US property guru Sam Zell has pulled out of New Europe, the real estate fund he set up in partnership with Credit Suisse First Boston earlier this year. Instead, he will focus on global emerging markets including Asia and South America through a new vehicle, Equity International.
Zell announced plans to invest up to $1bn in eastern Europe’s property markets through Emerging Europe Property Co, which was later renamed New Europe. But he has since decided Europe’s markets look over-shopped.
“We’re not looking at Europe, we’re looking at the world,” said Zell. “To a large extent in western Europe the amount of capital chasing the opportunities is out of line and the kinds of return we want are not achievable.”
According to Zell, his western European investments “are likely to be one-off special situations” while “significant investments will be elsewhere”.
The new global fund, Equity International, will function as a five-year closed-ended fund with a projected internal rate of return of around 20% pa. But instead of winding the vehicle up in 2003, Zell plans to float it on the New York Stock Exchange.
Zell is not completely turning his back on eastern Europe. Some of the real estate purchased by New Europe, including offices in Kiev and Baku, will be transferred to Equity International.
Meanwhile, Credit Suisse First Boston’s New York property investment operation, led by Andy Stone, has taken over the New Europe vehicle. Richard Powers, who resigned earlier this year as head of GE Capital’s European property arm to work with Zell on New Europe, is now running it for CSFB.
In Europe, Zell’s Equity International will focus on high-yielding eastern European property. Hungary and the Czech Republic are top of its shopping list, although it is also looking at the UK and Germany.
Peter Linneman, formerly director of the real estate faculty at the University of Pennsylvania, will head the company, which will eventually employ around 35 property professionals. Equity International is seeking joint venture partners outside the US but has no immediate plans to appoint agents.
Equity International will be owned by Equity Group Investments, Zells’ private holding company that owns stakes in four US Reits including Equity Office Properties Trust, the US’ largest office landlord, and Equity Residential Properties Trust, the owner of over 104,000 apartments.
Zell, known as the “grave dancer” because he made his fortune buying and fixing troubled companies, wants to transform the property sector from one consisting of a myriad of privately-owned businesses into an industry where large, public, accountable firms produce regular returns for investors.
His property philosophy incorporates economies of scale: owning many buildings in a particular area allows him to negotiate on service costs and to gain some control over rents.
Equity Group also has interests in 20 other organisations.
