Blackstone may be the gorilla in the European real estate jungle, but there are also some lions out there. PropertyEU 's latest edition of Top 100 Investors provides an overview of the fittest property companies in Europe to have survived the financial crisis.

Blackstone may be the gorilla in the European real estate jungle, but there are also some lions out there. PropertyEU 's latest edition of Top 100 Investors provides an overview of the fittest property companies in Europe to have survived the financial crisis.

In the past year, it has become eminently clear: the early wave of US opportunistic investors seeking distressed loan opportunities emerging from Europe’s beleaguered banks form a league of their own in PropertyEU's Top Investors. They rank among the most sophisticated investors in the world - not just in real estate but other asset classes as well. It will therefore come as no surprise to those who have watched this space that the juiciest prizes in Europe in the current cycle – and certainly in the past year – have gone to US players, and that Lone Star is by far the biggest buyer of commercial real estate loans in the first six months of this year. The US investor accounted for almost €15 bn of acquisitions during H1 as overall volumes rose more than 600% compared to the year-earlier period. It was followed at some distance by US peers Cerberus (€6.2 bn), CarVal Investors (€3.3 bn), Blackstone (€2.2 bn) and Oaktree Capital (€2.1 bn).

The figures are big, but then so is Europe’s real estate debt mountain. Cushman & Wakefield’s Corporate Finance team estimates that European banks and asset management agencies have a gross exposure of €584 bn to non-core real estate which is subject to disposal or work-out strategies. And although total sales volume for the first half of this year was higher than expected at €40.9 bn and the full-year figure has now been raised to €60 bn, the expected sales figure for this year is still only 10% of the remaining burden. In other words, the deleveraging process throughout Europe may have accelerated in the first six months of this year, but it is still far from over. While the UK and Ireland were two of the most dominant markets in terms of deleveraging over the last three years, both still have significant non-core real estate exposure.

The first wave of opportunistic investors continues to chip away at Europe’s real estate debt mountain, but the pool of players is expanding as new, smaller entrants converge on Europe in the slipstream of their bigger peers. In many respects, the US private equity giants have stepped into the shoes of the big investment banks like Morgan Stanley, Goldman Sachs and Lehman Brothers who were caned after their real estate funds were wiped out after the global financial crisis broke out.

SILVERBACK GORILLA
While Lone Star stands out as one of the biggest winners at this point in the crisis, the most aggressive US player has undoubtedly been Blackstone. The private equity giant is not only amassing distressed loan portfolios, it has also picked up distressed companies like pan-European retail developer Multi to create a portfolio of over €17 bn in just a few years. ‘If the European real estate industry is a jungle, then Blackstone is a gorilla in that jungle,’ commented Jos Short, founding chairman of Internos Global Investors. In fact, I would say it’s a silverback gorilla – the most dominant of them all.’

Short’s own London-based company has also emerged as one of the winners of the crisis, if not a gorilla, then certainly a lion. In early 2008, Short and his partner Andrew Thornton set up a new real estate business based on the traditional private equity model. The aim of their partnership was to back real estate opportunities across the risk spectrum with a small team of bright and experienced people, Thornton told PropertyEU earlier this year. ‘All of that was going swimmingly until Lehman hit. Rather naively, we thought we could raise capital for our plans, but it took awhile before we got investors’ trust. The feedback we got was: “We wish them well, but we’ll see how it goes before we make a commitment”.’

Needless to say, Thornton and Short’s fledgling company has not been one of the major fund-raising machines since the outbreak of the global financial crisis, but the pair quickly found another lane to swim in. At end-2009, the London-based company led the acquisition from the Sydney-based GPT Group of the Halverton real estate investment management business for the nominal sum of €2. In one fell swoop, Internos obtained €1.7 bn of gross assets under management in five funds and two separate account mandates in Germany and the Netherlands. Five years later, that figure has more than doubled yet again to over €4 bn and the pair are now bent on expanding their platform into fund management.

Internos is not the only private equity real estate manager that has started from scratch during the crisis. Two more London-based examples include Tristan Capital Partners, headed by American-born Ric Lewis, alongside Meyer Bergman, headed by Dutch-born Markus Meyer. After earlier successes, both are now engaged in fund-raising initiatives for the coming year.

Other companies that started as fledglings in Europe just a few years ago include California-based Kennedy Wilson which floated on the London Stock Exchange earlier this year and Merlin Properties, which was launched on the Spanish stock exchanges over the summer. The newly-listed Spanish REIT is managed by Magic Real Estate, the asset management firm headed by former RREEF executives Ismael Clemente and David Brush. Elsewhere in Spain, the number of survivors is thin. Former listed heavyweight Metrovacesa has been taken private following a disastrous spending spree in the boom years, and has recently been forced to sell its most valuable asset, its shareholding in French REIT Gecina.

Designer outlet developer Neinver failed to meet the €3.5 bn threshold for inclusion in our Top Investors ranking this year but is one of the more resilient firms in the Spanish real estate sector. And in September, it teamed up with another big US gun KKR to acquire two retail assets in the country. KKR has said it is ‘embarking on an ambitious journey’ in Europe, but its real estate presence on this side of the Atlantic remains limited and it, too, failed to make it this year into our ranking with under €1 bn of AUM.

FERTILE GROUND FOR IPOs
All in all, however, Spain has been fertile ground for new real estate IPOs this year and although no Spanish company appears in our latest ranking, seeds of hope for some newcomers have been sown. A number of the newly established listed vehicles have been relatively small, but there has also been a group of big so-called SOCIMIs (the Spanish equivalent of a REIT) like Merlin and Hispania which have received a lot of interest from global investors including the likes of George Soros. ‘They have been quite active in chasing after properties in Spain and more are on the way,’ CBRE’s Palomar said. Three vehicles that are currently making preparations for a flotation in Spain – Quabit, Norfin and Fidere. The latter is a vehicle being set up by US private equity giant Blackstone.

Germany has also seen its fair share of IPOs in recent years, particularly in the residential sector with Buwog – a spin-off of Vienna-listed Immofinanz – the most recent company to make its debut on the Frankfurt stock exchange. But despite a sizeable number of winners in Germany, the country has also generated some big losers. Indeed, one of the biggest to be felled by the crisis is Germany’s former listed giant IVG. In September, the company – which gorged itself during the boom years on flagship assets such as London’s landmark Gherkin tower – emerged from insolvency following a major debt restructuring. The company is now considering options for a new stock market listing, Hans-Joachim Ziems, an IVG board member who led the restructuring, said upon the announcement. Earlier this year, the private closed fund business was sold to the family-owned Zech Group. Other German losers include some of the open-ended fund managers such as SEB Asset Management and its smaller peer KanAm: both have seen their assets under management dwindle in recent years as they wind down a number of their vehicles. By contrast, their larger competitors – Deka Immobilien, Union Investment and Commerz Real – have all booked modest to significant growth in the past few years.

Another home-grown German lion with the potential to become a gorilla is Patrizia Immobilien. The Augsburg-based company is believed to have eyed the remaining IVG business as it seeks to expand its assets under management. It has already taken a number of steps to broaden its platform both at home and in other parts of Europe including the UK, Scandinavia and the Netherlands and has seen its assets under management soar during the process to over €13 bn at end-June 2014.

CAUTIOUS COMEBACK
After an abortive attempt to sell its real estate unit RREEF to Guggenheim Partners in June 2012, Deutsche Bank now appears to be making a cautious comeback on the fundraising front. The rebranded business – Deutsche Bank Asset Wealth and Management (DeAWM) – has seen its total assets under management shrink in recent years, but still has a loyal following and remains a sizeable player worldwide. It appears keen to avoid the mistakes of its ill-fated Karstadt venture with Prelios and Goldman Sachs’ Whitehall Funds and is steering clear of new opportunistic initiatives. Indeed, the new open-ended real estate fund it is due to launch in October will be a conservative vehicle, so value-added and opportunistic assets will only play a small part.

The fund is DeAWM’s first open-ended fund in 14 years and follows the introduction last summer of Germany’s new capital investment act (KAGB), which is designed to promote greater fund stability. The subtext is clear: no more risky adventures in the European real estate jungle.

Judi Seebus
Editor-in-chief


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