Financial colossus Citigroup is only a recent starter to property investment management, but the European team, led by Roger Orf, wants to be a major player.
In 2006, the group which has existed in its present form only since 2004 raised nearly €3bn in equity for opportunistic funds in North America, Europe and Asia. Citigroup Property Investors is also planning to raise $750m-€1bn of equity for a core-plus fund, which will be seeded with €150m of in-house equity. If it remains on track to hit its target five years from now, CPI will be raising a third European fund and have €10bn of equity under management.
The presence of Orf has clearly been a benefit to CPI, especially in Europe, because his contact list and track record is second to none. Prior to joining CPI in 2004, he was head of European operations at Lone Star Management, where he bought €5.5bn of German non-performing loans and €1bn of direct property.
Previously, he was a managing director at Pelham Partners for seven years and before that he spent 13 years at Goldman Sachs, where he was involved in setting up the group’s Whitehall Fund. Orf recruited former Goldman Sachs colleague Neil Hasson in 2005 to run the European
opportunity fund.
Orf says: “We want to become one of the leaders in the real estate money management business, even though we’re late behind companies like Morgan Stanley, Whitehall and Blackstone.”
CPI closed its European opportunistic fund, CPI Capital Partners Europe, in December, having raised €1.162bn from institutions and high-net worth individuals, mainly in the US, including €200m from Citigroup and the CPI team. Orf says CPI expects to invest half of the fund in residential projects. It will also invest in NPLs, but will mainly be focused on equity deals. Germany will be a major target country because it still offers large portfolios and a lot of property in public or owner-occupiers’ hands.
The fund will also look at refurbishment opportunities in second-tier central European cities, in countries such as the Czech Republic, Hungary and Lithuania. In Lithuania, CPI has bought land near Vilnius for which it expects to get planning permission. In Hungary, the fund is involved in residential development.
CPI is still keen on Western Europe. It owns a stake in the La Manga resort in Spain in January, and has bought its first UK asset for the opportunity fund. In partnership with listed UK group Halladale, CPI bought 33 Gracechurch Street in the City of London from Dawnay Day for £9m. The vacant 10,000m2 block will be refurbished by Halladale this year. “We think that City of London rents are really poised to grow, as are office rents in central Paris,” says Orf.
It was a single deal, completed before the opportunity fund was raised, that really put CPI on the map. With the benefit of proprietary capital from Citigroup, CPI was able to become active in the market prior to fund-raising and took a €250m equity stake in the €7bn Viterra deal, where UK private equity house Terra Firma bought a 150,000-home portfolio from German energy firm EON.
Citigroup sells all but €75m
Despite only having €200m of in-house capital initially allocated, Citigroup increased that amount so that CPI could take a role in the Viterra deal. It has since sold down all but €75m of that equity stake. The Deutsche Annington vehicle, which manages the Viterra and other German residential portfolios, is set to be floated later this year.
Citigroup led the debt financing of the Viterra deal, which was a good example of how the power of the investment bank can be leveraged to aid CPI. However, there are clear Chinese walls (and physical walls CPI is based in Mayfair, not Canary Wharf) and Citigroup is not necessarily the partner of choice for CPI.
Hasson says that the opportunity fund is unlikely to get involved in too many big auctions in Germany, but that there “may be opportunities in smaller deals where there is less Anglo-Saxon capital to compete with”. But CPI is prepared to do smaller deals. “We’ll get out of bed for less than €100m,” says Hasson.
The opportunity fund is also looking farther afield. Orf says that Russia, Turkey and “the ‘stans” are all possible targets. Turkey offers a large, young population, a strategic location for both US and European interests and “huge demand for everything”.
Russia is seen as a higher-risk option, and the opportunity fund is restricted as to how much it can invest in such markets.
Refurbishment and development projects will be an important part of the strategy. “Income is overpriced today,” says Hasson. “We take below-institutional-quality stock and reposition it for institutional buyers.”
CPI also has a strong core-plus business in Europe, which pre-dates the arrival of Orf and the CPI brand. Stuart Webster, formerly part of John Rigg’s team at DTZ, runs the European core-plus business, which has €1bn of assets in three fully invested funds. Two are Shariah-compliant vehicles and one is a UK retail fund, CPI Active Retail, in partnership with Halladale.
Core-plus fund targets Europe
A core-plus fund will be raised this year, but Webster is already beginning to spend the capital allocated by Citigroup. The core-plus business will be targeting the eurozone, the UK, Scandinavia, Hungary, Poland and the Czech Republic. Other Central and Eastern European countries are considered too pricey for the core-plus business.
Webster says that the key to CPI’s core-plus philosophy is minimising of downside risk. “It’s like a one-way trampoline,” he says.
CPI’s core-plus business has generated IRRs in the “high 20s” so far, he claims. Increasing the size of the business is crucial, in order to increase diversification and minimise risk.
However, Webster explains: “We don’t want to be the biggest, we want to be the best.”
Genesis of a megagroup
Citigroup Property Investors grew out of Citigroup Alternative Investments, becoming a major unit within the bank after former AEW chief executive and president Joseph Azrack joined to head the fledgling CPI.
Azrack recruited Roger Orf and a number of high-level executives to the business, which now manages $7bn of equity capital for direct property and securities. CPI has also launched two opportunity funds for North America and for Asia.
In December, the group closed its CPI Capital Partners North America fund, which raised $603m of equity. Citigroup and the investment team are committing $200m to the fund. So far, the team has invested around 40% of the fund’s equity in 17 investments in the US and Mexico.
CPI raised $1.4bn for its Asian fund and has invested in a number of projects and vehicles across the continent. Azrack recently said that CPI is planning to invest $500m in India, where it has already committed $250m.
Citigroup’s securities unit thinks globally
“We are a single team in three locations,” says Citigroup Property Investors securities analyst Claudia Reich.
“Although we have offices in New York, Hong Kong and London, we function as a single unit. Every analyst needs to think globally.”
The property securities business was the first part of CPI to be set up. Global head Dan Pine joined a team from AllianceBernstein in June 2004 with the intent to develop a global strategy. All analysts cover both regions and sectors to ensure that they have a good breadth as well as depth of knowledge.
Although it is operating in good times for listed real estate, the team has posted a strong performance, beating its benchmarks. This performance and the Citigroup name has helped it to raise $800m from mainly institutional investors including $80m from Citigroup itself. Institutional clients tend to want CPI to run separate accounts for them.
In the US, CPI is thought to be launching mutual funds investing in securities. It is also keen to raise more cash from the retail investor.
The team offers three main strategies: a diversified strategy benchmarked against the FTSE EPRA/NAREIT global index, an alpha strategy targeting higher returns but with higher volatility, and an income strategy targeting higher-dividend stocks.
Despite recent stellar performance from property stocks, the team is still expecting strong growth in 2007. Reichs says that as long as capital continues to flow into the sector, returns will remain solid.
IPOs in Europe and Asia will increase the weighting of those regions in the CPI universe, while CPI also expects more merger activity in Europe and the US.
