Winter's day

During his years at Cerberus as head of real estate in Germany, Ralph Winter oversaw billions of euros worth of acquisitions. Having launched his own firm, Corestate Capital, Winter talks with PERE about his firm's strategy, the current investment climate and how to choose the right name. By Robin Marriott

Berlin, May 25, 2004: a city and a date stamped in the memory of Ralph Winter, founder and chairman of Corestate Capital, as a milestone in his career.

At the time, Winter was head of real estate in Germany for US investment firm Cerberus Capital Management and, on that late spring day, he had just presided over the closure of a controversial €2 billion ($2.7 billion) acquisition of GSW, a residential company owned by the State of Berlin with 65,700 flats under management.

The sale to Cerberus and partner Goldman Sachs was controversial for several reasons, not least because there were fears that the new owners would kick out tenants. Local elections at the time added to the tension. Berliners were deeply suspicious of private equity—and secretive Cerberus was a relative unknown.

Nevertheless, the firm prevailed. It took seven months, countless meetings with 45 senators at Berlin's Parliament, the Abgeordnetenhaus, and even an event for 600 politicians, city honoraries and pressure group representatives to meet the team. Winter was spending four or five days a week in Berlin explaining Cerberus's strategy.

“We showed people our targets and that there were humans in the background running the business,” he says. “We were able to convince the government that we were a partner who could pay a big price but, more importantly, that we would respect all contracts and do something for the tenant, not against the tenant.”

Taking a similar approach to buying a public sector asset nowadays would be difficult, he implies: “What we saw in later auctions was too much resistance from government.”

Today, with a CV boasting billions of euros worth of acquisitions for Cerberus, Winter is in a very different position. He no longer spends his time trying to win over Berlin politicians or answering to his masters at Cerberus in New York. Winter now has his own firm, Corestate Capital. He runs it from Zurich, Switzerland, a location he calls “the best compromise between work and life.”

Living near Lake Zurich with his girlfriend, a doctor, he says: “The balance is fantastic, life is safe and people are much more relaxed than anywhere else in Europe.”

Winter left Cerberus in May 2006 to set up Corestate at a time when the opportunities for private equity real estate funds seemed to be drying up. “We had a very good time there but we saw that the opportunistic time frame was more or less over,” he recalls. Interest rates were rising, prices were coming up and competition from suitors with cheaper equity was getting more intense. Winter decided it was time to move on, but the way he did it sent shockwaves all the way to New York. A number of colleagues followed him out of the door, including Thomas Landschreiber, who became the chief operating officer at Winter's start-up.

Lessons learned
In building his new business, Winter applied the experience gathered during his four years at Cerberus, starting with the name. “Corestate,” which corporately is spelled out in capital letters, doesn't mean anything in particular, but that was precisely the point. “Cerberus” is named after the three-headed hound of hell in Greek mythology, with connotations that Winter felt were not helpful when dealing with third parties.

“I think you have to avoid an aggressive name,” he says. “I never thought it was an advantage to have the Cerberus name. That was not funny for us.”

Another, more positive lesson he learned was the importance of meeting the right people to secure support for a transaction. At Cerberus, Winter and his team worked hard to meet politicians—so much so in fact that they were beating local competitors to the deals. For example, in the GSW sale, Cerberus and Goldman went head-to-head with Apellas Property Management. Though Apellas was backed by American speculator George Soros, Apellas viewed itself as a local firm that would beat their foreign rivals. They were wrong.

Even though the relationship didn't last, Cerberus' decision to work with Winter was a smart one. In Germany, it helps to speak German to do deals, and Winter acted as a bridge between Germany and the US firm. The son of a driving instructor and born just outside Frankfurt, he studied in his home city and gained his first professional experience in New York, and even came with the added advantage of having already run a German real estate company, SAB. This was all crucial when meeting politicians in Berlin.

“A senator doesn't want to speak to someone in New York,” Winter says. “He wants to be able to pick up the phone and say, ‘Ralph, this is my concern.’”

An early payback
Winter's prediction in 2006 that the days of buying large portfolios of German residential property and waiting for capital appreciation would end appears to have come true. Indeed, there have been more sales than acquisitions recently, and Cerberus is cashing in its chips. In August, the firm sold its BauBeCon portfolio for €1.6 billion to Italy's Pirelli and Deutsche Bank's RREEF, in one of the latest transactions.

Corestate's strategy is very different from the mega-deal approach. The firm is buying small- and medium-sized assets below the radar of the larger funds. “It is a very German play,” Winter says. Corestate relies on relationships and connections to families and insolvency receivers, as well as small and regional real estate brokers. It is dealing with sellers who do not want to negotiate their deals in English or have any lawyers at the table. What they do want is to get the deal done quickly, “sometimes in one or two weeks,” says Winter.

At the time of ING's investment, Corestate had a pipeline of approximately €100 million and was moving fast: So fast, in fact, that in February 2007—just a few months after drawing down capital for the first time, generating income and completing a first exit—Corestate was able to pay investors a dividend.

The strategy is all about targeting mismanaged assets and managing them better. Value creation can be achieved by using local networks to buy property at reduced rates, then working hard at lowering vacancy rates within the portfolio. “You have to look in much more detail at the asset,” says Winter. “What we had done at Cerberus was to not focus in detail on the assets. Day-by-day, prices went up. [In addition to the GSW deal,] we built up an additional €800 million portfolio by buying €70 million [and] €80 million portfolios which were considered small at the time. Today, small means €10 million.”

In pursuing bite-size investments, Corestate is taking advantage of the fact that Germany has developed less of an asset management approach to property than Anglo-Saxon countries. Until recently, most of the residential stock has been in the hands of municipal owners, and few people have given much brain power to what can be done with certain assets. What Corestate and others are now doing is thinking about hands-on engagement, from condo conversions to refurbishments.

Corestate originally planned to list its first fund,CORESTATE German Residential, but the idea was dropped in the face of waning investor appetite for IPOs. Winter then began to turn his attention to sourcing private capital and has raised almost €500 million for the fund which, including leverage, aims to invest €2.5 billion at a rate of up to €100 million a month.

The team's track record from the Cerberus days was instrumental in persuading investors to back the fund. Marketing the product brought the kind of challenge usually facing first-time funds, but a breakthrough came when ING Real Estate Select in London began to show interest. ING liked German residential property—and then came to like Winter and his team as well. The result was that ING decided to back Corestate by seeding the fund with €45 million.

At the time of ING's investment, Corestate had a pipeline of approximately €100 million and was moving fast: So fast, in fact, that in February 2007—just a few months after drawing down capital for the first time, generating income and completing a first exit—Corestate was able to pay investors a dividend.

Other blue chip investors have come into the fund, such as CBRE Investors, Schroders, Lloyds TSB and the Shipbuilding Industries Pension Scheme (SIPS), based in Sheffield, UK.

According to Winter, the firm's network allows it to source assets outside of auctions and at lower prices. As a result, Corestate can afford to acquire properties at an 8 percent cap rate against the 6.4 to 7 percent currently being paid in the sector.

And it seems there is no shortage of opportunity. Properties often have vacancy levels running at 20 percent: If a buyer is capable of reducing vacancies to 5 percent, they would have plenty to work with. Another potential value driver is increasing the rent, although given Germany's stringent tenancy laws, private equity buyers of large residential portfolios have often struggled to do this effectively.

Corestate's residential fund has bought thousands of flats already. During a three-week spree in February and March, it acquired 6,020 flats for around €280 million from 11 different owners in Berlin, Leipzig, Frankfurt, Bremen and Hamburg.

The next challenge will be to convince investors to commit capital to its second vehicle, the German Commercial Properties Fund. Similar to the residential vehicle, the commercial vehicle has a target of €500 million and will aim to invest approximately €2.5 billion. Winter predicts 70 percent of the total will be invested in the recovering German office sector, particularly in second-tier cities.

Stepping into commercial real estate might not seem like an obvious step for Corestate, but then again, Winter has a track record in this sector, as well. While he was at Cerberus, the firm acquired more than €1.5 billion of commercial assets.

To achieve its deployment targets, Corestate is working with regional brokers who bring the firm approximately 100 deals a week, which the team then analyzes. Approximately 50 percent of these deals are commercial property.

As the firm looks to expand into the commercial sector, it has learned that its team is just as important as its deal flow. Earlier this year, Manfred Hillenbrand, a market veteran of 20 years and founder of broker Knight Frank in Germany, joined Corestate to manage the commercial property team alongside Winter and Landschreiber. The firm has also hired Christian Schulte Eistrup, the former head of European real estate strategy and research at Morgan Stanley, as head of capital raising and investor relations.

Already the group employs 60 real estate professionals working out of offices in Frankfurt, Zurich and Bochum, a mediumsized industrial city in Germany's Ruhr District. Bochum is the headquarters of the Dr. Ochel Gruppe, a specialist condominium privatization company with 30 employees. Corestate acquired a majority 51 percent stake in the company in March.

With such a large team in place, expect Corestate to look at other opportunities in specialized sectors and maybe even outside of Germany. Switzerland, where the firm is based, is a potential target—despite the small size of the market and restricted access to foreigners.

The coming months will see Winter and his colleagues flit between Zurich, Frankfurt and beyond. The team will be in Munich this month for the Expo Real trade show to increase awareness of the firm and hopefully drum up more deals. The event comes at an interesting time for real estate investors, with the effects of the global credit crunch beginning to trickle down to all levels of the real estate universe.

Many say a tougher environment will help sort the men from the boys. Corestate might still be a young outfit, but what the firm has done so far suggests it has what it takes to cope with a downturn. Investors are taking notice. “Winter is a dealmaker,” says one. “He understands how to make money.”

As long as this understanding doesn't desert him, Winter may be on his way to building a prosperous real estate investment firm.