board is confident that the com- banks, carries a stark warning about the statement, “The offers we received did pany is well positioned to benefit from likely long-term effects of financial market not match our valuation of this proper- the market trends by executing on new regulation on the traditional sources of fi- ty. At the same time, the refinancing ob- acquisition opportunities; by continuing nance. tained makes it commercially attractive to enhance the rental income from its In particular, it highlights how the strin- for us to keep THE SQUAIRE in our port- properties and by realising value from its gent demands of Basel III and Solvency folio. It shows a commercial viability well substantial portfolio,” it added. II will see banks – particularly those refi- above total portfolio’s average”. The company also said in a statement nancing via Pfandbriefe - being forced out The construction costs with enormous that it has signed a binding term sheet of the property financing role, in favour overruns of more than €1bn played no with a German bank for the financing of of insurance companies, debt funds and small part in IVG’s downfall, and led the nine of the 11 properties the company pension pools. group to being taken over by its bond bought back in April 2014. According to Professor Michael creditors in debt-for-equity deals. IVG’s The company said the deal is for a €33 Hüther, director of the IW, there is a po- finance director Fabian John added, million, seven-year facility, at an interest litical will to favour alternative providers “The refinancing terms ensure that, with rate of 2.1% a year and an amortisation of finance over the banks, by deliberate- its current letting levels, The Squaire will rate of 3% a year. It said the loan will bear ly absolving insurers from the need to deliver an earnings contribution in the “customary covenants”. Of the total loan, publish liquidity figures and by imposing double-digit millions.” €2.5 million is subject to the extension of lower equity capital requirements on debt He said that the firm’s liability restruc- some leases. funds than on banks, for example. turing is now almost complete, following Summit regained full control of the Jens Tolckmitt, CEO of the vdp, points this loan and two further loan agreements portfolio of mainly office buildings last out that the banks are effectively being made with Deutsche Bank last October April when it bought a loan facility on forced to refocus on short-term lending by for €1.5bn, of which a €680m tranche the 11 properties for about €45.5 million. the new leverage ratios and liquidity mea- was secured in a CMBS transaction. The properties covered by the refinanc- sures LCR and NSFR demanded by Basel

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III. Likewise, Solvency II decrees that in- II even provides incentives for insurers lowed to fall below 3% for any financial insurance companies have lower incentives to plump for shorter loan terms, since stitution) as the proviso likely to cause the to invest in long-term Pfandbriefe, since they need to underpin the loans with most problems, particularly when it comes it would tie up more of their equity capi- less equity capital. fully into effect in 2017. “This will raise the tal – with its accompanying negative con- Longer-term financing is the norm in cost of loans significantly”, he says. sequences for bank refinancing and thus Germany, particularly in private residential Like Tolckmitt at the vdp, Hüther of the banks ability to provide loans. mortgage financing, with more than 70% of IW is firmly against any shift in long-term Hüther raises the question in his all new loans since 2000 being issued for a financing to the newer financial intermedi- study as to whether the alternative fi- period of five years or more. Variable inter- aries who are less regulated, established nance providers have boththe will and est rate loans account for only 15% of new and experienced, and he believes it would the ability to underwrite long-term mortgages, compared to a eurozone aver- lead to unwelcome market distortions. lending. “First of all they have to build age of more than 45%. Hüther argues that His proposal is to introduce the Lever- up the necessary know-how so they disadvantaging the banks in favour of more age Ratio as a benchmark figure and have can make accurate assessments of short-term oriented lenders would harm the the authorities monitor it carefully for the the likely rate of delinquency of such country’s ability to plan for the longer term next while. At the same time the authori- long-term loans”, he says. Another and would remove a key stabilising element ties should lower the Liquidity Ratio NSFR factor hindering debt funds is that their keeping German prices in check. from 100% to 95% to give the banks a bit investors are normally oriented to the Tolckmitt of the vdp sees the Leverage more more wiggle room, and be less fix- medium-term (5-7 years), rather than Ratio (the relationship between core capi- ated purely on the numbers but take each the 113_Refire_194x134_Vs1_REAGlong term (10 years plus). Solvency 16.12.13 17:24 tal Seite and 1 total balance sheet, which is not al- individual bank’s situation into account.

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RZ_Anzeige_InstitRELetter_A4_en_01.indd 1 01.12.14 15:09 see page 13 12

Germany/Financing respondents noted fall- are also attracting more atten- Climate for financing in Ger- ing liquidity costs. tion here. many hits record high According to founder With financing of existing Curth-C. Flatow (picture, assets being made available The FAP-Barometer, now well-estab- right) “The positive mood at LTVs of 30% and 100%, the lished as a German index for measur- among financing institu- average across all lending and ing the real estate financing climate, tions stems from the new asset categories is 71%. Not showed it highest-ever reading for the business they are writ- such good news for finance first quarter of 2015, indicating that the ing. Nearly 60% report providers is that margins are environment for financing commercial increasing levels of new currently between 65 and 525 property has never been as good. business, the highest lev- basis points, with the average The FAP reading, managed by Fla- el since end-2012. We could even be being 158 bps, down from last quar- tow Advisory Partners in Berlin, takes about to see another record year in Ger- ter’s average of 176 bps. quarterly soundings from providers of man commercial real estate. Project developments are seeing real estate finance as to how they view The average sums lent by 51% of LTC values of between 45% and 90%, the attractiveness of financing different respondents are between €10m and with the average being 72%. Margins market segments. The data collection €50m. Loans of between €50m and are up to 300bps, with the average be- is carried out by real estate research €100m have risen by 7.5%, while loans ing 201bps, down from last quarter’s group BulwienGesa. of above €100m are up by 1.1%. Note- 224bps. This indicates a fall in margins The reading for Q1 is +2.87, up from worthy is perhaps a shift to the financ- over the last 12 months of more than 2.33 in the last quarter. Financing con- ing of non-core assets, due to stiff 22%, while for project developments ditions are seen as having improved competition in the core sector, as well they have fallen by more than 10%. by 53% of those surveyed, while 47% as the demand for financing assets in The study and accompanying view the market as unchanged – with C- and D-locations. Niche segments graphics can be downloaded at: no respondent believing that condi- and operator-driven assets such as http://www.fap-finance.com/de/ tions have disimproved. About half of hotels and student accommodation barometer/

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Asset Management Take advantage of our experience and track record in purchasing and Christoph Wittkop actively managing properties with upside potential. Represented in the five Managing Director, most important German real estate markets, our strong team will partner Country Head Germany [email protected] you throughout the acquisition, leasing, optimisation, refurbishment and

sales process. Gunther Deutsch Managing Director, Investment Solutions Head of Investments PAMERA CORNERSTONE Real Estate Advisers develops and manages [email protected] tailored real estate solutions for investment and fund management, designed as pool funds or individual mandates, such as special funds governed by Matthias Gerloff German investment law. Managing Director, Institutional Investment Solutions Creating real value. [email protected]

Berlin . Dusseldorf . Frankfurt . Hamburg . Munich . London www.pamera-cornerstone.de 13 www.refire-online.com

...from page 11 KRIEGER R EAL ESTATE M ANAGEMENT

AUDITOR· TAX A DVISOR· ATTORNEY Germany/Study FRANKFURT AM MAIN · LAMPERTHEIM · BERLIN German urban housing estates need €90bn investment - study

German housing estates, an important pillar of urban residential supply, are suffering an enormous investment backlog, and will need some €90bn for modernisation through 2030, according to a new and comprehensive study published by the German Institute of Urban Af- fairs (Difu) in Berlin. Large estates with over 500 rental units make up some 10% of total housing stock or 4m apartments, and are home to 8 million people throughout the country, Difu found in its new study. It places the investment backlog in modernisation and new construction at €56bn through 2030, plus an additional €33bn for social and technical infrastructure in the surrounding areas. The main challeng- es are the conversion of space to become barrier-free and elderly-friendly as the population ages, and to find cost-efficient solutions for energy-friendly refurbishment. Housing estates form an important pillar of urban social infrastructure as they offer affordable living space, Difu said. To counter the poor reputation of some neighbourhoods, these modernisation plans need to provide attractive everyday living spaces, mixed-use functions and a better integration into the cityscape. Against the backdrop of a general housing shortage in the large conurbations, more municipal, investor and planning attention should be given to the role played by these estates. The study was commissioned by the German Building and Construction Industry Association HDB, the German Building Materials Association BBS, the German Federal Association for Housing and Real Es- tate Companies GdW and the Housing Estate Centre of Excellency (Kompetenzzentrum Großsiedlungen).

Germany/Study German investment and leasing markets drifting further apart

One of the notable features of the German real estate market through 2014 was widening gap between the investment markets and office leasing markets in Germany’s biggest cities. While the large brokers were cracking open the champagne bottles to cele- brate a record year for investment transactions, their colleagues responsible for leasing were experiencing their weakest year for five years. In the Big 6 cities of Berlin, Hamburg, Munich, Frank- 14

Pinpoint Investment in Class-B Cities ue to be, overlooked. Or else investors see no way to act upon their insights because they lack the market access and the nec- How to enter the German market beyond the Big essary acquisition and/or asset management resources. As a Seven as an international investor result, profitable investment opportunities are missed. - by Ulrich Jacke - In order not to lose out on such chances to invest you need a International investors are quite right in considering the German partner on the ground in Germany with a nationwide footprint housing market as one of the most attractive worldwide. So far, and both knowledge of, and access to, local real estate markets. however, many of these institutional investors have almost ex- Ideally, your partners know-how will be rooted in first-hand asset clusively focused on the country’s so-called Big management and transaction experience. Seven cities. Why was that? Better yet, your partners detailed market expertise should be complemented by a For one thing, the Big Seven did not seem to successful network built up over decades pose a liquidity risk and were rated as perma- in the business, as it might open up lucra- nently stable. Adequate market data for them tive off-market deals to the investor. permitted qualified investment decisions. They were assumed to have balanced risk-return Our company, for instance, facilitated ratios, obviating the need to ponder future exit more than 750 million euros worth of strategies. Moreover, they permitted very large- off-market transactions involving a total scale investments suitable for geographically of 7,800 residential units during the past concentrated asset management. twelve months, and audited more than 5,000 units within the framework of due diligence mandates. So investors used to be well served with their commitments in Germany’s metropolises. You could barely go wrong investing Our extensive long-term experience in the residential invest- in residential property here in recent years. Rental growth com- ment business enabled us to build up portfolios with a total bined with rising multipliers almost anywhere you looked. investment volume of up to 240 million euros for international investors within the framework of acquisition / asset manage- But it is always risky business to simply carry past performance ment mandates, and to support their asset management for forward into the future, and yield rates in these locations have many years. noticeably declined lately. Once you factor in the location risk, the rates of return on such investments have ceased to be sen- But how will Germany’s contemplated rent control legislation sible for many market players. Indeed, they have often declined commonly called “rent freeze” (“Mietpreisbremse”) affect invest- to the point where a risk-adequate yield rate is no longer in the ment decisions? cards. In a way, investors are affected by the rent freeze. But it is im- This is the upshot of the Risk-Return Ranking developed by Dr. portant to know: For the areas to be declared “strained housing Lübke & Kelber, which matches the achievable yield with the markets” in order to qualify them for the application of the rent corresponding exposure for 50 German cities. Many secondary freeze will mainly be the metropolitan districts in the Big Seven or “Class B” cities in Germany, such as e.g. Wolfsburg, Lüne- most coveted by tenants and investors. Conversely, many Class burg, and Mannheim rank well ahead of Munich, Stuttgart and B cities are likely to be spared the introduction of the rent freeze Hamburg. Investors are therefore well advised to take a close even if they are prospering towns with positive or at least stable look at Class B cities. economic and demographic growth.

What often stands in the way of such a reorientation is the lack So it will make Germany’s Class B locations all the more inter- of local market expertise. Many of the Class B cities are simply esting for investors. uncharted territory for international investors or else are deemed negligible. This means that existing earning potential, apprecia- Author Ulrich Jacke is Managing Partner of Dr. Lübke & Kel- tion tendencies and exit strategy options have been, and contin- ber GmbH in Frankfurt am Main

Sponsored Statement 15 www.refire-online.com

furt, Düsseldorf and Cologne a total of ies’ classical Central Business Districts, risk, and finance providers will also be 2.7m of new office leases were signed, where increasingly cost-conscious ten- drawn further into non-core financing. As 4.3% less than in 2013 and well below ants are clustering. a rule, investors’ yield expectations rise on the 10-year average of 2.9 sqm. The Brokers Colliers and Savills are pre- average by 1.4% when they invest outside figures are even starker when Hamburg dicting for 2015 that the current drift the tried and trusted A-locations, which and Berlin are excluded, as both those between investment and leasing activ- they are increasingly being forced to do. cities had an INCREASE of 12%, but ity will continue. After moderate rental this could not compensate for the -5% growth in 2014, office rents are expect- in Munich to the -31% in Düsseldorf. ed to stabilise as potential tenants hold Germany/Debt Financing At the same time (with the exception off on major leasing decisions in antic- CAERUS secures new man- of Düsseldorf) all the main broker groups ipation of falling rents. With less new dates for €350m debt finance are at pains to point out the overall fall in office property coming on the market, the availability of office space in the big- however, a floor exists which will pro- CAERUS Debt Investments AG, the ger cities, such that the actual vacancy vide good support, say the brokers. Düsseldorf-based consultancy specialis- rates again fell – a trend likely to be con- Both brokers however anticipate in- ing in real estate debt, gained two ma- tinued in 2015, as more than half of the vestment volumes of again, €35m to jor new mandates at the end of the last new-built office space coming on stream €40m, with the wall of money looking for quarter from German institutional inves- is already pre-let. suitable assets likely to drive yields in cit- tors. CAERUS will advise both clients The winners in the current market are ies like Munich down to 2007 levels. In- on the investment of a total of €350m in those locations on the edge of the cit- vestors will be drawn into taking on more senior collateralised mortgage loans with 16

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high loan-to-value ratios, so-called whole loans. tional mutually-held German insurer that’s been in business for The Düsseldorf-based CAERUS, headed up by Michael nearly 100 years. Volkswohl Bund’s policy holders are private Morgenroth, a former chairman of INREV and a board member households and commercial ‘Mittelstand’ companies, and the of insurer Gothaer Asset Management AG, has now gained relatively low-key insurer offers its policies via an extensive net- mandates of €420m since CAERUS’s founding two years ago. work of insurance brokers and independent financial salesmen. It has already placed €188m in three investments, securing the Volkswohl Bund board member and Head of Investment loans on both individual properties and portfolios. Axel-Rainer Hoffmann told REFIRE that the attractions of debt CAERUS’s CIO Dr. Patrick Züchner commented, “For some investment for his company were the low risk involved, the more time we have been noting considerably increasing demand for attractive yield available, and that it is senior secured debt. senior secured real estate loans, from a single source, for loca- Although Volkswohl Bund has about 7% of its assets invested tions away from the top cities and use types outside the main- in real estate, and it offers mortgages to its policyholders and stream. This demand is not being adequately satisfied by the third parties, investing in debt is a new investment category for traditional market players. Individual clients advised by CAERUS the group. With debt investments, he is not looking for either ad- have access to financing solutions for complex financing situa- venture or indeed, capital appreciation, he said, and certainly not tions, for example in the area of larger portfolios.” at this point in the real estate cycle. As a fixed income investment, At €200m, one of the two new mandates won by CAERUS debt finance is an attractive option, he said. is from the Dortmund-headquartered Volkswohl Bund, a tradi- Michael Morgenroth of CAERUS added, “Widening our invest-

Guest Column: Jürgen Scheins, Managing Director of VALTEQ Gesellschaft mbH Strategic outsourcing of facility management services

For a number of years, outsourcing of For example, a major insurance concern increasingly complex service packages tendered out comprehensive operator has been a trend in the field of facility responsibility for its concern head- management. A market study titled, quarters and placed the contract “The future of FM services in Germany as part of an innovative outsourcing in 2020” already showed in 2011 that process. In this regard, the overall facility many industry experts were declaring management of the self-used properties themselves in favour of the full-package was contracted on the basis of strategic placement of facility services as an business principles: www.valteq.de alternative to the traditionally prevailing - Comprehensive bundling of corridor”. Beyond this, there is no further individual package contracts. However, responsibilities and competencies risk sharing on the part of the client; in the contracting of FM services in by transferring the “operator other words, the client benefits from the outsourcing or operator models is a responsibility” to the service partner service partner’s Guaranteed Maximum process that can result in very differing - Anchoring of “life-cycle orientation” Price. Accordingly, the client receives degrees of economic success. Decisive through the agreement of a long- a rebate in the event that the baseline factors are often organisation-related term service relationship, and of amount is not reached. operative barriers and, in particular, the “performance orientation” through The significant improvements in thorough preparation of the process, functional performance agreements performance quality and cost efficiency which should include a concept for - “Output specification” coupled with speak very much in favour of grappling the definition of services, as well as for a sophisticated quality assurance with detailed concepts of this kind. control mechanisms, or contract and system. Empirical evidence shows that most payment models. Generally speaking, it In addition, a so-called “floating GMP” companies in the industry have so is to be decided whether contracts are approach was selected. Until a defined far only scraped the surface of the to be placed individually, or as a full payment baseline is reached, the true potentially feasible solutions. According package, in which the demands placed costs of performing the works are paid in to VALTEQ’s experience with such on the configuration of service level addition to a preset profit margin. Once projects, more intelligent concepts agreements, functional performance the baseline amount has been passed, therefore offer qualified asset managers programmes and the contractual the client bears at least part of the service a broad scope for further significant definition of payment models are higher provider’s additional expenditure – within improvements in the economic success again. the bounds of a so-called “floating of their management services. 17 www.refire-online.com

ment solutions to include whole loans can provide investors with access to attractive yields. As part of our investors’ port- real estate for your success folios, these make a noticeable contribution to achieving their internal target returns.”

Founded in 1910, AENGEVELT IMMOBILIEN is Germany/Hotels one of the largest and most experienced real German hotel investment at record €3bn, but demand set to fall estate service providers in Germany.

It was long looking clear that 2014 was shaping up to be a record year for investment in the German hotel sector, but when the final figures came in, they were still a cause for surprise. According to property advisers JLL, the transaction volume of €3bn exceeded the boom years of 2006 and 2007 (both around €2.3bn) by nearly a third (30%), and well above the 10-year average of €1.2bn. In the last quarter of 2014 alone, hotel deals of nearly €1bn were transacted. The primary driver behind the surge in investment were international investors and other internation- als who had not previously been involved in the sector. The solid German economic climate, low interest rates, the willingness of banks to finance, as well as the low euro helped to drive more investors into real assets, the brokers say. Yields of 50 to 100 basis points above comparable investment in offices meant that fund investors as well as insur- It offers comprehensive, individual customer consul- ers and pension funds were often adding hotels into portfolio buys to raise overall returns. (Figures from CBRE suggest the ting both nationally and internationally in the market peak hotel yields fell over the last twelve months by 50 basis segments of of ce premises, retail, logistics, points to 5.25%.) hotel and residential. JLL says another strong year lies ahead in 2015, although a survey it took in November raised warning flags about a notable shift in sentiment ahead. “In 2015 we expect another The company will support and advise you on the good year for the hotel investment market, though not neces- basis of its extensive real estate research across the sarily a repeat of record year 2014,” said JLL’s Head of Hotels entire value creation chain of your properties - from & Hospitality Group Germany, Ursula Kriegl. JLL recorded 70 transactions across the market, 15% more buying properties to project initiation/management, than in 2013. Off those, 57 were single deals – up by 70% on leasing and portfolio analyses right through to the the previous year to €1.8bn. “In 2014, potential buyers were exit and sales stage. provided with a lot of large single assets,” said Kriegl. A doz- en transactions exceeded €50m, against only three in 2013. Helping to boost the figures was the average transaction volume for single assets, which rose to €31m from €21m. AENGEVELT Immobilien GmbH & Co. KG Trade in luxury hotels certainly lent the market wings, tri- Kennedydamm 55 pling in value to €965m. Among the largest deals were US D-40476 Düsseldorf REIT Host Hotels & Resorts buying 90% of the Grandhotel Esplanade Berlin for €81m from Blackstone, the sale of the Phone +49 211 8391-0 · [email protected] Atlantic Hotel in Hamburg, and Deutsche Asset & Wealth www.aengevelt.com Management acquiring the Jumeirah Hotel in Frankfurt as part of the €800m Palais Quartiers from Rabobank. Portfolio 18

transaction volumes more than doubled of dominant UK shopping centres, and The development will move forward in to €1.2bn in 11 deals with 124 hotels and dovetails with the company’s conversion a number of phases comprising logistics two mixed-use transactions. The largest to REIT status on December 31st 2014. warehousing units ranging from 5,000 was French hotel operator Accor, buying The joint venture with Ares Manage- sqm to 40,000 sqm being delivered from 67 hotels from Moor Park for €450m. ment consisted of 23 properties with 100 this year onwards, and is expected to The most active buyers were institu- retail units across five separate portfolios have an end-value of more than €85m. tional investors, high net worth individ- and mainly anchored by national grocery Verdion had previously developed the uals, hotel operators and private equity and DIY stores, which Rockspring will al- adjacent 46,000 sqm Air Link Park, where firms. The share of domestic buyers fell to locate to its German Retail Box Fund. tenants include Parxel, Dachser Spedi- one third from 58% in 2013. French and The sale to Rockspring put an equity tion, and Unitax. UK investors were responsible for €625m value of €52.5m on Capital & Region- According to Rockspring’s Ber- in volume, US investors for €116m. al’s share, but will generate about €43m lin-based partner and head of Germany, JLL surveyed 600 hotel experts in in cash after transaction costs and the Stuart Reid, “This underlines our com- November about their forward views. In keeping of a small minority stake in the mitment to Berlin and our belief in the contrast to a similar survey six months ongoing German portfolios for the next growing importance of strategic logistic before, the number of optimists had fall- five years. sites in Germany, which benefit not only en from 77% to 58% - noticeably more Rockspring CEO Robert Gilchrist from strong regional access, but which so than for Europe at large, and at odds commented: “The deal is illustrative of are also within easy reach of the city and with stated global perspectives. the retail acquisition strategy we have airport. With Berlin’s projected growth Frankfurt was seen as particularly vul- been implementing in Germany for our in- and Berlin Brandenburg Airport expected nerable, along with Berlin and Hamburg, stitutional clients over the past 10 years, to become one of Europe’s busiest air- along with Düsseldorf which is particularly and we will be progressing a range of op- port hubs on opening, we consider this prone to volatility given the 2-3 year cycle portunities to generate a solid distribution site to be one of the best in the region.” of some of its biggest trade fairs. Munich return whilst applying asset management was seen as the most favourable market. expertise to extract value over time.” The investors surveyed showed clear- Capital & Regional will now focus ex- Europe/Research ly that their intentions are shifting, from clusively on its UK interests, after what More capital heading to real buying existing hotels to project develop- CEO Hugh Scott-Barrett said had been estate – and more risk appetite ments, buying refurbished properties, or a transformational year for the group. converting existing properties into hotels. : “Having restructured the company’s Investment in real estate is headed for a Ursula Kriegl of JLL believes that this is debt, undertaken a number of non-core further rise in 2015, reflecting market sta- being driven by the low yields currently divestments, acquired full ownership of bilisation, according to the Global Invest- achievable and the difficulties, particularly the Mall Fund and received sharehold- ment Intentions Survey from non-listed in Munich, of buying existing properties. er approval for a REIT conversion on 31 property industry associations INREV, December, the proposed disposal of our ANREV and PREA. Institutions intend to German joint venture represents the last raise allocations to global real estate to a Germany/Acquisitions major step in repositioning the compa- median 11.3% this year from 10.8% cur- UK’s Capital & Regional de- ny’s focus on its core portfolio of domi- rently, meaning that a minimum €42.5bn parts Germany to focus on UK nant UK community shopping centres.” is being targeted at real estate this year. Separately, Rockspring bought a Figures from the latest INREV Invest- The UK’s specialist retail property com- 16-hectare site with permission for a ment Intentions Survey shows real estate pany Capital & Regional sold its 50% fully-serviced logistics development is set to remain a ‘hot ticket’ in 2015, with stake in its German retail joint venture right beside the new Berlin airport, the investment target well up from €35bn with Ares Management to clients and which is still under construction af- in 2014. Investors from Asia- Pacific funds managed by fellow UK investor ter several controversial delays. The are driving this increase as they expect Rockspring, in a deal which puts an eq- €13.5m VERDION AIRPARK deal was allocations to rise to 11% from 9.8%. uity value of €105m on the joint venture. done in partnership with logistics de- Likewise, North America and Europe- The deal represents the last major step veloper Verdion, with Rockspring pro- an investors will increase allocations in in Capital & Regional’s stated strategy of viding the full equity funding for the their regions to 9.1% from 8.6%, and to refocusing its business onto its portfolio proposed 93,000 sqm scheme. 12.6% from 12.3% respectively. 19 www.refire-online.com

GERMAN B CITIES: COMMERCIAL RENTS INCREASE BY 1.7 PERCENT

The stronger investor interest in Cologne and 15.22 euros in Munich. second-tier cities of the commercial With an average figure of 12.78 real estate market in Germany is euros, they are thus at the level of the accompanied with rising rents. In fourth quarter of 2013 (12.80 euros). conjunction with empirica, CORPUS As expected, in terms of the age cate- SIREO has analysed the offered gories of the buildings in B cities, the rents at 14 German potential loca- leading positions are occupied by old tions for the seventh time. In the buildings (built before 1945) as well second quarter of 2014, the average as modern new buildings (less than offered rents were approximately three years old). The average rents 8 euros per square metre. This is for new buildings amounted to 12.20 equivalent to an increase of 1.7 euros per square metre in the second percent compared with the fourth quarter of 2014. At present, there are city centre, the Mainzer Landstraße quarter of 2013. not many old buildings in prime loca- and the Abraham-Lincoln-Straße are tions on the market; this is the reason the main areas of the office market With its study „GERMANY 21 – Re- why there are hardly any changes in in Wiesbaden. For instance, four gionaler Büromarktindex“ (Germany this segment. Office premises built in new properties are currently being 21 - Regional Office Market Index), the 1970‘s and 1980‘s have to a large built in the Mainzer Landstraße, the CORPUS SIREO is analysing the extent not benefited from the positi- corridor between the city centre and German top-7 cities (Frankfurt, ve market development. In general, the motorway link. Further project Hamburg, Munich, Cologne, Ber- properties during this period are to development has been initiated in the lin, Düsseldorf, Stuttgart) as well as be found in the low-price market seg- Abraham-Lincoln-Straße, the loca- 14 regional cities (Aachen, Bonn, ment, and are therefore hardly able to tion which is dominated by insurance Bremen, Dortmund, Dresden, Essen, benefit from rising rent levels. groups. The completion of these Hanover, Karlsruhe, Leipzig, Mainz, projects is likely to be accompanied Mannheim, Münster, Nuremberg, City in focus: Wiesbaden by a further increase in the top rents Wiesbaden). The current issue focu- in Wiesbaden and also increasing ses on Wiesbaden. The office market in Wiesbaden is vacancy levels in older properties. In of an average size, with 2.8 million future, it is expected that Wiesbaden The average offered rents at the square metres. In terms of prices, will also see a process whereby office second-tier locations are between the regional capital of Hesse belongs buildings from the 1970‘s and 1980‘s 6.55 euros per square metres in to the leading group, with average will be revitalised or increasingly Leipzig and 9.84 euros in Bonn. On quoted rents of 9.70 euros and top converted into residential properties. average, they amount to 7.99 euros, rents of 13.80 euros per square metre. which is equivalent to an increase of The vacancy rate in Wiesbaden is The complete report „Germany 21: 1.7 percent compared with the fourth currently approximately 6.0 percent. Regionaler Büromarktindex“ (Ger- quarter of 2013 (7.86 euros). The office market is mainly characte- many 21: Regional Office Market rised by administration and insurance Index“) can be downloaded free of At the top-7 locations, the average groups, and is stable and not very dy- charge from: rents range between 10.59 euros in namic. In addition to the small-scale www.corpussireo.com/downloads

Sponsored Statement 20

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Of this some 45.1% or €19.2bn of markets. In Asia-Pacific 67.7% say they over the past couple of years. It’s a case the anticipated total allocation is point- will invest in their own region, against of investors chasing dependable returns ed toward Europe, with Germany, UK 77.5% of Europeans and 68.5% of North through real estate in an otherwise unex- and France still ranked as the top three American institutions. “However, there citing investment landscape.” investment destinations for all investors. are encouraging signs that some inves- “But we can’t ignore the cyclical na- Italy is now attracting attention, jump- tors are moving further afield. Investors ture of real estate – what the survey ing three places to become the eighth from Asia-Pacific, for example, demon- shows us could also be reflective of a preferred target destination this year. A strate a desire for geographic diversifica- market enjoying a period of calm before big loser is Turkey, however, which has tion.” the storm.” dropped out of the list of top-15 target INREV cited an increase of around destinations. 20% of Asian investors planning to in- The INREV survey found an increasing vest outside their region – with more than Germany/Acquisitions focus on risk – with 41.4% of investors half of them targeting Europe and North Corestate Capital sells further surveyed indicating value-added is their America. Within Europe, again, the key repositioned portfolio for €83m preferred investment strategy, now on a markets Asian investors are targeting are par with core, for which a further 41.4% the UK, France and Germany Switzerland-based Corestate Capital, of investors express a preference. While INREV has been carrying out its sur- which largely focuses on opportunistic office remains the preferred asset type, vey in Europe since 2007 but last year residential real estate in Germany, contin- alternative sectors are gaining in pop- teamed up with ANREV and PREA – its ued its long series of disposals by selling ularity. Just over 20% of respondents counterparts in Asia and the US, respec- a further 2,360 units – this time to a listed highlighted assets in hospitality, student tively – to provide a more global perspec- (unnamed) international institutional in- housing, healthcare and parking as well tive. vestor, for a price of €83m. This brings as real estate debt as desirable invest- Henri Vuong, INREV’s director of to over €1bn the revenue raised from sale ment targets. research, said: “This year’s survey is by the company in the last two years. As in previous years, investors display broadly consistent with the predicted The properties are located in the Ger- a preference for investing in domestic and actual investment trends we’ve seen man states of North Rhine-Westphalia and Mecklenburg-Western Pomerania, and were acquired from a distressed seller in early 2010. Typical for Corestate’s “repositioning” approach, when it bought the properties they had a significant maintenance backlog, high vacancy levels and a poor rent roll. By restructuring the funding, com- mitting heavy capital expenditures to redevelopment, and actively managing the assets, Corestate says it lowered the vacancy rate from 14 % to 7 % and cut the delinquency rate from 15 % to 5 %. Thomas Landschreiber, Corestate’s CIO, commented: “We focus on creating value in real estate as opposed to pas- sive buy-and-hold strategies. Our asset management platform covers the entire spectrum of real-estate-related deliver- ables, which made it possible for us to stabilise this distressed portfolio within four years and to successfully reposition it on the market. “Given the persistently upbeat senti- Germany house price development 21 www.refire-online.com

ment on the German investment market, Germany/Listed Companies five new shares in the enlarged Deutsche the comparatively moderate entry-level Green light for Deutsche An- Annington. Gagfah stock is currently investment volumes, and the low rate of nington takeover of Gagfah trading at just under €20.00. interest on the capital market, real estate this quarter According to Annington’s CEO Rolf investments in Germany remain an inter- Buch, “We are very happy about the un- esting proposition”, he said. Germany’s Cartel Office last week gave failingly positive acceptance of our un- Since its establishment in 2006 by the green light for the takeover by Deut- dertaking to combine Deutsche Anning- ex-Cerberus staff under the leadership sche Annington of fellow-listed Gagfah, ton and Gagfah to form a leading German of Ralph Winter, Corestate has invested removing a potential hurdle to the creation residential company with around 350,000 more than €3bn in Germany for interna- of the new giant residential housing compa- units.” Remaining Gagfah shareholders tional investors and family offices. Two ny, with its more than 350,000 apartments. will be able to tender their shares in an years ago it opened a further office in Annington said last week that it now additional acceptance period ending on Singapore to tap into Asian capital sourc- had the acceptances of 85.2% of the 9th February. Formal closing of the deal es looking to invest in Europe, in addition votes of Gagfah shareholders, including is expected this quarter. to offices in Zug, Frankfurt and London. shares tied in to convertible bond issues, The new company, whose likely new This week it announced that it planned to go ahead with the takeover. The min- name and headquarters location have a doubling of its investment in the eu- imum quotient had been set at 50%, or yet to be decided upon, will see Rolf rozone this year following the removal 57% of the bond-related share, a margin Buch becoming CEO and Gagfah’s CEO of the peg between the Swiss franc and which has now been comfortably met. Thomas Zinnöcker becoming his dep- the euro, which has seen the value of the Annington has offered €122.52 in cash uty CEO. The combined group will have Swiss currency jump by 20%. for every 14 Gagfah shares, as well as assets worth €21bn. 22

Germany/Debt Funds real estate investment funds in 2014, a ty’s assessed value of €370m in Septem- DeAWM launches €500m rise of 65% to a record volume. Most ber last year. The building was sold from debt fund after record year of the transactions involved buildings in the Grundbesitz Europa fund, where it Germany. It bought buildings valued at had been the single largest asset; it had Deutsche Asset & Wealth Manage- about 2.4bn and sold about €1.2 billion been bought in 2003 for about €320m ment (DeAWM), the alternative invest- euros of properties. The corresponding at the time. The 35,000 sqm building ment management arm of Deutsche figure in 2013 was €2.2bn, unchanged near the Tower of London, designed by Bank (previously known as RREEF), has from 2012. Norman Foster and built by Tishman closed its first senior commercial real es- The 2014 deals included the acqui- Speyer, is fully occupied with consulting tate debt fund, raising €500m. sition of Frankfurt’s Palais Quartier mall, group Marsh & McLennan as the prin- The investment manager said it will office and hotel complex, valued at about cipal tenant. structure the vehicle as a German Spe- 800 million euros, which was Germany’s zialfonds, and will write loans against biggest single-property sale of 2014. It German real estate – both in the com- also bought the Rondo One office build- Germany/Retail real estate mercial and residential sectors. The fund ing in Warsaw from BlackRock for its in- UK REIT Redefine boosts will invest in facilities that have loan-to- stitutional clients. German retail holdings in value ratios of up to 60% and are se- DeAWM also carried out numerous €157m deal cured against office, retail, residential deals for its open- and closed-ended and logistics assets across Germany, funds, popular with thousands of pri- Redefine International, the London while loan maturity would range between vate savers. These included buying five Stock Exchange-listed REIT, completed three and 10 years. properties for €528m and selling four for an €57.4 million acquisition in mid-Jan- The group did not reveal any details €585m in its two open-end- uary of a portfolio of 56 Ger- on who the investors are, other than say- ed real estate funds man retail properties in a 50/50 ing it used its Alternative Asset Manage- Grundbesitz europa joint venture with Johannes- ment arm in the UK to raise the capital. and Grundbesitz Glob- burg-listed Redefine Proper- However, insurers and pension funds al. Its latest open-ended ties, its biggest (30%) share- have been backing similar debt funds fund, Grundbesitz Fokus holder. in this cycle, with iii-investments of Mu- Deutschland is current- The portfolio is valued at nich being an early real estate debt fund ly evaluating several po- €156.8m and will be acquired to structure as a Spezialfonds on behalf tential investments, it together with existing bank of a German pension fund in 2012 when said. The group also sold debt of €100m, which the joint it was awarded a mandate to launch a one property out of its venture intends to refinance €200m debt vehicle. closed-end fund business immediately after the deal is “The capital raise demonstrates the for €173m in 2014 and closed. The deal reflects a net increasing demand for real estate loans bought residential proper- initial yield of 7.5%, although as an alternative to corporate and gov- ty worth €25m. Redefine says that, subject to ernment bonds,” said Andrea Vanni, According to Georg Allendorf, (pic- refinancing, it is expected to produce an head of European real estate debt invest- tured, right) the genial, bow-tied co-head initial yield on equity of more than 11.0%. ments for DeAWM. “The fund close also of European real estate at DeAWM, “2014 The deal will boost Redefine Internation- represents a further milestone for the was a record year for us with extraordi- al’s portfolio of assets in Germany to expansion of our real estate debt busi- nary market opportunities. Institutional about €478m. ness.”DeAWM has €1.27tr of assets un- investors in particular need appropriate The acquisition is in keeping with Re- der management globally, with €37.1bn real estate investment opportunities and define International’s stated strategy of invested in core, value-add and oppor- favour German special funds for that focusing more on income yielding as- tunistic real estate, real estate securities purpose.” sets in the retail, commercial and hotel and property debt. Just recently DeAWM also took ad- sectors in the UK and Germany to grow A recent statement by Deutsche Bank vantage of strong Asian interest in Lon- income returns to shareholders. Germa- itself on the dealings of its DeAWM sub- don to sell the Tower Place office proper- ny now represents 35% of Redefine In- sidiary said that DeAWM bought and ty to Chinese insurer Ping An for €427m, ternational’s total core portfolio by value, sold €3.6bn of property for its German bagging a 15% premium on the proper- while the company recently exited the

...see page 23 23 www.refire-online.com

Swiss market by selling its retail portfo- part of US wealth management group property in Birmingham, UK. The proper- lio there, let out to COOP, Switzerland’s Invesco, bought the 56,800sqm Plac ty, Brindley Place in central Birmingham, second-largest retailer. Unii building for €226m on behalf of the is let to the bank RBS, and is currently The portfolio’s 56 properties total over institutions, both of which are separate owned by investment company Tritax. 128.000 sqm of lettable area, made up account clients. The sellers were Bel- Early last year, VGV, through Union In- of stand-alone supermarkets, grocer-an- gium-based Liebrecht & wooD, a de- vestment’s Institutional Property arm, chored retail parks and cash-and-carry veloper focused on eastern Europe, and bought 60 Holborn Viaduct in central Lon- stores. The properties are well-located Polish listed BBI. don for around £250m in a joint venture within their respective micro markets, with This is the first time the BVK pension with Hines, with Mercer Investment 85% of the total annual rental income lo- fund has entered into a joint venture with Consulting advising VGV. The building is cated in western Germany and Berlin and NAEV and a BVK spokesman said that let to Amazon as its UK headquarters. the remainder in eastern Germany. the cooperation was currently limited to CBRE also has a €500m mandate to The net price paid includes the acqui- the Warsaw one deal - “but further joint invest on behalf of pension fund BVK in sition costs and net working capital and ventures are not excluded”. He said that global real estate markets. BVK awarded will be funded equally by Redefine Inter- the joint venture was entered into on this CBRE the mandate in 2013 ““in a bid to national and Redefine Properties from ex- occasion “because of the size of the diversify its exposure to the asset class, isting cash resources. As part of the deal, BVK’s investment in this submarket and targeting property types across geogra- the joint venture will assume the existing for this object” in order to allow for “risk phies, capital structures and risk profiles”. bank debt facilities totalling €100 million. diversification”. Mike Watters, CEO of Redefine Inter- The property will become part of the national, said the deal in one of the com- portfolios of the two Versorgungswerke Germany/Private Equity pany’s core markets in conjunction with via the investment platforms set up by Parking operator APCOA its major shareholder is a considerable BNP Paribas REIM for the €60bn BVK restructures, lowers debt by achievement in a highly competitive mar- and Universal-Investment for the €11bn €440m ket. “The portfolio is well let, has been well NAEV, respectively. managed, and offers considerable scope The class-A property, located on the The previously troubled Stuttgart-head- for asset management activity. The trans- edge of Warsaw’s central business dis- quartered APCOA Parking, the largest action is expected to be earnings accre- trict and only completed at the end of European operator of parking garag- tive in this financial year,” Watters said. 2013, consists of three parts, with up es, has completed a major financial Redefine’s other assets in Germany in- to 21 storeys and 41,300sqm of office restructuring after nearly two years of clude: four office buildings let out toVBG , space, as well as 15,500sqm of retail complex negotiations, which should a workmen’s compensation insurance space in total. The main office tenants put it back on a strong financial footing. system; three major shopping centres in are ING and energy services company Struggling in the last few years un- Berlin, Hamburg and Ingoldstadt; and a Dalkia, and the retail space is let to a der the weight of its debt, the group has range of strip malls, supermarkets and mix of clothing stores (including H&M), now undergone a “consensual financial DIY stores, numbering Edeka, Aldi, Lidl, restaurants, cafés, a fitness studio and a structuring” which sees it slashing its OBI and others among their key tenants. supermarket. debt burden by €440m permanently, Last summer, BNP Paribas REIM was and securing €80m of additional financ- part of a consortium alongside BVK to ing to support a much-needed capex Germany/Financing finance the development of the Mall of program, along with extending existing German pension funds step- Berlin. loans by up to six years. The main cred- ping up RE investment Meanwhile, the VGV Verwaltungs- itors were Norway’s DNB Bank, Bank gesellschaft für Versorgungswerke, a of Ireland and Japan’s Mizuho Bank German pension funds Bayerische pension fund for Berlin doctors and phar- The group is now majority-owned Versorgungskammer (BVK) and Nor- macists, is pressing ahead with its first by US and UK-based private invest- drheinische Ärzteversorgung (NAEV) investment as part of the €500m man- ment firm Centerbridge, which has have teamed up in a joint venture to pur- date it granted CBRE Global Investors taken control through debt-equity chase a newly built mixed-used property last year to invest on its behalf. swaps and agreements creditors, and in Warsaw. CBRE is now close to completing its with previous main sponsor French pri- The UK-based Invesco Real Estate, first deal for VGV, the purchase of an office vate equity firm Eurazeo. The French 24

Germany/Funds its Hotel Fund 1 and its Hotel value-add Internos targeting German re- mandate, which will bring hotel assets to tail, care homes, in €750m drive €700m and add to the twelve hotels acquired since 2012. Internos, the €3.9bn European invest- In the German care homes sector, it group originally bought APCOA from ment manager, plans to invest about has raised €80m of equity for its Inter- Bahrain-based Investcorp for €885m €750m into real estate across Europe nos Care Invest Fund 1 and is currently in 2007, but itself nearly drowned un- this year. A good chunk, put at about in negotiation on €50m of assets. Also der the weight of the debt it took on to €400m, is being targeted at German re- in Germany, Internos will be looking to finance the acquisition. In August last tail property including shopping centres make new buys on behalf of SH-Immo, year Deutsche Bank also provided a and neighbourhood malls (“Fachmarkt- a fund management mandate with a Ger- loan of €90m. zentren”), as well as into nursing homes man Pensionskasse, which acquired two APCOA has an annual turnover of and office properties. office assets in Cologne. It will invest a €678m, with a staff of 4,700 managing Having completed €330m of acquisi- further €100m in German retail parks 1.4m parking spaces at 7,400 locations tions across five funds in 2014, Internos for Internos Novapierre Allemagne, its in 12 European countries, including says it is looking to take advantage of joint venture with French partner Paref managing parking facilities at 30 Euro- specific opportunities in the European Gestion. pean airports. Centerbridge, with offices real estate market. Meanwhile, Internos has sold the re- in New York and London, has more than In the hotel sector, Internos is target- maining assets in the German Retail €25bn of assets under management. ing a further €225m of investments for Partnership (GRP), a 55-asset German

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...from page 24

retail portfolio, to a fund belonging to value-added real estate in the main Euro- can be used to fight potential real-estate New York-based Marathon Asset Man- pean markets, including Germany. bubbles – in a pointed statement that agement. The sale was constructed EQT has raised €22bn for private eq- the liquidity measures by the European in the form of a share deal, and marks uity investments since it was established Central Bank can only increase the risk the liquidation of the fund which was in 1994 by Swedish family Wallenberg’s of escalating asset prices. launched in 2007 as a closed-ended vehicle Investor AB, bank SEB and the Germany’s financial stability commit- Luxembourg ‘fonds commun de place- US-based AEA Investors. The group has tee plans in coming months to recom- ment’. The fund had raised equity com- since attracted investment funds from mend that the government create the le- mitments from several institutional inves- a wide variety of insurance com- gal framework tor groups including co-investment by panies, pension funds, sovereign for putting such the GPT Group. wealth funds, funds-of-funds and tools to use, The retail assets are a combination family offices, and operates across Bundesbank of neighbourhood shopping centres, re- the world with a wide network of board member tail parks and standalone supermarkets partners and independent ‘Industri- Andreas Dom- geographically spread across Germany, al Advisors’ with strong local indus- bret (left) said in with the majority in Bavaria, Rhineland trial and geographic knowledge. a recent speech Palatinate and Hesse. The properties are Edouard Fernandez and Rob in Berlin. well-let and anchored by strong national Rackind of Wainbridge are setting up “Even if the risks on the property mar- retail chains such as REWE, Netto, Nor- the European platform and will become ket seem slight at the moment, we still ma, Edeka and Penny. partners in EQT, the firm said. “There are have to prepare for all eventualities,” he Last year Internos raised debt financ- new real estate opportunities opening said. “The world has become a bit more ing of more than €200m at rates typically up across Europe,” Racking said. “From dangerous for real-estate investors.” below 2%, which boosted returns in its the EQT platform, we can add a fresh The ECB said on January 22nd that it newer funds, as well as refinancing or ex- approach when investigating business will buy €60 billion of bonds every month tending a further €500m. possibilities.” through September 2016 in a drive to Earlier this month Internos bought Lennart Blecher, EQT deputy man- put more cash into circulation and revive ten German retail properties for €38.3m aging partner and head of infrastructure, euro-area inflation. The measure was an- on behalf of its SCPI Novapierre Alle- said: “The real estate segment has long nounced against opposition led by Ger- magne, its French partner. Internos will been dominated by North American pri- man officials in the Governing Council, be the asset manager for the 25,000 vate equity firms. There is a market oppor- who have long taken an anti-inflationary sqm portfolio, which are located in Ba- tunity for a pan-European player, applying stand against the majority opinion of the varia, Baden-Wurttemberg and North opportunistic and value-add strategies.” Council members. Rhine-Westphalia. The French-managed EQT said it has also recruited Fredrik German house prices rose 5.1% in fund has raised €50m but overall is tar- Elwing as a director. Elwing had been 2014, for the sharpest increase since geting €200m, and will invest in smaller managing director in Greenhill & Co’s 1993, according to researcher Bul- German shopping malls with 4-6 units, Real Estate Capital Advisory group until wienGesa. Domestic and international anchored by prominent retailers. July last year. buyers, including private individuals and investment firms, are piling into German real estate as a way to earn higher re- Europe/Acquisitions Germany/Banking turns amid record-low interest rates in Swedish group EQT Part- Bundesbank’s Dombret fixed-income markets. ners kicks off in real estate calms fears of rising property Consumers and banks should prepare prices for potential increases in interest rates, Swedish investment advisory firmEQT is Dombret said. “Mortgage contracts making its first foray into European real While the European Central Bank was should only be signed if borrowers can estate, having previously given the sec- announcing plans to open the financial still pay them off when interest rates are tor a wide berth. The firm has hired the spigots to combat the threat of Europe- higher,” he said. two founders of UK property group Wain- an deflation, across town in Frankfurt at The Swiss National Bank’s recent de- bridge to spearhead its strategy, which the Bundesbank German financial reg- cision to remove its currency cap shows will see it investing in opportunistic and ulators said they are studying tools that that property markets can become vul- 26

nerable if borrowers take out mortgag- Germany/Research ty local studies, complemented by bro- es in foreign currencies, as has been German prices touch 20-year ker analysis and on-the-spot surveys. the case in several eastern European high in 2014 – more expected For the coming year, more can be markets, notably Poland. However, only expected, due to low interest rates, a about €2 billion of Germany’s approx- German property prices across all cat- healthy economy with low unemploy- imately €1 trillion in mortgages are in egories rose 4% overall last year, the ment, and few adequate alternatives, Swiss francs, meaning that there’s no steepest gain since 2005 and touching a say the researchers. According to Bul- cause for concern, Dombret said. 20-year high, says Berlin-based research wienGesa director Andreas Schulten, Dombret repeated the Bundesbank’s firm BulwienGesa. The price growth is “Yield levels across all asset classes are assessment that there is no German expected to continue this year, although now significantly below their 2007 lows. property bubble, although home prices residential housing is expected to slow, German properties have never been as in cities such as Berlin, Hamburg and say the researchers in their latest report. expensive as they are today compared to Frankfurt were overvalued by more than Last year, residential property in their European peers.” 20% as recently as 2013, by the Bundes- the large cities drove growth, gaining Nonetheless he does not see current bank’s own measure. None of the con- 5.1% on nationwide average. Prices for political moves as likely to reverse the ditions of a bubble are present, he said. semi-detached housing rose by 6.4%, trend. “Urban development will have to Price increases have already started to for new apartments by 5.4% and for sin- face problems that are not to be coun- slow down, credit growth remains mod- gle family home plots even by 7.4% as tered by a rental cap,” he says. “Less erate and most banks have maintained they become scarce. Rents for new-build expensive sites, fast building laws and strict lending standards, he said. properties rose by 3.2% and by 3% for fewer political and legal requirements – However, regulators will take a closer existing homes over the period, in the A these are what we need for affordable look at data that were presented in the cities even by 3.4% and 3.8%. new housing.” Bundesbank’s annual financial stability BulwienGesa’s property index is has In commercial property, prices rose review in November, suggesting some been based upon 50 western German 2%, with prime retail locations lead- banks in large cities are offering mort- cities since 1975 and a total of 125 cities ing growth at 2.4%. Commercial plots gages covering more than the property’s across all of Germany since 1990, using gained 2.1%, office properties in central appraised value, he cautioned. proprietary data and a range of third-par- locations rose 2% with supply tight and

GRAPH-3

Total Return Performance GPR 250 Index (€) 150

100

GPR 250 Europe

GPR 250 Germany

0 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14

Source: Global Property Research (www.globalpropertyresearch.com), 2015

Page 1 Graph of Total Return Performance of Europe and Germany in Euro currency over the past twelve months Charts courtesy of GPR Global Property Research 27 www.refire-online.com

both occupier and refurbishment activi- are more than forty years old, with only ty starting to pick up again. In A-cities, about 5% of these in any way adapted prime retail gained 3.3% and prime of- to ‘elderly-friendly’ living. At least €40 fice 2.9%, while growth in C and D barely billion is needed urgently to adapt these dent apartments. They are described as matched the inflation rate. properties for use. For those in need of well-maintained, with almost no deferred A similar annual study, commissioned more hands-on care, the market needs maintenenace or capex backlog and by Deutsche Bank and carried out by the at least 750,000 new apartments, say the located in good parts of Wilhelmshav- Real Estate Institute of the University researchers. en, Germany’s largest naval port. The of Regensburg (IREBS), draws broadly properties were mainly built in the 1930s the same conclusions. While seeing little and 1940s and generate rental income evidence of a a national bubble develop- Germany/Residential of about €20.5m. The occupancy rate is ing, they do warn of tendencies to over- Soaring Adler Real Estate 93%. heating in regional sub-markets. buys further 6,750 units Adler said the portfolio had good up- The IREBS study highlights the issue side value with further upward rent po- of demographic development in Germa- Publicly-listed German residential in- tential and positive local economic out- ny and the level of inheritance of prop- vestor Adler Real Estate boosted its look, underpinned by the construction of erty. For the years up to 2020, property holdings by buying a portfolio of 6,750 a new deep sea water port in Wilhelm- valued at about €100bn is handed on housing units, bringing its total property shaven. from one generation to the next, of which holdings now to over 32,000 units. The Adler’s stock has soared 1000 % over about 60% is residential property. The properties are in Wilhemshaven in Low- the last three years as the company, researchers say that the issue of the ag- er Saxony, while the deal represents the which has its roots in the old Frankurt- ing population is becoming a major issue majority interest in the housing associa- er Adlerwerke manufacturing business, for the German real estate market, given tion Jade GmbH. The portfolio is valued has become an active investor and trad- the enormous backlog of refurbishment above €200m. er in real estate. Last year it streamlined piling up. Of currently 8 million pure According to Jade, the portfolio com- its hotch-potch of recently-acquired pensioner households in Germany, more prises specifically 6,641 residential and properties, and raised €70.5m by selling than half are living in apartments that 31 commercial units as well as 74 stu- assets, raising €28.3m in extra cash and

GRAPH-1

Total Return Performance GPR 250 Index (€) 250

GPR 250 Europe

200 GPR 250 Germany

150

100

0 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15

Source: Global Property Research (www.globalpropertyresearch.com), 2015

Page 1 Graph of the total return performance of Europe and Germany in Euro currency over the past five years REFIRE charts courtesy of GPR, Global Property Research 28

booking a profit of €4.9m. It also sold “We have advanced our realignment through individual sales to tenants, inves- 56 building sites in Munich and Berlin, a towards becoming a major residential tors and owner-occupiers through its own 10,000 sqm site in Offenbach, and sell- real estate company. This began roughly Part-B privatisation subsidiary, but also to ing a housing project in Texas in the USA. two and a half years ago, and since then institutional investors. The group headed It also bought housing portfolios which all acquisitions and disposals have gone by the colourful Einar Skjerven, is both an saw its holdings leap from 7,800 to about according to plan,” commented Adler’s investor and asset manager, co-investing 25,000 units. CEO Axel Harloff. “For 2015 we are tar- along with clients. Investors have been liking the Adler geting strong and profitable growth.” The company provides asset manage- story, buying up the company’s bonds. ment, financing and fund management ser- Adler recently increased the volume of vices to international high net worth individ- a five-year bond issue from April 2014 Germany/Residential uals, and has long had a powerful internet from €100m to €130m in a private place- Skjerven Group sells €60m presence for attracting clients., as well as ment to institutional investors. The bond of Berlin apartments an interesting newsletter with its own mar- was placed at an issue price of 102% ket commentary. The group now plans to and is paying a 6% coupon. Otto Sey- Skjerven Group, a specialist investor in parlay its extensive Berlin experience into dler bank managed the placement as Berlin residential, sold €60m worth of a move to offering commercial real estate global bookrunner. apartments in the city last year, partly within the city for professional investors

Note • This diagram illustrates where JLL estimate each prime office market is within its individual rental cycle as at end of December 2014 European Office Property Clock Q4 2014 • Markets can move around the clock at different speeds and directions SM • The diagram is a convenient method of comparing The JLL Property Clocks the relative position of markets in their rental cycle • Their position is not necessarily representative of investment or development market prospects Lyon • Their position refers to Prime Face Rental Values Cologne Helsinki Berlin, Frankfurt, Stuttgart, Hamburg, Oslo St. Petersburg

Munich Moscow Rental Growth Rents Slowing Falling

Dusseldorf London WE Stockholm, Dublin, London City Rental Growth Rents Luxembourg Accelerating Bottoming Out Kiev Geneva, Zurich

Manchester Warsaw Edinburgh

Amsterdam, Milan, Madrid Athens, Brussels, Rome, Barcelona, Paris CBD Bucharest, Budapest, Prague, Copenhagen, Istanbul, Lisbon Source: JLL, January 2015

This data is based on material/sources that we believe to be reliable. While every effort has been made to ensure its accuracy, we cannot offer any warranty that it contains no factual errors. Neither Jones Lang LaSalle nor any of its affiliates accept any liability or responsibility for the accuracy or completeness of the information contained herein. 29 www.refire-online.com 30

Guest Column: George Salden estate project as can be seen time and again from such public projects as the Berlin-Brandenburg Airport or the Elbe Phil- The German Property Market: harmonic in Hamburg. However, the methodology underlying Correct Valuation is Essential for a Good the residual contribution valuation technique is of great impor- Return - Part Two tance for arriving at a detailed projection, because the residual contribution is ascertained from two values: the construction In my previous column I focused on established valuation tech- costs and the expected sale value. These two amounts are not niques. There I came to the conclusion that the three “classic” only much higher than the residual contribution itself, but fur- techniques – the sales comparison technique, the asset value thermore are almost identical. If accumulated costs increase technique and gross rental technique – or there is a reduction in the expect- had only limited suitability when applied to ed sales price, then the residual real estate investments. Why? Because all contribution can be erased or even three only give insufficient answers to the pass into the negative. most important questions: It is for this reason that in academ- 1. What is the property currently worth? ic circles the residual contribution 2. What will the property be worth at the valuation technique is in part made end of the investment period? subject to the criticism that one can 3. How can I raise the initial value to the arrive at a residual contribution in final value? the amount desired. It is indeed true that the highly subjective nature of One method that was not taken into investment costs allows them to be account by legislators in the ImmoWertV (Immobilienwerter- easily manipulated. Moreover, in order to ascertain the residu- mittlungsverordnung = German Ordinance on the Valuation al contribution, a second technique is always necessary, one of Property/Real Estate) is the residual contribution valuation that allows one to arrive at the expected sales price. However, technique. This technique is applied to property that will be because both the gross rental technique and the sales com- subject to real estate development. The residual contribution parison technique are subject to methodological limitations, valuation technique ascertains the value of real estate based these limitations are then imported into the residual contribu- upon the difference between the value of notional develop- tion valuation technique through the predicted sales price. ment in the context of a project and the investment costs. In order to reach the contribution that would constitute this Another technique is the discounted cash flow method – in value, the value of the real estate at the end of the project is short the DCF method – which has its origins in the evalua- determined. The value of this notional property can then be tion of companies. Strictly speaking, it is incorrect to speak of ascertained with the help of the comparative price technique the DCF method, because an evaluation using discount rates or the gross rental technique. However, investment costs must belongs to the same type of procedures as the gross rental be deducted from the anticipated sales price. In this regard, technique. In the language of experts in the real estate sector, the various costs accrue in various stages of project develop- which is being adhered to here, the concept DCF method is ment: in the planning stage it is primarily acquisition costs as used for a special variant of the gross rental technique. well as experts’ fees that accumulate. The construction costs and the ancillary construction costs accrue during the imple- There is a discussion going on among experts as to whether mentation stage, at the time of actual building, while it is in the or not to incorporate the DCF method into the ImmoWertV. disposal stage that both vacancy and recycling and disposal There are two reasons for this: first, the DCF method is very costs first arise. This is important, because unaccrued interest close to the gross rental technique in terms of methodology must be deducted from each individual cost. and the latter has already been incorporated into the ImmoW- ertV. Second, the DCF method has proven itself successful A major problem of the residual contribution valuation tech- in management consulting. However, at this point the DCF nique is that one does not have the ability to predict future de- method has not yet been incorporated into the ImmoWertV, velopments. On a professional level, it is virtually impossible to because it has not been sufficiently standardised. While use of predict the planning and implementation costs of a major real the DCF method has not been prohibited by German courts, it 31 www.refire-online.com

is nonetheless possible that its use could skew the value of real rately predicted for such a time frame. Changes in the infra- estate and thereby render an expert opinion vulnerable. This is structure can influence the level of rent or the economic power because the DCF method has not proven itself in ascertaining a of the tenants can drastically change - to name only a couple commercial price, i.e. a market value, but rather treats real estate of examples. The DFC method does not have any systematic as an investment asset and ascertains its investment value. instruments with which to monitor the marketplace and to create a forecast of its development. Although the suitability of the The methodological core of the DCF method is, as the name DCF method may appear reasonable for investment analysis, already suggests, cash flows, i.e. the periodic future inflows that the lack of any systematic underpinnings makes it impossible are generated by an investment during a certain period of time. for this method to provide accurate results for determination of In the context of real estate evaluation such cash flows are treat- market value. ed as payment surpluses generated from rental income above non-recoverable costs. These cash flows are subject to a review At the end of this analysis of different methods for the valuation period of between five and fifteen years and are discounted ac- of real estate, the difference between the valuation procedures cordingly based on the measurement date. An amount is then based on statutory norms, i.e. the classic three methods un- added to this cash value that represents the residual value of der the ImmoWertV and the new valuation methods based on the property after the review period. Up to this point the mathe- international norms, becomes clear. Both the discounted cash matical approach of the DCF method still resembles that of the flow method as well as the residual contribution valuation tech- multi-period gross rental evaluation technique. In contrast to the nique have a conception that focuses on the investor. It is the gross rental technique the DCF method also expressly takes into expected returns of the individual investor that have a highly account factors such as inflation, maintenance expenses or fi- subjective influence on the value of the property. However, it nancing costs. is these basic premises that limit the procedure because they thereby impose limitations on viewing the reality of the real es- Another crucial difference in the application can be observed in tate market. discounting. For while the gross rental technique seeks to obtain an objective discount in conformity with the market on the basis Furthermore, the process is not unjustly accused of having a of property interest rates, the DCF method uses a subjective tar- static understanding of the market. The complex dynamics of get rate, i.e. a discount rate at which the investor wishes to see the real estate market cannot be grasped by a market adjust- his capital bear interest. This target interest rate, in contrast to ment factor because the movement of the market as so far de- the property interest rate, is subjective, thereby reflecting the in- scribed cannot be broken down into individual cities, districts, vestor’s expected return as well as the risks of the investment. It and streets of houses. is composed of a risk-free interest rate, to which a predicted risk is added. The amount of the base interest rate and the risk pre- Is property evaluation therefore a problem that really has no mium lie in the discretion of the investor who determines these satisfactory solution? No, because the real estate itself can - as independently of individual capital availability. In the context of an asset and part of a market - specify a range of investment an investment analysis this is not only unproblematic but also opportunities that can be identified - if one looks at the details, desirable. However, this interest rate is not suited for the deter- as we shall see in the next column. mination of market value. George Salden is the author of the book “Die Dynamische The limitations of the DCF method are due on the one hand to Methode” [The Dynamic Method] based on his 19 years its methodological design and on the other hand to the problem of experience as an expert and manager in property of the predictability of economic development. The latter has a and transaction management which highlights the way two-fold significance in the DCF method because it enters into towards a whole new method of determining the profit- the calculations at two different points. On the one hand, a re- ability of properties. He was previously a director at al- view period of up to 15 years is established for the exact predic- t+kelber Immobilienmanagement, a subsidiary of conwert tion of cash flows. However, even here inaccuracies enter into Immobilien Invest SE, where he was responsible for major the calculations. This is because it is hardly possible to provide a international transactions. He then took over as Interna- detailed description of rental income over such a period of time. tional Head of M&A at AK Holding GmbH & Co. KG. He is Moreover, general economic developments - and above all, the now Head of Transaction/Executive Board Member at Dr. development of the regional location - can no longer be accu- Lübke & Kelber / Arbireo. 32

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