DEALS: Sharing the spoils

Last month, Brookfield Property Group signed a purchase agreement for one of the largest transactions in Germany since 2008; the acquisition of a trophy portfolio in Berlin’s Potsdamer Platz. Even more noteworthy, however, is the fact that the Toronto-based asset manager plans to sub-sell some of the equity pieces of the portfolio.

Located in the center of Berlin, the portfolio includes seven offices and five residential buildings, as well as a mixed-use urban quarter including the Potsdamer Platz Arkaden shopping center. The portfolio also features a Cinemaxx cinema and the Stage Theater, the Mandala Hotel, some 30 restaurants and cafes, and more than 2,000 parking spaces. Although the deal price was undisclosed, Brookfield is said to have acquired the trophy portfolio from a Frankfurt-based real estate investment unit of Savills Investment Management for around €1.4 billion.

The Brookfield deal, which is expected to close by year-end, is only the beginning. Market commentators said they expect to see the largest real estate investment managers start to syndicate more deals. The rationale for these investment managers to sell down portions of their deals is multifaceted.
For instance, spreading risk is one key reason to syndicate. Syndicating equity in larger transactions enables managers to avoid overcommitting to a given strategy. Transaction speed is another. In a highly competitive marketplace, the risk of losing out on a deal due to the slow moving approval process of an institutional partner is rendered moot by securing the deal, then syndicating. Also, syndicating equity while credit is more freely available and typically on good terms enables managers to avoid gearing up to levels which might cause a few raised eyebrows among investors.

There is also the possibility of achieving a premium by selling pieces of a deal at a higher price relative to the original transaction on account of shouldering the initial deal risk. “There are portfolio premiums kicking around but if you have got that much equity concentrated into one asset, and if someone is buying a smaller piece of an asset, they are likely to pay a little bit more for it than the investment firm would have paid for the whole,” said one London-based real estate capital advisor.

From the investor’s perspective, there is the certainty that comes with buying into a deal already secured. With today’s pressure to deploy capital into large assets, the knowledge that the transaction has already been secured is a plus for a number of investors. Investors also can take further comfort in knowing that they will not have to bear failed transaction costs, as can be the case in direct joint ventures when the investor and investment manager bid in tandem.

“There is so much equity around that there is definite pressure being applied by the largest investors to get a piece of the biggest deals being done,” according to the European head of investor relations at a global real estate investment management firm.

However, equity syndication deals, by their nature, typically are large transactions. And they typically are executed at the height of a market cycle.

Strained seller
More opportunities to syndicate deals may emerge with a raft of large portfolios and trophy assets that are being forced to enter the market in the near future.

Potsdamer Platz’s previous owner, Savills Fund Management, was previously part of SEB Asset Management before it was sold to London-based property services firm Savills in September and then rebranded. It had acquired the portfolio for the SEB ImmoInvest mutual fund, one of SEB’s funds, in 2008.

But SEB ImmoInvest had to be dissolved after failing to meet investor withdrawals. Since the global financial crisis, German real estate mutual funds have struggled to meet redemption requests. Research released by global property services firm Cushman & Wakefield said this enforced liquidation will result in German open-ended funds selling €9 billion of European assets by 2017.

The liquidation of these German funds has already provided the market with €14 billion of sales since 2012, €1.7 billion of which closed in the first half of 2015.

European banks and asset management agencies likewise have decreased their exposure to non-core real estate, selling €53 billion between second quarter of 2014 and the second quarter of this year, according to a separate Cushman & Wakefield report. That trend is expected to continue, the firm said.