Back to opportunistic roots for Corestate, exits ‘core’ sector

The Zug, Switzerland-based specialist for German opportunistic real estate investment, Corestate Capital, has been muttering about the difficulties of finding new value-add opportunities for some time. It had traditionally left the field of ‘core’ investing to others, preferring to focus on maximising its grass roots network to locate and identify underperforming residential portfolios which it could buy at a good price and upgrade.

So it was somewhat of a surprise last year when the group adopted an “If you can’t beat ‘em, join ‘em” approach to core property by setting up its own core investor division, to tap into the steady stream of funds looking to invest in ‘core’ German properties, which as CEO Ralph Winter commented last year, “is just getting more and more expensive”. The reasoning was simple – given the steady demand, and with such assets being essentially simpler to manage than the complicated hotch-potch of individual assets in the portfolios the company normally buys, it made sense for Corestate to extend its product offering.

Barely six months later Corestate has reversed that strategy and dissolved the new ‘core’ division. Two top managers from IVG Institutional Funds, Steffen Ricken and Oliver Zimper, have returned to IVG to continue to invest in the sector from there. CEO Winter commented on the change of tack, “We’ve been looking carefully at them market for the last six months, and have now come to the conclusion that prices are overheating. Demand isn’t actually falling, because new money keeps driving into the market. Yields are too low, and there are simply too many mediocre fund managers out there trying to invest.”

With yields after costs of a typical 3%, Winter views the business as essentially not worth it. “The high degree of liquidity in the market is pushing conservative investors into apparently safe investment assets, which is leading to very high prices in the Core segment. The expected safe cash flow should not detract from the fact, however, that in many cases the yields are very low compared to other available returns in Germany. With ever more bidding processes for top assets, deals are being concluded at ever-higher price levels.”

Corestate will, however, invest up to €500m in Germany this year based on its preferred strengths, actively managing assets and taking up to 25% equity stakes in investment. For Winter, it’s back to the value-added and opportunistic sectors, in particular individual undervalued assets, project financing, and commercial properties with expiring lease agreements, he says.

In line with its trading philosophy, Corestate earlier this month sold a residential portfolio with 2,400 units to the rapidly-expanding listed Adler Real Estate AG, for an undisclosed price. The assets are located in Helmstedt near Braunschweig and Wolfsburg in northern Germany, and were acquired as recently as September 2012 from former E.ON subsidiary WBG in an off-market transaction, since when they’ve been upgraded.

According to Thomas Landschreiber, Corestate’s chief operating officer, “We were able to implement our capital investment programme and eliminate the maintenance backlog due to our local asset and property management teams while improving the overall quality of the portfolio in only 14 months. The repositioned portfolio was now acquired by the listed Adler Real Estate company as part of its expansion strategy.

“This transaction compliments the existing portfolio of Adler since they are focussing on B-location residential properties with a positive cash flow. This deal underpins the existing strong demand for stable residential portfolios. Especially long-term oriented portfolio managers who expect strong single-digit returns show an increased interest. Corestate Group will continue to focus on management-intensive real estate portfolios that show a potential for value increase.”

Separately, Corestate said that over the course of 2013, the company bought portfolios for €460m, while disposing of assets for €481m. Returns for investors in these club deals was an average equity multiple of 1.6 times and an average Internal Rate of Return of 32% per annum. Again, COO Landschreiber credited the returns to the company’s deal-by-deal approach and exit-driven business model. For 2014, the group is taking a closer look at anti-cyclical investments across the continent. “Stressed markets such as Spain or the Netherlands show an increasing number of investment opportunities at measureable risk. Still, with interest rates at an all-time low, Germany continues to offer an extremely good environment rarely found elsewhere in Europe”, he said.