Frankfurt-listed Corestate has seen its assets under management increase ten-fold since end-2016 following a string of acquisitions. More is on the way, says CEO Michael Bütter in an interview with PropertyEU.
Corestate Capital is not short on ambition. After floating on the Frankfurt stock exchange in October 2016, the company was promoted barely 18 months later to the SDAX section for small and medium-sized companies. And in an interview with PropertyEU, Corestate’s new CEO Michael Bütter revealed that his ambition doesn’t end there. ‘In five years I hope we will be listed on the MDAX index for medium-sized German companies.’
That goal does not seem unrealistic given Corestate’s rapid expansion so far. The company’s flotation has been instrumental in its growth drive, Bütter concedes. ‘The listing has given us access to international capital.’
The IPO has also helped the company in terms of attracting new staff, he adds. ‘We are now more attractive to younger talent and have made quite a number of new hires. It really raised the company’s profile and we are now building a growth story. But we want to build a bigger team with care and a structure for future growth.’
Financial restructuring
One of the key hires the company has made since its IPO was the appointment of Lars Schnidrig in July 2017. Since then, the new CFO has used the financial instruments at his disposal to restructure the company on the debt side combined with the equity raised since the IPO, Bütter explains. ‘In November 2017, we issued a €200 mln convertible bond and in March this year we issued our first senior unsecured bond. We raised €300 mln in difficult circumstances, but we received a good rating from S&P and our debt ratio is good. We could have achieved an investment grade rating, but we decided we wanted to retain some of our flexibility.’
Bütter himself has also played a key role in driving the company’s recent development from a firm with just under €3 bn in assets under management (AUM) at the time of its IPO to €22 bn in the first six months of 2018. Prior to his appointment on 1 May, Bütter worked as a senior adviser to the Frankfurt-listed firm and helped orchestrate the big steps that it has taken with the recent acquisitions of Helvetic Financial Services (HFS), Atos Group and Hannover Leasing. ‘I already knew everybody there. You could say I got off to a flying start.’Germany is building a reputation for spawning fast-growing listed real estate companies with ambitions to make waves in Europe. While Augsburg-based Patrizia is the poster boy for this development, Corestate Capital is following in its slipstream. After bolting on the three above-mentioned acquisitions, it added almost another €1 bn organically in the year to 30 June, taking AUM to €17.1 bn from €16.2 bn in the same period a year ago. The non-real estate funds obtained via the acquisition of Hannover Leasing are meanwhile being run down and fell to €4.8 bn in H1 from €5.7 bn year-on-year.The company has not only grown significantly, the integration processes have been completed ahead of the timeline, Bütter says.
‘Thanks to these three takeovers, we have acquired a different range of asset management companies and the results so far have been better than expected. HFS has been a good addition to our business and Hannover Leasing turned in a positive result this year for the first time in several years. Atos has strengthened our management expertise in the commercial real estate sector and expanded our fund business with institutional investors. These results are evidence that the integration has gone well.’ Following Corestate’s takeover of Hannover Leasing, it restructured the business, did some cost-cutting and trimmed staff numbers, Bütter notes. ‘The company has truly great assets that were not managed as well as they could be. It had some hidden champions in the portfolio.’ He cites the example of Düsseldorf Stadttor. ‘Stadttor is a super asset, it had great potential for improving the letting ratio and our expertise in active asset management helped to increase the overall performance of the asset.’ Since acquiring HL, the remaining space of the Stadttor has been fully let. ‘We took over the asset management and have done the same for a number of other cases.’
HFS meanwhile already has a ‘huge’ market position in providing mezzanine financing for residential developments and operates a €1.2 bn debt fund for this attractive segment which is already 90% deployed. ‘Due to HFS’s quality leadership and strong market position, they can ask for very good terms,’ Bütter explains. ‘The market is very fragmented, and the biggest nearest competitor offers no more than a low three-digit-million-euro sum for financing. They’re in a unique market position and have a long-lasting relationship with developers. We have seen real synergies with this new business so far this year, it’s very professional.’
Attractive package
The financier is also able to provide a mezzanine facility for three, 12- or 18-month periods to facilitate the launch of a project development. Bütter: ‘These loans have a bridge function and can be turned into regular/senior loans once the project is further along.’
Once the financing has been completed, Corestate comes onto the scene to offer asset and property management. ‘It’s an attractive package. We can offer everything over the full value chain of a deal from the right mezzanine financing slots through investment to asset and property management. It’s a one-stop shop experience that is attractive to German-speaking investors and which we think can be rolled out on an international level.’
Development has a higher risk generally speaking than existing real estate, but Büitter claims German residential is one of the most sustainable asset classes in Europe. ‘HFS has not communicated this to international investors in the past but it’s a super story.’
Micro-living is a key pillar
Bütter says the addition of HFS has given Corestate Capital an edge in the burgeoning micro-living market in Germany. Earlier this year, the company announced plans to invest a total of €2.4 bn in this niche by the end of 2019. It has already acquired 26 plots for development and properties with more than 7,600 apartments for students, commuters, project employees, entrepreneurs and young professionals. Over the next two years, Corestate plans to add several assets to the portfolio, which is set to grow beyond the 10,000-unit mark. Target locations are selected German and European metropolises as well as university cities.
Germany requires 400,000 new flats annually, and current building levels are ‘not even close to that’, Bütter notes. ‘There’s constantly high demand and we are continually refuelling the deal pipeline. All the big seven cities need more housing to cater to the growing demand from smaller households, for singles, students and the business community. That is a trend that fits well into our micro-living strategy.’ Demand for student housing and micro-apartments for professionals is strong across Europe, he adds. Urbanisation is a mega trend.’
Corestate is interested in all other asset classes including retail and office, but residential – or micro-living – generates a higher yield and return, he explains. ‘There are possibilities, for example, for innovative product design and other ideas. Depending on what an investor needs, returns can be as high as 8-10% or even more, for example via financing investments (via HFS). We are able to offer flexibility in terms of risk profile and asset class.’
At the announcement of the company’s H1 earnings in August, Corestate said it had a €5.7 bn deal pipeline and Bütter is not ruling out further M&A activity. He has also set his sights on logistics and hotels which are currently missing in Corestate’s portfolio. An acquisition of a specialist asset manager is a possibility although there is nothing yet on the horizon. ‘We want to be fit for the cycle. One of our advantages is that we are a speedboat, not a super-tanker.’ Size itself is not so important, he adds. ‘What matters is revenue, EBITDA, reducing costs, and our share price. Investors want a dynamic but sustainable company that they can trust, not an adventurer.’
In terms of future growth, the focus is on the German-speaking countries and key international markets, in particular Spain and the UK, but also Poland and the Benelux, he says. ‘But any acquisition needs to be accretive and a good fit for the business. We don’t want to grow just for the sake of increasing our assets under management.’ In Poland, Corestate is likewise interested in all real estate asset classes, but here, too, micro-living is a key focus, Bütter says. ‘We have a good track record in advising project developments. So far we have worked on some 25 developments worth around €1.5 bn. This is proof of our success.’
In this area, the company has also been successful in Spain where it recently announced the acquisition of a 413-unit student residence project in Seville. Meanwhile its 260-unit student housing scheme in Madrid is close to completion and scheduled to open in September. Two further student housing projects are planned in Valencia and Bilbao. ‘We have a hands-on team in Madrid,’ Bütter points out. ‘This is an example of how we operate. We like to have people on the ground.’
Extending the client base
Corestate is also blazing a new trail on the capital-raising front. In January it appointed Audrey Klein as managing director of international institutional clients to expand the company’s client base to institutional investors in London and the Asia-Pacific region. Different regulations apply on an international level, but Bütter is upbeat about the expansion potential. ‘We are following up on some very interesting leads to expand our model for international investors.’ He added that he hoped to have some concrete results before the end of the year. ‘I would be very surprised if international investors didn’t tap into this business. Mezzanine loans can provide returns of between 17-20%, which is a far more attractive yield than most pension funds are getting. Particularly given the fact that lack of [real estate] product is resulting in further yield compression.’
Of the more than 100 institutional investors that Corestate now ranks as clients, the Bavarian pension fund BVK is undoubtedly the most high-profile. ‘We are really happy to have BVK as a client. Our first high street retail fund is running as planned and our micro-living platform is also running very smoothly.’
Bütter points out that it is no mean feat to get the BVK on board as a client. Before signing up with Corestate, the Munich-based pension fund conducted a due diligence that lasted eight months. But in a world where pension funds are required to generate a return of 4% per annum and are effectively not managing to exceed 2% in many cases, the higher returns that Corestate is able to offer makes for an attractive proposition. ‘More and more pension funds are leaning towards real estate because of the yields and interest rates they are able to obtain which are clearly more than 5%. We are now on a good trajectory and are glad that we have been able to get the trust of BVK. The BVK mandates were well received in the German market and we know there is huge interest in what we are doing. We hope to continue to win similar-sized mandates, also from international investors.’
PERSONAL PROFILE
A graduate in economics and law, Michael Bütter joined Corestate Capital Group as CEO on 1 May this year. He has more than 18 years of experience in the real estate and private equity industry with companies including Deutsche Annington (now Vonovia). Before joining Corestate, he served as CEO of Immobilienscout and was previously a partner with law firm Hogan Lovells LLP.
COMPANY PROFILE
Corestate was founded in Zug by Ralph Winter and Thomas Landschreiber in 2006. It is now a fully integrated investment manager headquartered in Luxembourg. The company’s key market is Germany, but it is also active in Austria, Spain and the Benelux. Clients include semi-institutional investors (HNWIs and family offices) as well as institutional investors. The company has assets under management of approximately €22 bn, of which €17.1 bn comprises real estate. Corestate was promoted to the SDAX section of the Frankfurt stock exchange in March this year. Winter is still active as a senior advisor and has an 18% stake in the company.
