US Fortress exits Gagfah investment in €740m deal

US private equity firm Fortress Investment Group has ended its 10-year holding in German listed real estate firm Gagfah by selling over 60 million shares for around €740 mln ($986 mln).

In a statement, Fortress said that the disposal comes shortly after a secondary offering of Gagfah shares completed in April, and brings the total amount of shares sold in the past two months to 90.5 million, representing a total of $1.4 bn.

Fortress formed Gagfah in 2004 through a series of acquisitions largely from the German pension fund, BfA (Bundesversicherungsanstalt für Angestellte, now Deutsche Rentenversicherung Bund). It has since built the company - which went public in 2006 - into one of the largest German owner-operators of residential real estate in Germany.

'Over the lifetime of Fortress’s investment in Gagfah, Fortress funds have realized proceeds of $3.8 bn on a total equity investment of approximately $2.9 bn,' the company noted.

Deutsche Bank, which sold the 27.6% stake on behalf of Fortress, said they were priced at €12.34 a share, Gagfah's highest level at the time since early 2008.

Fortress started to implement its exit strategy last year, when it sold a 10% interest at €8.85 in July 2013 and another 7% for €10.15 in December last year.

'This does not come as a surprise as Fortress was clearly no longer a committed investor,' noted analyst Kai Klose of Berenberg Bank. 'We would not exaggerate the importance of this liquidity event, as we have always paid greater attention to Gagfah’s operational performance.'

Gagfah is one of Germany's largest residential landlords with a portfolio of around 145,000 units, competing with Deutsche Annington, currently the country's largest residential owner with 175,000 units.

Gagfah has recently raised its earnings outlook for 2014, with Funds from Operations expected to come in at €181-185 mln at present, from €172-176 mln previously.

Fortress' exit comes at a cyclical high for the German residential sector, which reached a peak of €15 bn of investment in 2013, up 35% year-on-year.

German residential real estate has been a major magnet of institutional capital in recent years, and generating €5.1 bn of investment in the fourth quarter of 2013 alone. That figure represented a sharp increase from €2.9 bn on the same period a year earlier. However, the investment wave is now starting to subside.

'The number of major transactions will decrease due to a lack of product,' commented Matthias Pink, responsible for research at Savills Germany. 'Also, the foreseeable stricter regulatory framework, with the new coalition aiming to continue capping rent increases for existing contracts but also extending this rental cap to include new lettings, will lead to a certain reluctance on the part of investors.'