Hello to Berlin
According to a popular German saying, even the stupidest farmer can grow the biggest potatoes. If you plant the seeds, sun and rain will do the rest. That sentiment has driven the German residential real estate market for the past four years: flocks of foreign investors have bought up over a million apartments, betting that the sun and rain of undervalued assets and high leverage would do all the work for them. But times have changed and the easy opportunities have gone, say market participants: anyone who wants to make money in Germany now has to be ready to sweat.
The clearest sign of the new market dynamic has been the exit of opportunistic investors such as Blackstone, Oaktree and Cerberus. Having been buyers in 2004 or 2005, the three private equity firms all became sellers this year, between them disposing of more than 80,000 apartments. Late last year, Morgan Stanley also sold a portfolio of more than 40,000 units that it had bought from steel-maker ThyssenKrupp in 2004, to French Reit Foncière Développement Logements (FDL).
"In terms of transaction volumes, this year has been on a par with the banner years in 2005 and 2006 but the rationale behind the activity has changed entirely," says Klaus Hölzer, director of corporate and institutional banking with Oliver Wyman in Frankfurt. "All the guys who were buying back then are now selling and the new buyers are not just looking to make a quick buck. It’s now about scale and making money over a much longer-term horizon."
The investors that are leaving the market tend to be tight-lipped when asked whether their foray into Germany’s residential market was a success. Morgan Stanley doesn’t even like to refer to its transaction as a sale.
|
"We retain some exposure to the assets we exited and also got additional exposure to a much larger pool of assets"
James Lapushner, Morgan Stanley |
 |
James Lapushner, the bank’s head of real estate for Germany, says: "You could call it a sale. But what we really did was recapitalize and diversify our position." In the transaction, FDL acquired the bulk of Morgan Stanley’s German residential portfolio, paying some cash and also giving the bank a substantial amount of shares in the company, he says: "We retain some exposure to the assets we exited and also got additional exposure to a much larger pool of assets." He says that the return on the transaction was positive. Blackstone declined to comment on its own exit. Cerberus failed to return calls asking for comment.
For the most part, market participants think that these investors will be satisfied with the money they’ve made. "We believe that those who left the residential market have had good returns and have simply cashed out," says Marcus Lemli, head of capital markets for Germany with Jones Lang LaSalle (JLL) in Frankfurt. Christian Schulz-Wulkow, head of M&A and capital market services with Ernst & Young Real Estate in Berlin, says that most of the early entrants to the market managed to buy low and sell when prices had climbed: "Most of them made quite good returns. They’ll have met or exceeded their target IRR."
But there’s a question hanging over Cerberus. It acquired the Baubecon portfolio of more than 20,000 apartments in late 2005, when prices had already begun to climb – and then Ralph Winter, the co-head of its German real estate team, left the firm just six months later along with five members of his team. One real-estate research firm estimates that Cerberus paid €75,000 per unit for the Baubecon portfolio, compared with the €44,000 per unit paid by Morgan Stanley in its ThyssenKrupp deal. In July this year, after holding the asset for 18 months, Cerberus sold Baubecon to Pirelli RE and Deutsche Bank’s RREEF. The fund still has a stake in a second large portfolio that it bought in 2004 with Goldman Sachs – and these assets are believed to have performed well – but the Baubecon transaction is now attracting criticism.
"If you want to set up a €3 billion fund then you have to buy bulk, so bulk goes at a premium," says Alberto Matta, one of the co-founders of BMB Investment Management, a property investor that is about to close a Berlin-focused fund (see box). "If valuations had doubled then Cerberus and others might have hit their targets but the market’s only gone up 20%, so they’re selling now because they bought at a price that was too high. Anyone who works in real estate valuation will tell you the same."
Others have a kinder explanation. The global head of real estate with one large US bank says: "My guess is that Cerberus think that they bought at a fair price, but they realized that they couldn’t compete without buying further portfolios and wholesale prices had gone up too much to make that an option. If you’re not a buyer you should be a seller. And I’m sure that the departure of Winter also changed their view on the business."
In fact, Winter’s story neatly illustrates the changes taking place in Germany’s residential market. Having been behind two of the billion-euro-plus mega-deals that catapulted the market into the headlines, Winter is now operating at the other end of the market in terms of scale – still buying residential but doing so in bite-size chunks for his own company – Zurich-based Corestate Capital.
"He’s a very talented guy and he decided that he could do things as well on his own as he could with a big American backer – and he also wanted to go in a slightly different direction," says the US bank’s real estate head. "His strategy is very much focused on smaller portfolios whereas Cerberus has a lot of money to spend and would be less patient spending €50 million here and €100 million there."