KKR and DIC bundle German interests to create new force

In a number of statements last year about the future of Germany’s listed commercial real estate sector, Ulrich Höller, the head of the listed Frankfurt-based DIC Asset AG forecast a likely wave of consolidation in the sector, similar to what the German residential sector is experiencing.

Höller was likely speaking with an insider’s understanding of how such steps would be realised in practice. Earlier this month Deutsche Immobilien Chancen (DIC), one third owner of DIC Asset AG and likewise headed by Höller, announced that it was partnering in a new investment vehicle with prominent US private equity firm KKR to invest in Germany’s office and retail sectors. The new company, GEG (German Estate Group), is likely to become a significant investor in German commercial property.

GEG will invest its own capital as well as third party money, and will be KKR’s sole route into German real estate. The primary focus will be core property, but it will also invest in riskier assets and project developments.

The new group will be headed by Höller, and will see Deutsche Immobilien Chancen, which is backed by investment companies and insurance firms, transferring its operational business to GEG, including about 40 professionals who will continue to manage its major current project developments MainTor in Frankfurt and the Opera Offices in Hamburg.

Höller will resign as CEO of Deutsche Immobilien Chancen Group, but will remain as head of DIC Asset until the end of 2015. DIC Asset manages more than €3bn in assets for itself and third parties in a fund division launched three years ago. It posted FFO figures for 2014 of €48m, up 5% on 2013, while buying property assets for €180m and selling assets worth €162m.

In a statement, Deutsche Immobilien Chancen said, “GEG will be an active investor across the core sector, opportunistic transactions with appreciation potential, and development transactions. GEG will invest its own capital and third-party money.”

“The creation of GEG is a continuation of KKR’s commitment to German investments, having built a successful investment track record, with more than $4.4bn of equity deployed in 15 German companies since 1999,” the statement said. It is also an important step for KKR’s real estate platform which has committed over $1.6bn of equity to 26 deals worldwide since its launch in 2011.

In the first phase DIC will hold a 75% majority of the new business, but KKR says it plans to acquire further shares in the medium term and become a 50% joint partner. A report in Reuters suggested that KKR plans to pump at least €5bn over the next five years into the German office and retail segments.

Ralph Rosenberg, KKR’s global head of real estate, commented: "With this new platform, we will be able to accelerate our access to investments in Germany across the risk spectrum."

At a press conference in Frankfurt a week ago, Ulrich Höller said that the listed DIC Asset AG, primarily responsible for asset management, would not initially form part of the new GEG vehicle. “DIC Asset is not part of the deal as return expectations from the US were too high. However, joining may be an option for the future as consolidation will be a major theme in the overall commercial real estate market going forward.”

As for GEG’s investment strategy, said Höller, GEG will focus on investments in trophy assets above the €80m mark and, investing alongside other institutions, on opportunistic investments – as soon as that market picks up again in Germany, he added. GEG will also seek €50m-plus developments, including high-end residential, in the 10 largest German cities. “We will start slowly this year but we’re seeing offers already coming in.”