Beset by the global financial crisis, laden by debt and hit by the insolvency of the main tenant, it is little wonder Goldman Sachs is believed to have once written down to zero its 2006 investment in the €4.5 billion German retail property joint venture known as Highstreet Holdings. The bank, however, could be forgiven for feeling a lot more optimistic lately about its 51 percent stake in the portfolio.
Just before Christmas, Goldman and the other investors in Highstreet agreed to sell 17 assets, including the landmark KaDeWe department store in Berlin, to Austria’s Signa Holding for €1.1 billion. That sale took total disposals for a portfolio that contained around €3.5 billion in assets at the end of 2010 to just over €2 billion, with about €1.5 billion more to go.
Such has been the strength in demand for retail assets in Germany lately – not to mention faith in the country’s stable economy – that sources close to Highstreet say Goldman might even make a profit from the portfolio, nevermind recouping its initial investment. If that proves to be the case, it would be a remarkable turnaround given the trouble the investment found itself in.
The genesis of the original investment lay in German retailer, mail order and tourism conglomerate Karstadt Quelle (later re-named Arcandor) seeking to raise capital halfway through the noughties. According to an article in the Financial Times, the company approached Goldman’s head of Germany, Alexander Dibelius, who reportedly suggested the company make use of its real estate portfolio.
Sure enough, in 2006, Karstadt Quelle agreed to tip 164 properties – comprising 81 Karstadt departments stores, nine sporting goods stores, 28 parking lots, 14 office buildings and 32 other facilities and land – into a newly created joint venture called Highstreet, of which Goldman would own 51 percent. Two years later, the retailer sold the remaining 49 percent of the joint venture to RREEF Real Estate, Pirelli Real Estate (now rebranded Prelios), insurer Generali and the Borletti family in a deal said to value the portfolio at €4.6 billion.
By virtue of the deal, both Goldman and the other Highstreet investors had major exposure to German retail property, but the investment took on a death stare after suffering huge problems. In June 2009, after being turned down for state aid, Arcandor filed for insolvency, forcing its subsidiary Karstadt to do the same.
The subsequent insolvency plan involved an option to sell the retail chain to a third party, and some 30 Quelle and Karstadt stores were vacated.
To make matters worse, Goldman and the other partners in Highstreet were struggling under the debt they had taken on. Naturally, given the easy days of finance prior to the downturn, there was a complex CMBS transaction attached to Highstreet, and the maturity date on the €1.1 billion CMBS secured against parts of the Karstadt portfolio was looming in 2010. With the tenant in trouble, there followed a complex and lengthy round of negotiation, plans and counterplans as bondholders, banks and the investors in Highstreet sought to protect their respective positions. As things panned out, in 2010, Karstadt was bought by billionaire Nicolas Berggruen, founder of US investment firm Berggruen Holdings.
Having navigated the restructuring of the portfolio’s debt and the insolvency of its main tenant, Goldman began harvesting assets. For example, earlier last year, it sold department store Bielefeld to German investment firm Aachener Grundvermögen. And, as the Christmas sale of 17 assets for €1.1 billion goes to show, it continues to sell.
Goldman is enjoying continued and improving demand for retail assets in Germany by both domestic and foreign investors, but it also must hope for the continued turnaround of the main tenant under Berggruen. Still, the recent sales certainly improve the prospect of Goldman and its investors actually making money on the originally investment, not just breaking even. That would be quite the turnaround.