Big deals are still a go - if the price is right

When Germany's largest state, North Rhine-Westphalia, sold its residential property company Landesentwicklungsgesellschaft NRW (LEG) to Goldman Sachs' Whitehall Funds in June for about EUR 3.4bn, it sent a signal to the market that big deals can still be pushed through in the current climate - if the price is right.

The sale marked Germany's largest property deal since the credit crunch erupted last summer. The portfolio, including debt, comprises 93,000 apartments - in cities such as Bonn and Cologne. Around half of the portfolio comprises social housing. The sale is part of North Rhine-Westphalia's strategy of boosting its coffers by raising money from asset sales, including property. Other bidders are believed to have included US asset management firm Fortress Investment Group and UK private equity group Terra Firma Capital Partners, according to those who track the market.

'The LEG deal sends a good signal to the market that big deals - with well-known investors - can still be transacted. Germany hasn’t seen the volatility that some markets, such as the UK, have seen and is holding up quite well, which is attracting investors,' said Dr Florian Schultz, a partner in the real estate division of law firm Linklaters in Frankfurt.

Social housing

However, Whitehall shouldn't be looking to turn a quick buck, warned Timo Tschammler, director of international investments at DTZ in London: 'As other buyers of residential portfolios have discovered, the privatisation of what is often largely social housing is not as easy, quick and profitable as it can look on paper. But Whitehall is mature enough to know this and that it needs adopt a mid-to-long term strategy,' he added. DTZ did not advise on the deal.

Investors continue to eye Germany's residential market because it still offers good value for money compared to many other European markets. Excluding debt, Whitehall likely paid around EUR 600 per square metre for the apartments in LEG's portfolio. This represents good value for money compared to the social housing segment in cities such as Munich, where homes can cost around EUR 1,200 per square metre, said Matthias Franz, a senior consultant in corporate finance at Cushman & Wakefield in Frankfurt.

There have been around EUR 52bn of residential portfolio sales in Germany since the beginning of 2005, according to Franz in Frankfurt. And while many states still own housing portfolios, the current climate - and tighter financing - makes it a more difficult time in which to offload them, Franz added, which suggests that the deal volume is likely to be lower this year.

Over time Whitehall Funds is likely to sell off the LEG portfolio in smaller lot sizes of around 100 units, which could allow the firm to make a profit of around 10%, property experts say. An IPO seems less likely in the current climate due to the volatility in global stock markets and the falling share prices of many property firms. Whitehall is also likely to be discouraged by the recent poor share performance of residential property company Gagfah: shares were trading at around EUR 8.80 in July, down from around EUR 15 in September last year.

In a further sign that institutional investor interest is growing, Corestate Capital, a Zurich-based real estate management firm, raised EUR 486mln in May for its real estate private equity fund, Corestate German Residential Limited. The fund attracted interest from large institutional investors such as ING Real Estate Select in the Netherlands and UK-based Morley Asset Management. The fund, which has a target annual return of 15%, will invest around EUR 600mln in German residential properties this year, ideally off-market - to avoid often expensive bidding processes, said Corestate Capital’s managing director Christian Schulte Eistrup.

Big spenders

Goldman Sachs - and its Whitehall Funds - have been big buyers of German property since the market rebounded in 2006. In 2006, Goldman Sachs and Arcandor AG, the retail and tourism group formerly known as KarstadtQuelle, set up a company to buy many of the German retailer's department stores. At the time, the deal was valued at around EUR 4.5bn. Last year, the Whitehall Funds acquired 37 properties from German fund manager Degi’s Grundwert-Fonds fund for EUR 2.45bn.

And for other investors looking to up their exposure to the German market, there are some interesting properties up for grabs. Record Realty Trust, a property investment trust managed by troubled Allco Finance Group, the Australian ASX-listed global financial services business, is selling a portfolio of seven Deutsche Telekom buildings with a combined value of around EUR 300mln, according to market watchers. The sale, which is believed to be in the final stages of negotiations, is expected to be concluded as early as next month. The portfolio is likely to appeal to institutional investors.

The sale is part of Allco Finance Group’s ongoing restructuring drive since problems stemming from the global credit crunch sent shares in the company plummeting earlier this year. The company has reported it may face record losses because of write-downs and other issues.

Frankfurt’s iconic MesseTurm is also up for sale with a target price of between EUR 400mln and EUR 450mln, according to those who track the market. However, the office tower - home to firms such as Goldman Sachs - will not be easy to sell, according to one real estate expert, who asked not to be named: 'The vacancy rate is close to 50% and the building is in need of renovation to make it more efficient, both structurally and in terms of energy usage. I would not be surprised if it didn’t sell,' he said.