The world is not enough

Already one of the largest real estate investors in the world, RREEF is now expanding both its global securities business and its burgeoning infrastructure platform. Here, the firm's leadership talks about their long tenure together, their big push in European retail and what it takes to find an operating partner in China and Russia. By Paul Fruchbom

It has already been a long day for Chuck Leitner. The global head of RREEF Alternative Investments, Leitner has spent the past eight hours with the rest of his senior management team cramped inside a small conference room in Midtown Manhattan. Empty water bottles and trays of half-eaten sandwiches litter the conference table. Outside the sun has already set on a late November afternoon.

The senior managers of RREEF, the real estate and infrastructure arm of Deutsche Bank, hold meetings like this every quarter, reviewing the firm's performance, its latest activities and initiatives, as well as the state of the property markets around the world. And given the firm's recent activity, there has been quite a bit to talk about. In the past month alone, RREEF inked its first property investment in China, acquired a stake in UK ports operator Peel Ports and purchased French retailer Printemps for approximately €1 billion ($1.3 billion).

The past year has been equally busy. In April, the firm not only made its debut investment in Russia, it also acquired the largest office portfolio ever sold in Silicon Valley. Three months later, RREEF signed an $800 million core mandate in South Korea. Then in October, the firm teamed up with Pirelli RE for its inaugural deal in the German residential market. And along the way, it managed to raise $1.6 billion for a global opportunity fund.

So forget about a long day. It's been a long year. And that seems to suit Leitner just fine.

As he emerges from the conference room, perhaps the last thing on Leitner's mind is an interview. But he shows no signs of fatigue, nor do any of his colleagues. Leitner is joined by three other senior managers of RREEF: Steve Steppe, head of RREEF Americas; David Brush, chief executive of Europe; and Kurt Roeloffs, head of Asia-Pacific. And they spend the next hour happily talking about their business, posing for pictures and, in general, displaying the type of camaraderie and familiarity that they have developed over a long history together.

Brush and Roeloffs have worked together for two decades, beginning at US investment bank Bankers Trust, where they focused on proprietary real estate investing. Leitner and Steppe have spent 18 years together at RREEF, which began life as a boutique, US-focused real estate investment advisory business. Befitting their role as acquirers of real estate, the four ended up at Deutsche Bank by way of acquisitions themselves: Bankers Trust was bought in 1999, RREEF in 2002. Together, those two acquisitions “formulated the building blocks of our global platform,” Leitner says.

Over the past four years, Leitner and his team have tried to build that platform by combining the global reach and private equity real estate capabilities of Deutsche Bank with the client-oriented approach honed at RREEF. So far, it's a strategy that seems to be paying off. Today, RREEF has more than €55 billion of assets under management, making it one of the largest real estate investors in the world. But as the activity of the past 12 months can attest, Leitner and his team show no signs of slowing down.

First, there is the firm's public securities business, which RREEF has expanded over the past few years in response to its clients' demands and the spread of REIT securities worldwide. Today, the firm manages approximately $11 billion of public securities in the US alone, according to Steppe, and they've been enjoying considerable success.

“We're doing a lot of development, more development than we've ever done in our history as a firm.”

“This year, we've had the best performance, I think, in the history of RREEF,” Steppe says. “It has been a great year for us, both on gross returns and above benchmark performance.”

Another area of growth has been the firm's infrastructure program, which has been active in Australia for a decade. Approximately two years ago, according to Leitner, the new management of RREEF began expanding that platform on a global basis. Last year, in addition to Peel Ports, RREEF Infrastructure invested in an Austrian toll road and raised €556 million for the first closing of its Pan-European Infrastructure Fund. Today, the firm has approximately €2 billion of infrastructure assets under management.

“[Infrastructure] has become red-hot, almost too quickly, because it's become fairly competitive pretty quickly,” Leitner says. “But we're still pretty excited about that asset class. We're investing in Europe now, we plan on investing in the US and we think it's a big part of the future of our business.”

Yet despite the growth in some of RREEF's business lines, Leitner stresses that the firm is not moving into new asset classes or higher-return strategies simply for the sake of getting bigger. Infrastructure and opportunity funds, for example, though important, are still a small part of the firm's overall assets. And, once again, that seems to suit Leitner just fine.

“We don't have any grand strategy to move more of our business into what might seem to be more profitable [strategies] because of more fees in the opportunity fund model,” Leitner says. “We like the combination of high-risk and low-risk. And we let our clients tell us, let the market tell us, what the mix should be.”

Due to its historical roots, RREEF's largest market by geography is the US, which encompasses approximately 55 percent of its assets under management. A significant amount of those assets are in the core sector, where the firm has long been a dominant player. However, as capital has continued to flood into the market and cap rates and yields have compressed, RREEF's management team has made a concerted effort to focus its energies on more value-added strategies.

“We're doing a lot of development, more development than we've ever done in our history as a firm,” says Steppe. “And that's really a function of ramping up the value-added side of our business, which has been client-driven.”

One of RREEF's most notable value-added deals last year was its acquisition of 119 Silicon Valley office buildings, which it purchased from local developer Peery-Arrillaga for $1.1 billion, one of the largest office deals ever in the region. The transaction, which originally was tied up by an opportunity fund, allowed RREEF to buy a large portfolio of assets in a recovering market at an attractive price, approximately 65 percent of replacement cost.

One of RREEF's most notable value-added deals last year was its acquisition of 119 Silicon Valley office buildings, which it purchased from local developer Peery-Arrillaga for $1.1 billion, one of the largest office deals ever in the region. The transaction, which originally was tied up by an opportunity fund, allowed RREEF to buy a large portfolio of assets in a recovering market at an attractive price, approximately 65 percent of replacement cost. The Silicon Valley deals fits into what Steppe calls RREEF's “tri-coastal strategy” in the US, focusing on the East Coast, West Coast and Southwest. A similar geographic focus pervades the firm's opportunistic investment program.

Out of its most recent opportunity fund, DB Real Estate Opportunities II, which closed on $1.6 billion in October, the firm's US investments have included hotels in Hawaii, Oregon and Rhode Island, as well as residential projects in Seattle and New York City. And in January, the firm announced that it had formed a joint venture with Epiphany Capital Partners to develop residence clubs in Vail, Colorado and Punta Mita, Mexico.

“The US is very niche for us,” says Brush, who heads up RREEF's global opportunity fund business.

If RREEF is pursuing a niche opportunistic strategy in the US, its focus in Europe is much broader. The firm has recently invested in everything from a vacant office building in central London to residential developments in Bulgaria, Romania and the Czech Republic. According to Brush, another investment strategy that the firm has been actively pursuing is buying operating companies with significant real estate assets.

The most visible example of that strategy occurred in November, when RREEF closed on its €1.1 billion acquisition of Printemps, the French retailer owned by luxury goods conglomerate and Gucci parent company PPR. Like similar acquisitions in the US, the Printemps deal allowed RREEF to acquire a significant amount of underlying property, which they believed was worth more than the price paid for the entire business.

“Take the main asset of Printemps,” says Brush. “It's a retail facility on the Boulevard Haussmann. That's equivalent to being able to buy Saks 5th Avenue. Now take that and say the same thing in Lyon; the same thing in Strasbourg. That is great real estate and it's not going to come up on the market and it's not being appropriately valued.”

RREEF's partner in the Printemps acquisition, The Borletti Group, also joined the firm in the 2005 acquisition of Italian retail chain La Rinascente, which it purchased from the Agnelli family for approximately €800 million. (The Borletti family originally founded the company, which owns 18 stores across Italy, including its flagship in Milan's Piazza Duomo.)

We're looking at indirect ways of acquiring real estate because the market for pure real estate is so expensive,” says Brush, explaining RREEF's European strategy. “Then we're moving to more peripheral parts of Europe like Portugal. We're moving eastward and we're moving south.”

In the east, RREEF made its first investment in Russia last year, focusing on the residential market in order to capitalize on many of the same trends seen in Eastern Europe: high economic growth rates, a growing middle class, declining household sizes, inadequate housing stock and a burgeoning mortgage market.

“Deutsche Bank has a very significant presence in Russia with many political and business contacts, which we can leverage,” says Brush. “Without that kind of on-the-ground expertise and connections, we would not have attempted to enter the market.”

The firm's first investment in Russia was a joint venture with a local developer, RBI Holdings, to build approximately $500 million worth of medium- to high-end residential projects in St. Petersburg. Brush notes that Russia's second largest city is a much more attractive market than Moscow, which has already attracted a significant amount of foreign and domestic capital.

According to Roeloffs, a similar thesis applies to the firm's strategy in another emerging market, China. “When you look at the weight of capital in first-tier cities like Shanghai and Beijing and its impact on affordability, it is clear that China's secondary cities have the best fundamentals,” he says. “And you naturally gravitate to those opportunities.”

As in Russia, 2006 saw RREEF make its entry into China, investing in a mid-market, mass residential project in Zhuhai, which is located near the gambling mecca of Macau. The firm, which took a 50 percent stake in the $225 million project, teamed up with three local partners in the transaction: Macau-based real estate investor New Genesis, local developer Zhuhai Zhong Zhu and sister company Zhuhai SEX Xihai Group.

“Finding a good operating partner is the most important thing to get right in China,” Roeloffs says, adding that the firm has been investigating opportunities in the country for some time. “But making the right selections has been well worth our time and patience.”

RREEF wasted little time in making its second investment in China, when, in December, it teamed up with H&Q Asia Pacific and Hilton to develop 20 limited service hotels in the country.

Outside of China, another important market for RREEF is South Korea, which is benefiting from stable growth and asset sales from large conglomerates. Although the possibilities for opportunistic-type returns have diminished in recent years, Roeloffs says that there is a lot of potential for generating stable returns and capital appreciation. Last year, the firm received a mandate from one of the country's largest institutional investors to spend $800 million on core office properties in Seoul, Pusan and other secondary cities.

“Our most rapidly growing market for core is Japan and Korea,” Roeloffs says. “You couldn't do core in Asia four or five years ago. With the maturation of the REIT market and the sophistication of clients, core investing is viable.”

The Asia-Pacific region currently accounts for approximately 14 percent of RREEF's assets under management, but that is expected to grow signifi-cantly in the near future. Australia is the firm's largest market in the region given RREEF's presence in core assets, infrastructure and public securities. But countries such as Japan, where both core and opportunistic strategies are being pursued, as well as China, Korea and Singapore are all becoming increasingly important. And though the firm has yet to make an investment in India, they are certainly looking—according to Roeloffs, the firm will likely announce something soon.

“[Infrastructure] has become red-hot, almost too quickly, because it's become fairly competitive pretty quickly. But we're still pretty excited about that asset class.”

that Roeloffs, who is now based in New York but previously spent time in both Hong Kong and Japan, will soon be moving to Singapore. “This is my third tour of duty in Asia,” he says. “And we expect to significantly expand our geography, products and clients during my stay.”

As the firm expands its presence in Asia and around the world, be it in hard real estate assets, public securities or infrastructure, Leitner says RREEF will be able to leverage off the global presence and research capabilities of Deutsche Bank—a key selling point for investors. According to Brush, however, there may be an even more important selling point: the four people sitting around the conference table.

“Kurt and I have worked together for 20 years. Chuck and Steve have known each other for 30 years and have worked together for 18,” he says. “When you have to make decisions across a global platform, having a team that understands each other and communicates—you can't do it without that.”

You also can't do it without burning the midnight oil. So forget about the past 24 hours or the past year. Leitner, Steppe, Brush, Roeloffs and the rest of RREEF's management team will likely have many long days (and nights) ahead.