Chinese wealth fund enters German residential in year's biggest deal

The long saga of the German residential portfolio most recently held by BGP Holding entered a historic new phase last week when giant Chinese sovereign fund China Investment Corporation (CIC) as the beneficial owner beat off lively German competition to snatch one of the largest residential portfolios not yet held by Germany's dominant listed companies. The move comes on top of a series of recent large acquisitions by Chinese investors in strategic German industrial assets, and represents the first time a big Chinese group has entered the German residential market in any scale.

The €1.2bn sale (including debt) of the BGP portfolio to fund vehicles managed by Morgan Stanley under instruction from majority owner CIC brings a welcome outcome to the long-suffering shareholders of BGP, for whom the portfolio has had a long and chequered history.

The portfolio consists of 16,000 residential apartments located in Berlin (40%), Kiel, Rendsburg and Cologne, with a small commercial component on the ground floor of a number of the properties. The sale of the portfolio represents the largest residential transaction in Germany this year.

The Morgan Stanley funds are buying both the business and the assets of Luxembourg vehicle BGP Holdings, which itself was originally a joint venture between Australian groups Babcock & Brown and GPT. Babcock and Brown filed for insolvency in 2009, crushed by its heavy borrowings which had seen the group invest €4.5bn across twelve European countries via more than 250 special purpose vehicles and minimal equity.

The portfolio was subsequently sold to BGP Holdings, which through its own history, including the issuing of shares to Sydney-listed property group GPT, is backed by several large investors, including Och-Ziff, Bennelong and Baring Capital, along with 58,000 private individuals. The group has sold off most of the assets it inherited, and the sale of the 16,000 apartments represents its final disposal of residential assets in Europe.

A report by news agency Reuters last Friday suggests that among those beaten out in the bidding for the portfolio by Morgan Stanley were the two largest German residential investors, Vonovia and Deutsche Wohnen, among nearly twenty other original bidders. This would suggest that Morgan Stanley and their Chinese investors were not afraid to pay top dollar for what is viewed as a portfolio of mediocre quality.

However, the regional compactness of the portfolio in the northern part of Germany and its solid management structure are thought by market observers to offer the new investors the basis for building a solid longer-term platform for future acquisitions, albeit preparing themselves for a certain amount of necessary capital expenditure. The deal is also likely to be viewed as a vote of confidence in further continued growth in the German residential market, amid renewed speculation of a general overheating of prices.

BGP Holdings had twice considered a flotation on the Frankfurt Stock Exchange as a possible exit, and in 2015 pursued talks with Austrian residential investor Conwert Immobilien about a sale before negotiations collapsed. It engaged JP Morgan to review its possible options – a trade sale or an IPO – before withdrawing the portfolio from sale in October 2015, at the time citing "bids that were undervaluing the company."

Rod McGeoch, the chairman of BGP Holdings, summed up the turnaround represented by the sale and what it means for the company's shareholders: “The sale of the portfolio is a highly commendable outcome, given the starting point in 2009 of a company with no value and negative equity, to now being able to realise nearly €600m on behalf of our patient shareholders. The transaction marks the end of a long and, at times, difficult journey to restore value to the BGP portfolio and is made all the more commendable in light of current market volatility.”

He added that the sale had been made more complex by the prevailing “volatile and unpredictable market conditions”, but BGP had remained "resolutely focused on its German residential portfolio, increasing asset values by renovating properties and cutting vacancy, as well as increasing rents. At the same time we have disposed of under-performing retail, commercial and light industrial properties, as well as selling many of the less prospective residential units,” he said.