EUROPE NEWS: Hands points to secondaries

When a major figure in mainstream European private equity singles out a particular segment of real estate investing for attention, it is best to take notice.

Guy Hands, who founded Terra Firma Capital Partners in 2002 and was a first-mover into areas such as German residential property last decade, said real estate secondaries potentially offer the greatest opportunity at the moment.

Guy Hands: second sweet spot

In an interview, Hands said: “Some of the real estate funds are trading at ludicrous discounts. As long as they are not over-leveraged, they are very cheap indeed.”

Speaking from his base in Guernsey in the wake of a court loss against Citibank concerning the firm’s ill-fated £4.2 billion takeover of music group EMI, Hands discussed real estate investing as a whole, suggesting the current problem was so much variation in values. “Certain property areas are very cheap at the moment and certain areas are still very expensive. Most funds set up in real estate between 2006 and 2007 have lost a lot of money and have not been successful because the timing was really difficult. I think now is a better time to go back into the market, but one should do so reasonably gingerly.”

While he was adamant that there are certain real estate assets and markets that looked attractive, the one area Hands saved the most enthusiasm for was secondaries. “Secondaries are not what we do, so it is a little bit difficult for us,” he said. “Still, we think the highest returns in real estate will be in secondary funds.”

Hands is famed for investing in asset-backed companies, building up one of the largest private residential property portfolios in Germany and buying into cinemas, hotels and British tenanted pubs.

In 2000, Hands acquired Deutsche Annington Immobilien Group (DAIG) for €2.25 billion while still working at Japanese bank Nomura. The acquisition went into Terra Firm’s first fund, Terra Firma Capital Partners I, whose sole investor was Nomura. In 2005, the firm bolted on another German property company, Viterra, to boost its holdings to 230,000 leased and managed units nationwide. In 2006, the 82.5 percent share of DAIG owned by Terra Firma entities was transferred to its German property fund, Terra Firma Deutsche Annington.

Operationally, the German residential portfolio is performing very well by throwing off significant cash flow, but valuations of German real estate have not recovered hugely. “I think we have got a return of about 6 percent to 7 percent compounded since 2006, which is great for real estate if we were a real estate fund, but we would really like valuations to move up a bit,” Hands said.