BEOS on its way to €1bn firepower for third industrial fund

BEOS, the Berlin-based commercial real estate asset manager and project developer led by Professor Stephan Bone-Winkel, has raised €600m in its first closing for its third open-ended Spezialfonds, following on the heels of its highly successful first two similar funds, which were likewise heavily over-subscribed.

Among the 30 institutional investors backing the BEOS Corporate Real Estate Fund Germany III (CREFG III) are insurance companies, occupational pension funds, savings banks and not-for-profit foundations. With projected borrowings of 42.5%, the fund now has €1bn in firepower to invest.

As with predecessors CREFG I and CREFG II, the fund will invest in high-yielding existing mixed-use properties in Germany’s stronger economic regions. It expects to be fully invested within three years. BEOS’s speciality is industrial property that doesn’t fit into the classical categories of ‘office’, ‘retail’ or ‘logisitic’, but is more like ‘flexible light industrial’ that can be used for production and manufacture, storage, repair and maintenance, research, administration, or even include showrooms.

According to CEO Stefan Bone-Winkel, “With this increased fund volume we can now do transactions of upwards of €100m with large Mittelstand companies, and hence open up entirely new segments of the industrial property market”. The average however is likely to be €25m-30m per property

The fund predicts returns of 6.5% annually after deduction of costs and charges, with the duration of the fund set for ten years.. Investors in the latest fund are exclusively domestic institutional investors, including those who failed to get a full allotment in the earlier funds, particularly CREFG II.

The first deals are already being lined up for the new fund. Three industrial properties in Berlin, Hamburg and Cologne with a total volume of about €200m are currently being closed on. Three-quarters of the fund’s capital will be targeting Germany’s Big 7 cities, with a quarter reserved for B-cities such as Hannover, Regensburg, Ulm or Karlsruhe, said Bone-Winkel.

Altogether this year BEOS expects to invest €450m, with the bulk of that earmarked for assets in its CREFG II fund as well as the new fund, along with about €150m for project developments. Last year BEOS bought eight assets for €350m, of which eight were for the second fund.

CREFG I, the first fund, was set up in October 2010 and reached a volume of €400m with 22 properties. BEOS’s second fund, CREFG II has a volume of €630m (far more than the original €400m planned), and with 17 properties is now 82% invested, while expecting to buy at most a further four assets. Both funds are so far meeting their targets of paying out 6.75% to 7.0% to their investors.

Founded in 1997, the company has grown rapidly in the past few years to 70 employees, including a further 27 staff between 2012 and the end of this year. It has offices in Berlin, Hamburg, Frankfurt, Cologne and Munich. It currently has 55 commercial properties under management with 700 tenants, with 1.8m sqm of lettable space valued at more than €1.5bn.

REFIRE: In an article in the German business press recently, Professor Bone-Winkel criticised the tendency of investors to justify current low yields by comparing the spreads available on real estate over the return on risk-free government bonds. This gives an overall false impression of yields available in asset categories which might not necessarily be those in which the majority of investors are competing with each other, and hence driving yields downwards on those assets, he rightly says.

He cites open-ended public real estate funds and certain special funds as probably achieving a yield of one percent in the current climate, similar to a private investor buying a multi-family house for a factor of thirty times annual rent (not untypical in a city like Munich, for example), who would be lucky to even make that. In 2008 the 10-year German government bond was paying 3.99%, while initial yields on a core German office property were about 5%. Today the government bond yields 0.31%, while the real estate asset returns 4%. And - hey presto! - a much improved spread of 3.7% for today’s investor.

Bone-Winkel cites our old friend Robert Shiller (of the Case-Shiller Index) in the revised third edition of Shiller’s book “Irrational Exuberance” warning of a coming bubble in bond prices. The actions of the Fed, and now our own European Central Bank, in buying up available bonds – and signalling to issuers that they are prepared to “do what it takes” to buy up any amount more – are leading to major distortions on bond markets. 2% on Spanish government bonds – the lowest ever recorded – and effectively negative interest rates on a third of European sovereign bonds make the comparison with the risk-free vehicle no longer a valid measure of satisfactory returns on European real estate, he says.

Bone-Winkel’s argument that investors need to be seeking out more profitable niche segments rather than all chasing the same elusive assets is given added weight by the success of his company’s approach to date. The equity flowing into his latest fund suggests that in Germany, at least, many domestic investors are starting to see the light.