Two years ago, GE Real Estate would probably not have expanded its collection of high yielding Swedish properties let to public bodies. Prices had risen to such a level that it was difficult to acquire assets at attractive prices.
However, times change and GE now wants to double the number of assets in the country believing it can achieve value-added double digit returns in Sweden.
In a recent transaction, reportedly worth up to €300 million, GE sold a collection of 29 properties to a newly-created company, Roxanne Fastighetsfond. Some SEK 750 million (€69 million; $93 million) of third-party debt has been injected into the company alongside equity from Swedish pension funds, Folksam ömsesidig sakförsäkring, KPA Pensionsförsäkring AB, Kâpan Pensioner Försäkringsförening, Vattenfalls Pensionsstiftelse and Stiftelsen för Strategisk Forskning.
The properties acquired are not centrally located assets in Sweden's biggest cities, but in good locations across 15 municipalities. They were acquired by GE at different times, and at least 80 percent of the income comes from publicly funded tenants.
“We think that in the coming two years there are going to be great opportunities in the segment,” said Lennart Sten, GE Real Estate managing director for the Nordic region. “To take advantage of that opportunity we wanted to broaden the capital base. The idea is to double the size of investment in three to five years. The strategic imperative was for us to expand without expanding our balance sheet much.”
GE and the investors have created a separate company to own the assets while GE continues to asset manage them. For this, the new investors pay a fee to GE, however the US conglomerate is not treating the asset management function as a profit centre. The fees just cover the costs of managing the assets.
Most of the Swedish institutions buying the assets have had real estate exposure already and are long term investors. GE said the firm wanted to have a small number of investors experienced enough to understand the assets and put significant equity into the fund.
According to Sten, at least two other initiatives in Sweden and Continental Europe involving similar structures have failed because the sponsor firm in question had not been able to agree the debt finance. “The most complicated part of this transaction was getting the leverage in such a tight credit market,” he said.
“I know of a couple of initiatives that were running in Continental Europe and Sweden but they failed to complete the transaction. The reason was lack of finance. In October, it looked dubious whether we would be able to succeed, but some of the financing market came back in November.”
GE will source new investments for Roxanne as well as manage the initial portfolio out of its office in Stockholm.