China Investment Corporation (CIC) has reportedly established a strong presence in the thriving German residential rental market by backing Morgan Stanley's €1.2 bn acquisition of 16,000 units from Luxembourg-based BGP Holdings.
'I'm delighted that the sale has gone through,' BGP's managing director, Mark Dunstan, told PropertyEU on Friday. ‘The German residential sector is very popular at the moment but there’s not much for sale and not on this scale.'
The bulk of the money involved in the deal came from Chinese sovereign wealth fund CIC, according to those who track the market, which would make the acquisition the first major Chinese investment in Germany's residential sector. CIC could not be reached for comment.
Funds available for distribution after the deduction of net debt and transaction expenses are expected to be close to €600 mln. The final proceeds will be determined on the basis of closing accounts. As such, the sale price shows an uplift from an equity value of €588 mln last December.
The portfolio comprises all of the business and assets of BGP Investment. In total, this comes to 1.16 million m2 of residential stock or around 16,000 units - of which around 40% are located in Berlin, with the remaining properties mainly located in the north of the country, in cities such as Kiel and Cologne. There is also a commercial component on the ground floor of some of the residential buildings.
Biggest deal
'The BGP sale has been the biggest residential sale to go through in Germany so far this year, although Vonovia's acquisition of Conwert will be even bigger when it closes,' said Konstantin Kortmann, head of residential investment at JLL in Germany. 'The BGP portfolio is an interesting one because the properties are located in attractive cities, which are expected to benefit from growth.' JLL did not advise on the sale.
BGP had five names on its original short list, Dunstan said: 'We actually exceeded our initial target of €1.1 bn for the portfolio because we sold off most of the retail assets – which accounted for over 25% of the portfolio - over the past three years for more than €200 mln before the deduction of debt. Proceeds were reinvested in the residential portfolio and also used to reduce the overall debt.'
Nonetheless, the sale has been a long time in the making. BGP twice considered floating on the Frankfurt Stock Exchange and last year pursued sale talks with Austrian company Conwert Immobilien Invest, before they fell through. BGP had initially pursued a dual-track process in 2015 - a sale or an IPO - before taking the portfolio off the market in October last year, saying that ‘bids at that time were undervaluing the company'.
Legacy portfolio
As such, the sale represents a remarkable turnaround for the firm, which started out as a joint venture between failed Australian investment and advisory firm Babcock & Brown and listed real estate firm GPT Group before being restructured in 2009 as an independent company in Luxembourg. The restructuring followed Babcock & Brown’s collapse into bankruptcy in the same year. BGP always planned to sell its German residential assets because shareholders inherited them following the firm’s restructuring in 2009.
BGP Investment held a €3 bn pan-European real estate portfolio six years ago, according to Dunstan. After the disposal of its German residential portfolio, the group will not hold any other real estate assets.
The deal is expected to be completed after the fulfillment of customary conditions precedent towards the end of the year after which shareholders will be sent the Notice of Extraordinary General Meeting. Pending shareholder approval, an interim distribution will be made shortly thereafter, and a final distribution when the business has been fully transitioned, BGP said.
'There will be a period of holdbacks so that we can ensure the deal goes through smoothly, but the liquidation process is quite complicated because we have seven levels of corporate structure in four main jurisdictions – Germany, Luxembourg, Malta and Australia,’ Dunstan said. ‘However, we are confident that we will be able to make the major part of the distributions to our shareholders within the next few months.'
BGP has about 58,000 retail investors and is also held by investment firms Och-Ziff, Bennelong and Baring Capital.
It has been a busy few weeks for Germany’s residential sector. In September, Vonovia agreed to buy smaller Austrian rival Conwert for around €2.9 bn, including debt. Following its acquisition of Conwert, which focuses on residential property in Germany and Austria, Vonovia will hold around 367,000 flats, up from its current 340,000, including properties in eastern German cities such as Leipzig, Berlin, Potsdam and Dresden as well as the Austrian capital of Vienna.
Vonovia said it would offer 74 of its shares for every 149 Conwert shares, implying a price of €17.58 per Conwert share, based on trading values in September. Excluding debt, the share offer - which is conditional on acceptances above 50% of capital - is worth around €1.8 bn.
