After German shopping centres, what next for Redefine?

Redefine International's CEO Mike Watters tells PropertyEU what the key obstacles were in clinching its recent shopping centre deal in Germany and where the company expects to head in mainland Europe.

Redefine International, a £1 bn (€1.2 bn) property owner listed on the London and Johannesburg stock exchanges, completed the purchase in September of a portfolio of three shopping centres in Germany from various funds managed by Irish investment manager CMC Capital.

The deal, which was first agreed in mid-August, is being financed through a combination of shares and cash valuing the assets at around €189 mln, reflecting a blended net initial yield of 5.5%.

The properties - the 19,000 m2 Schloss Strassen Centre in Berlin, the 15,500 m2 Bahnhof Altona in Hamburg (pictured) and City Arkaden in Ingolstadt with 10,400 m2 - were acquired by CMC at the height of the market in 2006 and 2007 and have since experienced a drop in value, according to market experts. CMC Capital decided to proceed with a sale in late 2012 and started negotiations with Redefine at the beginning of this year.

Pricing obstacle
‘Pricing was the main problem of this deal as some of the investors did not want to take a loss,’ Mike Watters, CEO of Redefine International told PropertyEU. ‘We were able to offer a structure which satisfied all the shareholders of the CMC fund, with some investors opting for a payment in shares and others in cash.’

The Hamburg and Ingolstadt shopping centres - valued at €72.5 mln and €23.5 mln respectively - were acquired by Redefine for a total equity consideration of €24.3 mln, comprising €19.3 mln in cash and 12.6 million in new ordinary shares, valued at £5 mln (€6 mln), as well as the assumption of €69.4 mln in debt. The acquisitions reflect a blended 5% discount to equity value.

The Berlin asset, which is valued at €93 mln, is being bought for an equity combination of €12.1 mln in cash and the issue of 19.6 million new ordinary shares, valued at £7.8 mln (€9 mln), in addition to the assumption of €72 mln in existing bank debt. The asset will be paid for in December.

Asset management
The transaction is expected to produce an initial yield on equity of over 12% with strong rental growth potential through asset management, according to Redefine. The malls are fully let, except for City Arkaden in Ingolstadt which has an occupancy rate of 87%. ‘Our acquisition strategy focuses on high-quality, well-tenanted, well-located retail, office and industrial assets. We do not compromise on quality and we like income-generating properties,’ commented Watters, who was advised on the deal by broker Brown, Cooper, Marples.

The company, which owns a portfolio valued at roughly £1.1 bn, plans to convert to tax-efficient REIT status later this year on the back of recent changes to the regime including the abolition of an entry tax which has made these structures more attractive.

German focus
The transaction substantially expands Redefine International's portfolio of European assets from £198 mln in February to £360 mln at present, or 30% of the company's total portfolio by value. With interests in the UK, Germany and Australia, the company is looking to grow further in continental Europe with a focus on income-producing assets in Germany and Switzerland.

‘We want to expand our presence in these two markets, while continuing to have a good balance between all the regions where we are active,’ said Watters. ‘There are lots of opportunities in Europe but we have chosen to remain focused on Germany and Switzerland, where the economy is picking up and the market offers good opportunities. We prefer to operate where we have an office and a team on the ground, like we can do in these countries from our Frankfurt office,’ he added.

Outside Continental Europe, the London-headquartered company will continue to look for opportunities in the UK where the value of secondary assets is on the road to recovery. ‘We have a major acquisition coming up in the UK, which we think will close in the next four to six weeks,’ Watters anticipated. He declined to disclose further details on the purchase but said the transaction involves a regional shopping centre worth £85 mln. The company currently owns five sub-regional shopping centres in the UK, valued at £226 mln, as well as a £175 mln package largely consisting of offices.

DEAL FACTFILE
BUYER: Redefine International
VENDOR: funds managed by CMC Capital
ASSETS: Schloss Strassen Centre in Berlin, Bahnhof Altona in Hamburg and City Arkaden in Ingolstadt
PRICE: €189 mln
YIELD: 5.5%, yield on equity 12%
ADVISORS: Brown, Cooper, Marples for the buyer, Chalkill Partners for the vendor
RENTAL INCOME: €10.9 mln
DEBT: €141.4 mln of existing loans provided by HSH Nordbank and Hypothekenbank

By Virna Asara
Southern Europe Correspondent