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EUROPE NEWS: Second thoughts

This summer, Immofinanz Group, the public Austrian real estate company, announced the sale of €137 million of interests in real estate funds via the secondaries market. While secondary transactions occur fairly regularly, this sale was a rare event on two fronts.

Firstly, secondary transactions usually are kept private given the delicate nature of these sales. Often times, the seller in question does not want it known it is a seller. Second, although it is hard to obtain accurate data as opposed to hearsay evidence, it seems the number of significantly large trades in Europe – and perhaps elsewhere in the world – is quite thin.

Being a public company, however, Immofinanz decided to announce the sale and did so with reasonable transparency. It named the nine fund interests sold, which is a rare event indeed.

There were five European fund interests, mostly focused on Eastern Europe. They included the Europa Emerging Europe Fund, Europa Fund II, FF&P Russian Real Estate, FF&P Development and Polonia Property Fund II. In addition, there were four American fund interests, comprising the Carlyle Halley Co-Investment, ProLogis North American Industrial Fund II, Gotham City Residential Partners I and Broadway Partners Real Estate Fund II.

The buyers of these interests agreed with Immofinanz not to be identified, though market participants suggested Landmark Partners, a US firm that buys private equity and real estate fund interest, was among the buyers. There are suggestions that other buyers were existing investors, but their identities are less revealing than some other aspects of the sale.

As long ago as the first quarter of 2008, Immofinanz contemplated disposing of its entire portfolio of unlisted fund interests in one go. What is expected to transpire, however, is a series of much smaller lot sales.

Following this summer’s sale of nine interests, Immofinanz is now left with a rump of interests in 18 property funds worth €160 million, which it said would be sold off in the short to medium term. Indeed, a portfolio of real estate fund interests was being shopped around in Europe at press time. This has been taken to be that of Immofinanz.
The reason behind the Immofinanz sale is quite clear. The real estate company has decided to concentrate on four core markets – residential property, offices, retail and logistics, according a spokeswoman. “Indirect fund interests do not fit within our core asset classes any longer,” she added. In addition, the company has decided to restrict itself to eight markets – Austria, Germany, Poland, Russia, Romania, Hungary, the Czech Republic and Slovakia. The company will accelerate the completion and acquisition of development projects, as well as the selective reactivation of pipeline projects, she noted. If all goes according to plan, it will be out of the indirect property game pretty soon.

According to Julian Schiller, head of indirect investments at Jones Lang LaSalle, the European secondary market is busier this year than last. “We probably have done as many secondary transactions in the first half of the year as we did in the whole of 2010,” he said. “We still see volumes increasing.”

Schiller noted that there currently are more groups interested in buying secondaries, including Aviva Investors via its recapitalisation fund. Meanwhile, Partners Group, Morgan Stanley and Landmark all have raised money specifically for the strategy, he added.

Indeed, the fund of funds arm of Morgan Stanley last year raised $370 million for AIP Phoenix Global Real Estate Secondaries, having originally targeted $250 million, but investor appetite for secondaries resulted in an oversubscription. In April, Landmark closed on $718 million for Landmark Real Estate Fund VI in what it claimed was the largest dedicated single-pool secondary fund ever raised. Madison International Realty also highlighted the demand for secondaries recently when it announced it had raised $510 million for Madison International Real Estate Liquidity Fund IV.

Transactions volumes, however, do not seem to be rocketing, even if they are above 2010 levels. One global buyer of secondaries said sellers were approaching the market in a similar fashion to the banks and their loans. Instead of completing huge deals, portfolios are being “carved up” instead.

The buyer noted that his firm was seeing lots of smaller fund investments for sale. “There are groups with mandates to sort out massive portfolios, but they are not unleashing them to the market in one go,” he said. “There are groups that for strategic and tactical reasons want to adjust their portfolios, but it becomes a sticky conversation when it gets to pricing them.”

Part of the reason for that, the buyer said, was no one wanted to sell on the premise that they might miss out on some recovery value. “On the buying side, a few are sitting back questioning the narrowing of the discount,” he added.