It's been a year now since GEG German Estate Group was founded. It is looking to revolutionise the large-volume commercial property market for existing properties and project developments, primarily at A locations. The editorial team spoke to the chairman about the first few months, the opportunities available and market developments. And things are looking good in all respects. Because even if the first few months were naturally dominated by the development of the organisational structures, a number of notable transactions were still made. Ed.
I&F MR HÖLLER, GERMAN ESTATE GROUP WILL SOON BE CELEBRATING ITS FIRST ANNIVERSARY. WHAT EXACTLY IS GEG, AND HOW DID THE START-UP PHASE GO?
GEG is a classic property company in which the Deutsche Immobilien Chancen Group and the international investor KKR hold stakes. We're not a run-of-the-mill joint venture, however, but a standalone company that is now being set up with a long-term strategy. We serve German-speaking regions, focusing on commercial property. GEG operates in three strategic business areas: firstly, the creation of a portfolio of "core landmark" products as individual properties with a minimum volume of €75 million, in which we invest as GEG in collaboration with capital investment companies, pension funds, insurance companies and pension institutions. We are the initiators, co-investors and managers of these properties. Secondly, GEG also focuses on classic project development, whereby we plan, construct and market projects at our own risk. Because of the high risk-return profile of this business area, we expect returns here to be higher than in the core landmark area. Our third business area is "opportunistic investments" – also known as "real estate private equity" – whereby we seek out attractive opportunities for investments. Such opportunities could include large-scale portfolio acquisitions, distressed situations or even suitable business interests. The business plan here is very clearly defined right from the outset and limited to a three- to six-year period.
I&F HOW WAS THE FIRST YEAR? ANY SUCCESSES TO REPORT?
The first few months were dominated by tasks relating to setting up the company. We put in place the corporate structures, took on employees and positioned ourselves on the market. We also made our first investments, with the focus here on two property acquisitions in Munich: the landmark core property "Sapporobogen" and the opportunistic investment "Neue Pasinger Mitte". Another project that will attract media attention is also in the pipeline. I can't comment on it yet, but you'll be hearing about it shortly. We are also working intensively on the Maintor complex in Frankfurt am Main, which is scheduled for completion in 2017, the Opera Offices in Hamburg, which are scheduled for completion later this year, and on two other project developments in Munich and Frankfurt.
I&F WHAT MOTIVATED YOU PERSONALLY TO TAKE ON A NEW CHALLENGE AFTER SUCH A LONG TIME WITH DIC ASSET?
I've been active in the property sector for more than 25 years now. I spent 15 of those of years at DIC, which I joined shortly after its founding, taking up the positions of chairman and manager for strategic and operational implementation. This gave me the opportunity to help shape the development of the company virtually from the outset. At a time in which the property sector was undergoing radical change, we turned DIC into an S-Dax company operating at the interface between the capital market and fundamental property expertise. When you achieve all of this with numerous successes along the way and keep proving yourself over many years, you once again get the urge to start something new. And this is something I'm really excited about.
I&F YOU MENTIONED RETURNS. WHAT KIND OF RETURNS ARE WE LOOKING AT IN THE INDIVIDUAL BUSINESS AREAS?
For core landmark products, our returns are around 5%; for project developments, they start at around 15%, but can be a lot higher. For opportunistic investments, returns should also be pushing 15% and more.
I&F GEG HAS TAKEN OVER DIC'S ENTIRE DEVELOPMENT AREA. HOW DOES YOUR NEW COMPANY DIFFER FROM YOUR OLD ONE?
I'd first like to make it absolutely clear that GEG took over the Development area of the Deutsche Immobilien Chancen Group, which had run it as an agency for DIC Asset. The Deutsche Immobilien Chancen Group is, at the same time, the majority shareholder in DIC Asset. This is what the two companies have in common on the ownership side. However, the business models are very different. DIC Asset is above all a portfolio holder, which, unlike GEG, focuses on smaller properties and secondary locations.
It has been highly successful in the development area for a long time, but, since the financial crisis at the latest, investors are more risk-averse than they have been for a long time. Investors in a listed property company want simple business models, are interested primarily in cash flows and dividends and yet still shy away from the higher risk profiles that are part and parcel of development business. This risk-return profile is also another reason why GEG, in addition to development, built up the other two business areas.
I&F ARE THERE STILL ENOUGH CORE LANDMARK PROPERTIES OF A VALUE EXCEEDING €75 MILLION? AND AREN'T THE PRICES ALREADY TOO HIGH GIVEN THE AMOUNT OF PEOPLE LOOKING TO INVEST?
You're right, there aren't that many transactions of this magnitude remaining. Competition is out there and is largely international in nature. A company like GEG, therefore, has to be highly target-oriented, efficient and successful. We need a high execution rate. This is what our owners expect of the management team. This is why have to be close to the market and also foster strong and durable ties. Transaction decisions are increasingly price-based, but not always. Transaction security, speed, access, discretion as well as the management of sometimes tricky situations are also crucial factors that speak in our favour. When it comes to exclusively price-driven transactions, GEG does not have any competitive edge.
I&F IN WHAT LOCATIONS AND IN WHICH PROPERTIES DOES GEG INVEST?
We have to differentiate by business field here: for core landmark objects, we invest exclusively in major hubs of economic activity. Given our target volume of €75 million plus per transaction, no more than ten locations in Germany are of interest to us. The same applies to development: in my previous position, too, I concentrated exclusively on top locations. This was simply because project developments involve quite enough framework conditions as it is, such as rental income, purchase prices, construction costs and interest rate cycles. Given these factors, the location simply has to be perfect. For our opportunistic investments, however, we don't rule out B locations.
I&F DOES THE PROPERTY ALWAYS HAVE TO FULFIL THE MOST STRINGENT REQUIREMENTS, OR ARE YOU ALSO PREPARED TO TAKE ON PROJECTS POTENTIALLY REQUIRING FURTHER DEVELOPMENT?
Let's take as an example the "Maintor" complex, which GEG is continuing to manage for its partners. Today, everyone talks about this being a top location in Frankfurt. But the old Degussa site was far from a top location when we started planning this project. We turned this location into what it is today because we had a vision of what this site could be. And that remains our commitment to this day. The same applies to the landmark properties. Here, too, we have the chance to unlock hidden potential and develop sites for the better.
I&F BUT ISN'T IT PRECISELY THE MAINTOR PROJECT THAT DEMONSTRATES THE RISKS INVOLVED IN SUCH PROJECT DEVELOPMENTS OF THIS MAGNITUDE? AFTER ALL, IT HAS TAKEN A LONG TIME AND HAS ULTIMATELY TURNED OUT TO BE MORE EXPENSIVE THAN ORIGINALLY PLANNED.
The project did indeed take longer than planned, which was mainly because we spent almost five years just planning phase 1 of the project development because the site was still rented out to Degussa up until 2011. Phase 2 – construction work and marketing – began in 2011 and is scheduled for completion at the end of 2017. As such, we are still completely in line with the original schedule. And you're right, construction costs have exceeded the original calculations, something that is almost unavoidable over such a long period. But the good news is that the higher construction costs can be compensated by higher rents and prices. There is, of course, a correlation here: construction costs are higher because the markets have developed so well. And because the markets have developed so well, prices and rents are in some cases higher, too. Is this something we can take into account right at the start of the planning phase? No. But this correlation makes the risk more manageable.
I&F OTHER COMPANIES ARE WITHDRAWING FROM THE DEVELOPMENT BUSINESS. WHAT MAKES GEG BETTER?
Development is the elite class of the property sector. If you want to be successful here, you need an entrepreneurial spirit, vision and comprehensive expertise coupled with experience. With its highly experienced team, GEG brings precisely these qualities to the table. Another factor is the support we receive from owners for this business. Nonetheless, the business model has to be balanced; in other words, the existing business must serve as a strong complement to the development business.
I&F HOW MANY CORE LANDMARK PROPERTIES ARE THERE IN GERMANY?
The term does not automatically mean "core" and "landmark". Generally speaking, landmark properties also happen to be core properties usually because of their prominent location. Of course, such properties are not in endless supply. But the market is big enough for us and a few competitors.
I&F WHO ARE YOUR COMPETITORS?
Taking our business model as a whole, GEG is quite unique. For this reason, we have differing competitors in each one of our three different business areas. In the core landmark segment, we compete against traditional initiators such as Patrizia, Quantum or Triuva. In our project development business, our main competitors are large, local developers. And when it comes to opportunistic investments, GEG is in competition with large, foreign private equity companies.
I&F WHAT WOULD HAPPEN IF A DIC ASSET WERE TO TAKE YOUR INTEREST?
The business models make this scenario highly unlikely, but, should it ever happen, then the two companies would have to enter into competition with one another.
I&F TO WHAT EXTENT DO YOU FINANCE FROM YOUR OWN RESOURCES?
In the core landmark area, we aim for maximum 5% leverage; for project developments, up to 70%; and for opportunistic investments, also up to 70%. In fact, in the latter two areas, the leverage used to be much higher.
I&F FOR REFINANCING PURPOSES, WILL YOU RELY SOLELY ON INSTITUTIONAL ASSETS OR ALSO DRAW ON FUNDS VIA THE CAPITAL MARKET?
Our primary objective is to use funds from investors. That said, GEG must also be able to leverage the possibilities of capital-market-based products and funds.
I&F IS GEG PREPARED TO CONSIDER SPECULATIVE DEVELOPMENTS?
No. Some kind of pre-marketing anchor is a necessary and sensible condition for us.
I&F WHAT GOALS IS AN OPPORTUNISTIC INVESTOR LIKE KKR PURSUING BY HOLDING AN INTEREST IN GEG?
KKR is looking to gain a share of the German property market. After the fundamental decision was reached in 2011 to also invest in property, this special asset class is to play an increasingly important role for KKR. Due to the extremely specialist expertise required to operate on the German property market, which is the most diversified in Europe, this business cannot be managed by the existing private equity teams. The sensible option here is to either set up a specialist property team or obtain an interest in partner companies like GEG.
I&F GENERALLY SPEAKING, HOW DO YOU CURRENTLY VIEW THE ROLE OF PRIVATE EQUITY INVESTORS ON THE GERMAN PROPERTY MARKET?
The significance of this particular group of investors has declined somewhat because returns have fallen sharply. But I expect them to be playing a more important role again in the future, at the latest when the situation gets more critical again on the markets.
I&F WAS IT A GOOD IDEA FOR GEG TO LAUNCH ITSELF AT A TIME OF HIGH PRICES AND LOW RETURNS?
Yes, because a company like ours with a portfolio like ours cannot be set up within a matter of just a few months. We are on the market, the structures are in place and will now become bedded in. We are already in a position to leverage opportunities, and we'll already be right there when the market enters a phase with attractive entry opportunities.
I&F WHAT ARE GEG'S AIMS? HOW BIG DO YOU WANT TO BECOME OVER THE NEXT FEW YEARS?
We set up GEG German Estate Group AG to be one of the leading German investment and asset management platforms in the property sector. We will concentrate above all on the commercial property sector, primarily in top locations, and with a special focus on the office and retail market. Both in our landmark core segment for larger individual properties and in our opportunistic investments, GEG will focus on leveraging appreciation potential and, of course, on the project developments we discussed earlier. In doing so, we will naturally utilise our own capital resources to a great extent, but we will also utilise capital from external investors. With our ambition and the size of our individual investments, we are set to become a key market player.
I&F ARE THERE ANY SEGMENTS THAT GEG FOCUSES ON IN PARTICULAR: OFFICES, RETAIL OR HOTELS, FOR EXAMPLE? AND WHAT IS YOUR ASSESSMENT OF COMMERCIAL PROPERTY MARKETS?
Thanks to stable framework conditions, the German commercial property market will play a significant role globally in the future both for investment capital and for innovative concepts and developments in the real estate industry. Nonetheless, I expect to see the market change over the coming years, which will hold major opportunities for professional and financially sound players like GEG. The recipe for success will always be to develop sustainable and innovative solutions. And it is precisely in these areas that we already have an excellent track record.
I&F YOU MENTIONED THAT, GIVEN THE RIGHT CIRCUMSTANCES, YOU MIGHT CONSIDER MAKING RESIDENTIAL INVESTMENTS. WOULD THAT STILL BE WORTH YOUR WHILE?
The phrase "given the right circumstances" indicates that we have not completely ruled this out, although such investments would definitely not constitute part of our core business. Of course, the residential market as a whole has become a lot more challenging. This market could nonetheless harbour some attractive propositions that we could use, for example in our development area, too.
I&F WHAT MAKES YOU SO SURE THAT KKR, AN AVOWEDLY OPPORTUNISTIC COMPANY, WILL BE A LONG-TERM SHAREHOLDER THAT IS TO – AND WILL – HOLD A 50% SHARE IN YOUR COMPANY?
The business plans are clear. Another reason for my confidence is that KKR acquired its stake in GEG with its own, long-term "balance sheet money" and not with a customer fund structure invested over the short term. It's a strategic investment, not a short-term financial investment. KKR will not be using customer funds until it invests jointly with GEG in deals, above all in the development area.
I&F HOW MIGHT A POTENTIAL PULL-OUT FROM KKR TAKE PLACE – VIA THE STOCK EXCHANGE?
I spent ten years working for a company listed on the stock exchange, and it was a great experience. But now I'm looking forward to some time away from it. And any talk of an exit is absolutely out of the question right now. We are at the beginning and focusing all our energies on creating an attractive and successful company and positioning ourselves intelligently on the market.