DEAL IN DEPTH: Kungsleden and GE Capital RE re-align in Sweden

In the largest pending deal recorded by PropertyEU Research during August, Kungsleden agreed to acquire a portfolio of 84 assets in Sweden from GE Capital Real Estate.

The portfolio, consisting mostly of offices, had an underlying property valuation of SEK 5.5 bn (€638 mln). Though not scheduled to close until the end of 2013, the deal was far larger than any of the completed transactions recorded during the August review period.

The second-largest transaction saw US private equity firm Blackstone committing to acquire two commercial assets in northern Italy for €220 mln - yet another sign following a number of recent deals that investors are returning to the battered southern Europe markets (see the August Deal Watch for more on Iberia).

Investment volume aside, Kungsleden’s acquisition at the head of the European continent also stands out as it neatly captures strategic realignment being undertaken by two large investors. For Kungsleden, the transaction was ‘instant implementation’, according to interim CEO Anders Kvist, of the company’s strategy to move away from opportunistic investment in various segments across Sweden to focus exclusively on economically strong metropolitan areas such as Stockholm and Gothenburg. The main target will be good quality office properties, a break with the last few years when logistics dominated the €1.3 bn portfolio by value.

One of the first steps in the new strategy of focusing on wholly owned properties in Sweden’s growth regions was the sale in December last year of its 50% stake in community services property company Hemsö Fastighet, which left Kungsleden over-liquid in terms of equity. Kungsleden received SEK 3.3 bn (about €380 mln) from its partner, Swedish pension buffer fund AP3, for its shareholding. Kungsleden also agreed to buy 15 properties from Hemsö for SEK 1.6 bn, or a yield of 7%.

KEEPING COOL
Kungsleden plans step-by-step growth under its new strategy and won’t be rushing out to acquire another large portfolio anytime soon. Kvist: ‘The transaction with GE Capital will improve Kungsleden’s cash flow tremendously. At the same time we are adhering to a conservative dividend policy as it is important to remember Kungsleden and other Swedish property firms are involved in a tax dispute with the government that could take a year or two before it is resolved.’

Kvist, who handed over the CEO role to Biljana Pehrsson at the beginning of September, told PropertyEU that Kungsleden may do other large deals at a later stage. ‘We need time to digest the GE portfolio but there are further value portfolios out there.’ In fact Kungsleden is more likely to be a net seller in the near term as about 10% of its €1.3 bn portfolio is located in areas defined as non-core under the new strategy. ‘At the right price these assets are for sale,’Kvist said.

Several investors aside from Kungsleden were keen to acquire GE Capital’s good quality assets in Sweden but from the vendor’s point of view the entire portfolio - with the exception of some assets held in joint ventures - and many of its direct holdings across other European markets are non-core. GE Capital Real Estate decided in 2012 to refocus its activities on real estate lending in Europe and the US and to withdraw from new direct property investment in Europe.

The re-alignment of portfolios and strategies is not restricted to Sweden. Sponda, the Helsinki-listed property company, announced in early September that it is to withdraw gradually from the Russian market where it had been trying to build up a position in recent years. Assets will be sold off over a 3-5 year period. Sponda has also decided to phase out its property fund business in order to concentrate on office and retail property investment as well as development in the Helsinki metropolitan area and Tampere in Finland.