The US giant is digesting some substantial corporate acquisitions, which it intends to use as a platform for growth
Arriving in the UK in 1986, GE Capital Real Estate has built up more than a decade of experience in what is still, for many US investors, the relatively uncharted territory of Europe.
Two strategies are driving GE Capital’s expansion into Europe – responding to local real estate cycles, and forging a global business.
The size and range of GE Capital’s operations mean that the company is a long-term investor, that plays in different ways across the spectrum of the property cycle.
“We don’t enter markets to play short term; at the first sign of problems or turmoil, we don’t close up shop,” comments Jeff Malehorn, vice-president in charge of GE Capital Real Estate’s European operations.
The value of GE’s European real estate portfolio has quadrupled over the past five years. Net earning assets – income-producing assets at book value – in 1994 stood at $937m; at April this year, the company owned European real estate assets worth $3.7bn.
These assets are a mixture of directly-owned real estate, stakes in operating companies and real estate loans.
The business is divided into broad categories: equity, debt and capital markets.
This distinction incorporates a diverse range of activities that includes direct ownership of real estate, straightforward debt finance, mezzanine finance, and securitisation of both equity and debt.
Last year, GE Capital Real Estate globally originated new business totalling $9.4bn; $3.2bn of this was outside the US, in Europe, Asia, Australia, Canada and Mexico.
This year the global target for new business is $11bn, of which $1.5bn is expected to be found in Europe.
The company has six European offices, in Paris, London, Madrid, Stockholm, Vienna and Frankfurt. The rapid growth of the business has been accompanied by a turnover of senior management and a shift of the European base from London to Paris.
Malehorn has been in charge of Europe since the beginning of the year, moving to Paris from the US in March. He took over from fellow American Paul Borghard, who has transferred back to GE Capital’s US operation. Borghard had been at the European helm since January last year, when Richard Powers left GE in London to set up New Europe Properties.
Malehorn has been at GE Capital for 15 years, the last eight of them in the real estate division. His most recent responsibility before taking up the Paris-based European role was head of new business origination in the US.
His objective is to continue to build the long-term structure in Europe. “My goal is not to come in and identify opportunities and then exit strategies. It is to capitalise on the acquisitions and business we’ve already done and to continue to grow the business here – both the operating businesses and the property finance.”
In maturing markets where a platform has already been created through equity investment and joint ventures with local partners, one aim is to develop the straightforward debt finance side of the business, he says.
Development is not at the top of the agenda, but will be considered in partnership with local players. The joint venture with Grupo Monthisa Parque in Spain is a prime example of GE taking development risk.
In terms of new territories, the company is looking for opportunities in countries in which it is “intrigued by the overall supply and demand”. Malehorn cites Italy, Germany and Switzerland as locations that are particularly intriguing.
The deals it is looking for in these markets are likely to be large, distressed debt portfolios or corporate real estate flotations, where GE can bring to bear its financial clout and experience of similar transactions in the US.
The rationale for expanding in Europe is more one of increasing the overall volume of GE Capital Real Estate’s business than seeking higher returns.
Malehorn is reluctant to pinpoint specific targets for the business, but says the sort of returns it is looking for, in broad terms, are “low to mid-teens” on mezzanine finance deals, and “mid-teens to 20s” for equity investments.
Despite wanting to exploit its international reach, GE is not trying to impose a template over a united states of Europe. “Each of these markets have very different characteristics and play differently,” says Malehorn.
Recognising this, the structure of GE Capital Real Estate in Europe is one of autonomy for each of the local businesses, “unified by the global resources of one company”.
These resources are substantial: GE Capital, based in Stamford, Connecticut, is the financing arm of one of the world’s largest corporations, General Electric Company.
GE Capital has total assets of more than $300bn worldwide, with real estate as just one of 28 specialised businesses that range from insurance to car leasing to credit cards.
In the US, this global financial experience has led GE to be one of the biggest players in the commercial mortgage-backed securities market. This is one area where the company might look to provide a pan-European approach in developing European CMBS issues.
Despite the turmoil in the US mortgage-backed securities market last year, Malehorn believes that there is still potential to develop the technique in Europe.
“Capital markets is an integral part of the business in the US and we see it as an integral part of the business in Europe,” he says.
Malehorn sees three types of capital flows that will underpin GE’s activities in Europe: crossborder transactions within Europe; US money into Europe; and European money back to the US.
Last year was largely taken up with the consolidation of some big transactions that came out of the property crash in Europe; the challenge facing Malehorn now is to refocus the business and adapt it to the recovery stage of the European cycle.
UK
First entered the market in 1986, and has focused on direct investment with joint venture partners. Has closed more than 22 portfolio deals and currently owns around 370 individual assets, valued at $1.1bn. The target volume of business for 1999 is $512m.
Most recent large transaction – £92m bid for Chesterfield Properties’ London portfolio, March 1999; negotiations ongoing
Managing director of the London office -Mark Collins
Number of employees – 25
Scandinavia
Stockholm office opened 1995, handling Sweden, Norway and Denmark. Owns a portfolio of 270 assets, more than half of them residential. $300m of net earning assets in Sweden; $100m in Denmark. The target volume of business for 1999 is $130m.
Landmark transaction – acquisition of a $360m NCC investment portfolio in 1997, in joint venture with Morgan Stanley
Director in charge of Stockholm office – Svante Wadman
Number of employees – 8
France
Paris office opened 1996. Rapid growth in 1997-98 through three corporate acquisitions – 100% purchase of quoted company UIS, with assets of $2bn; 50% stake in UIC with Goldman Sachs; and 40% stake in ISM, with Bankers Trust and JE Roberts.
GE Capital UIS now owns about 3,100 assets worth more than $2.4bn. The credit bail leasing activities of UIS amount to some $1.3bn, while the real estate operating portfolio is worth around $800m. The objective is to double the value of the direct property portfolio during the next 24 to 30 months, according to director Philippe Jouan.
The target volume of business for the French operations in 1999 is $411m.
Most recent large transaction – acquisition by GE Capital UIS of 12 office buildings from Sefimeg, April 1999
President of GE Capital UIS – Olivier Piani
Number of employees – 90
Spain/Portugal
Madrid office opened 1997; formation of joint venture with local operator Grupo Monthisa Parque to acquire Madrid property company Renta Inmobiliaria (GE share 80%).
Net earning assets of $100m; target volume for 1999 of $145m.
Director in charge – Simon Foxley
Number of employees – 20
Germany/Switzerland
Frankfurt office opened 1998. Investigating opportunities in commercial and residential sectors.
Director in charge – Elfi Garthe
Number of employees – one
Central Europe
Vienna office opened this year. A joint venture with US developer Golub has been in place since 1996. The venture has developed six commercial projects in Hungary, the Czech Republic and Poland. GE Capital’s investment in these schemes adds up to around $30m.
Director in charge – John McCarthy
Number of employees – one
GE Capital Real Estate
4 avenue Percier
75008 Paris
tel +33 1 44 13 15 00
fax +33 1 42 25 02 29
www.gecapitalrealestate.com
