Corestate bullish on German retail ahead of Asian inflows

The Swiss-based private equity group Corestate Capital has been both a big buyer and a seller in recent weeks, as it realigns its strategy towards higher, risk adjusted returns on capital in second-tier cities. Corestate's original primary market was undervalued residential across Germany for renovation and subsequent re-sale.

Last week Corestate sold a portfolio of six office properties, which are let out long-term to Deutsche Telekom AG, which it had originally bought in May 2013. The properties are located in the cities of Ansbach, Bonn, Flensburg, Freiburg, Regensburg and Stahnsdorf near Berlin. The portfolio has a combined lettable area of 144,000 sqm plus 1,170 underground and surface parking spots. The net annual rent, excluding utilities and based on the properties’ current full occupancy, amounts to roughly €14.8 mln.

According to Sascha Wilhelm, Corestate's COO, "Using sound timing, appropriate asset management measures and securitised debt, we managed to ensure sustainable rent revenues and to optimise the cost-income ratio. We will continue to handle the asset management for the portfolio, and facilitate the strategic alignment of the new owner."

Earlier the Zug-based Corestate paid €370m for 35 retail assets located throughout pedestrian zones in German mid-sized cities. The portfolio comprises more than 170,000 sqm and is let to a range of tenants including C&A, Deutsche Bank, H&M, Peek & Cloppenburg, opticians Fielmann, grocer Rewe and electronics retailer Saturn. Corestate said it build up the retail ensemble asset by asset

Tobias Gollnest, director for commercial real estate of Corestate Capital, said: ‘Our local knowledge is the key factor for successfully finding these opportunities. This type of approach needs a lot of detailed work on the ground and Corestate benefits from its 16 subsidiaries across Germany, which makes this possible.

"The appetite for higher risk adjusted returns in secondary cities is definitely growing. We notice that large players are currently looking into this segment. Higher returns based on top covenants are very rare in today's market environment. We see high potential in this market and will continue to pursue this strategy."

Speaking last week at the ULI Urban Leader Summit in Frankfurt, Corestate's founder and chairman Ralph Winter outlined his rationale for the group's recent retail commitment. Despite the rise of internet commerce, he said, there is still a lot of pedestrian traffic in attractive downtown shopping areas.

After opening an office in Singapore to present opportunities to Asian capital some years ago, Winter is more bullish than ever on Germany and sees a huge wave of capital coming into Europe from Asia, for which Corestate can play a real leadership role in Germany. The attraction of Germany, with its industrial Mittelstand, is its myriad of interesting secondary markets and sub-markets reflecting the diversity of its industrial structure, he said.

The wave of liquidity flooding markets means "it is not easy to lose money right now", commented Winter. Although also looking at investments in Spain, "where, with banks coming back into the business, you could now now buy at 200-300bps better cap rate than in Germany", Winter stressed that Corestate would be "continuing to focus on the market we really understand – Germany".

"Eight out of ten of the wealthiest Asians made their fortunes in real estate, but now with rising Asian volatility, what they're increasingly looking for are the mature markets of Europe", said Winter.