The Bavarian city of Augsburg has real estate success in its DNA.
In the early 16th century, it was one of the most dominant trading centers in Germany, owing much of its wealth to the patrician families living there. The most prominent of these were the Fuggers, who specialized in banking – and later property. The family was led by Jakob Fugger, whose aim was to put his business and city on the global map. He would succeed, with the Fuggers becoming one of the most powerful dynasties in the world, financing monarchs, popes and even the construction of St Peter’s Basilica in Rome.
Fast forward to the present, and on one of Augsburg’s major thoroughfares, Fuggerstrasse, named in honor of the family, another property company is attempting to do likewise.
Patrizia Immobilien has come a long way to meeting these ambitions. Since the global financial crisis, it has graduated from being a pan-German property company to being a pan-European real estate investment manager. Today, its sights are set on becoming global. And with almost €20 billion in assets under management, 20 offices in 15 countries and a roster of more than 200 international institutional investors, its progress has been tangible.
Patrizia has also become a fixture in the headlines over the last 12 months thanks to a host of deals, separate account wins and well-capitalized fundraises. There have been high-profile hires too, such as Anne Kavanagh, one of the European market’s most respected operators, who joined as its chief investment officer in January.
Its founder, chief executive and majority shareholder, Wolfgang Egger, attributes the growth to the firm’s expanded 630-person headcount while remaining an independent bricks-and-mortar company. “For the first five years after I started the business, I only invested in real estate. But since then, I’ve only invested in people,” says Egger.
He started building Patrizia’s deep bench as a teenager 33 years ago. “I was young. But even then I knew I needed to get the right people on board, who knew what they were doing. This industry is all about people; if you have the best people they will bring the right opportunities. You can make money with the right people in a rocky market and you can lose money with the wrong people in a very good market – it all comes down to the people you bring in. Our focus is to create a campus for talented people.”
For Egger, the other key ingredient is independence. “We’re not integrated into a corporation, so we do not have to sell products in the interests of the corporation. Instead, we can advise our clients independently. What this means in practice is that we place investments with them that open the door to strong revenues.”
With such a hefty headcount, Patrizia does not require external advisors, Egger reasons. “We never do anything where we need an advisor. What is key for us is that we have the best asset management capabilities on the ground, whether it is in logistics, in office or in retail, so we can create a ‘competence center’ in each country.”
The ‘do-it-yourself’ formula has evidently worked for the firm, if its assets under management growth is anything to go by. Between 2011 and 2016, Patrizia’s book expanded from €2.7 billion to €18.6 billion. Its investors have also been impressed by the returns the firm has managed. The flagship Patrizia Equity Partners fund series has yielded an internal rate of return of more than 20 percent, exceeding its target. Its greatest triumph saw Patrizia exit its €1.1 billion ‘Project Harald’ German residential portfolio at a massive 372 percent IRR, a return on equity of 170 percent and 2.8x equity multiple.
Thanks to deals like that, the firm has attracted commitments of more than €9 billion for its investment vehicles from institutional investors, including savings banks, insurance companies and pension funds, mainly from Germany, but increasingly overseas. From this support, it has created an enviable fee stream: pulling in €77.8 million from its vehicles in the first half of last year, 23.7 percent more than the same period the year before.
Despite this growth, Egger declines to set targets beyond the near-term. “That does not make sense to us. It is all about making the business stronger and seeing where the opportunities are.”
Indeed, he is more concerned about the firm’s progress in a thematic way; the primary focus is on becoming an investment manager of choice for a global institutional investor base. “We want to continue to develop Patrizia from its foundation as one of Europe’s leading real estate investment houses into a global provider of European real estate investments.”
One of the Patrizia’s investors, Versicherungsverein des Bankgewerbes (BVV), the €28 billion German pension fund, spoke to PERE about its relationship with Egger and his firm. “In 2002, Patrizia participated in a ‘beauty contest’ to manage our real estate portfolio,” says Rainer Jakubowski, chief financial officer and member of the board at BVV. “It was a domestic portfolio of 40 residential and commercial properties located throughout Germany. What was notable was the commitment and know-how of the people involved and the willingness to respond to our requirements. A further positive was the regional offices of Patrizia, which were able to realize a very short-term takeover of the portfolio.”
The partnership between BVV and Patrizia blossomed over the following years, says Jakubowski, and he was impressed with the care taken by Patrizia, not just as clients, but with his firm’s real estate portfolio. “This collaboration with Patrizia has been very successful, the earnings contribution for our insured persons is significant,” says Jakubowski.
“Egger’s direction and management is also felt at all levels.The real estate affinity and customer orientation that Egger embodies is also tangible among all Patrizia employees. I am personally impressed… by the never-tiring agility, as well as the strategic competence and innovative power of Patrizia’s CEO.”
Patrizia’s self-sufficiency began in 1984 when then-19-year old Egger built a house in Augsburg himself. Despite a limited education in construction, his housebuilding foray was a success and selling the property enabled him to purchase a block of six apartments for renting. After the young Egger decided better gains for both the block’s tenants and his burgeoning business would come from selling, he convinced them to buy him out.
“I had friends who were paying DM500 (around $265; €250) a month in rent to live in a small apartment. Over 30 years they could have ended up paying DM180,000. But instead they could buy the apartment outright for DM120,000 and pay it off twice over the next 30 years,” recalls Egger. “So I thought, ‘Why not buy the apartments, refurbish them, apply full property management and sell?’ There were so many benefits: they get the financial discipline of making monthly payments, they reduce their debt and have more savings than those who stayed as a tenant.” It was this foresight from Egger which led to the creation of Patrizia.
Despite this impressive start, it would be another 14 years before Patrizia made its breakthrough into Germany property’s big leagues. In 1998, the firm secured the acquisition of the Olympia-Pressestadt, the 769-unit media center used for the 1972 Olympics Games in Munich. After purchasing the asset from a major pension fund, it renovated the units before selling them on. That deal was followed by similar scale transactions for housing units owned by the German conglomerates, Bayer and Fendt. The deals were key, Egger says, because they enabled Patrizia to significantly expand its balance sheet and the potential for further growth.
Patrizia’s early residential focus has also expanded. Today, it is a diversified property company offering investors access to a range of asset classes across Europe and via a range of risk and return profiles. A slight majority of its assets carry a core or core-plus risk and return profile with the rest value-added and opportunistic. Investors can engage the firm via funds, but also co-investment vehicles or separate accounts.
In terms of property types, only 37 percent of Patrizia’s assets under management are residential, but Egger stresses that this asset class remains the most influential. “It is the most asset management-intensive sector in the industry,” he says. “The key aspect of residential is that, if you are doing it on scale, it is related to every other real estate sector. Once you buy a block of 1,000 apartments, you can bring in retail and then offices and self-storage – each time you are learning about other sectors.
“Once you do resi, you learn the subtle differences that you can’t put in an excel sheet. We can adapt a lot of our knowledge to Europe’s different countries. You can learn something new in each country.”
Joining the illustrious
Egger’s judgment has been strongly backed by Germany’s institutional investor base. Last year, Patrizia landed two of the biggest mandates to be awarded in the country. The first was a €300 million account from an undisclosed German insurer for residential investments across Europe. The second was even bigger, and committed by one of the world’s most active investors – Germany’s biggest pension fund manager, Bayerische Versorgungskammer (BVK) – which awarded a €400 million account to back developments in the Netherlands and the Nordics. In so doing, it joined an illustrious set of managers to have benefited from more than €7.5 billion of commitments last year, including Houston-based Hines and fellow German outfit Union Investment.
On the funds front, Patrizia launched its first pan-European logistics vehicle last August through which it will target institutional commitments of €500 million. So far, it has already acquired properties in France, Belgium, the Netherlands and Germany, totaling around 2.5 million square feet, on behalf of the fund.
The firm’s most notable single asset transaction was the September acquisition of the Commerzbank Tower in Frankfurt for around €650 million on behalf of Samsung SRA Asset Management, the investment management business of the Korean conglomerate. That deal was part of Patrizia’s strategy of securing trophy assets for Asian investors. It followed the €171 million purchase of Brussels’ Astro Tower, one of Belgium’s tallest buildings, for a Korean consortium, and the €466 million acquisition of London’s Madame Tussauds waxworks for a Taiwanese investor group.
As with its investing activities, the firm’s capital partners originally had a strong German bias, and even today, it is heavily dependent on German investors, with 91 percent of its capital raised coming from the country versus just 5 percent from wider Europe and 4 percent from elsewhere. Egger is keen for that to change, and has been hiring accordingly. At the end of last year, Robert Bilse filled the newly created role as head of North America, with a remit to diversify and expand the firm’s investor base in the US. And PERE understands that the firm has also conducted interviews with capital-facing executives in Asia.
Patrizia’s hiring of Kavanagh, AXA Investment Managers – Real Assets’ global head of asset management, as chief investment officer should also help the firm in its quest for global recognition. Egger believes Kavanagh, Bilse and any other hires Patrizia makes fit a particular mold.
The same belief applies when making corporate acquisitions. In its year-end results, Patrizia revealed it had €400 million in firepower earmarked for M&A. But Egger says Patrizia will only invest in firms with people that he feels can buy into Patrizia’s culture, as it did when it acquired LB Immo Invest, from a subsidiary of HSH Nordbank in 2011, and GBW, the listed housing subsidiary of regional bank Bayern LB in 2013.
“What this company has achieved over the last 30 years is somehow priceless – we have secured the trust of the institutional investor. But you can ruin that in one day and our people are aware of this. We know what type of trust we have and what kind of expectations our investors put on us.”
Patrizia made its largest ever single-asset transaction when it acquired Frankfurt’s Commerzbank Tower, the tallest building in Germany, on behalf of Samsung Asset Management, the investment arm of the Korean conglomerate, for around €650 million.
Last September’s deal was significant in three ways. Firstly, it was an example of Asian capital scooping up prime European trophy assets, a trend which would continue over the year. Secondly, the deal came only three months after the UK’s vote to leave the EU, when London’s role as Europe’s primary financial center was under threat from rival cities such as Frankfurt. But for Patrizia, it was also significant because the deal, namely an Asian investor buying European assets, was perfectly in line with its stated aim of becoming a global provider of European real estate investments.
According to Konrad Finkenzeller, the firm’s head of international institutional clients, the deal meant that, at the time, Patrizia had invested around €1.3 billion on behalf of its Asian institutional clients throughout Europe. “Clients from Asia appreciate our specialist real estate knowledge and our fully integrated investment management capabilities,” said Finkenzeller. For Egger, though, another significant factor behind deals such as the Commerzbank transaction was the already established relationships between institutional clients and Patrizia: “A lot of deals are all about the relationships because the majority of these landmark assets are held by institutions with which we have long-term relationships. When it comes to a deal, we can always make a call.”
Headquarters: Augsburg, Germany
Management board: Wolfgang Egger, chief executive; Karim Bohn, chief financial officer; Anne Kavanagh, chief investment officer; and Klaus Schmitt, chief operating officer
Assets under management: €18.6bn
Assets split: 59% core/core-plus; 40% value-add; 1% opportunistic
Market capitalization: €1.45bn (as of April 18, 2017)
Offices: 20 in 15 countries