The US bank’s European real estate private equity group is looking to spend up to 40% of its latest, €2.4bn fund in Europe, and will enlist local partners to make the most from its money
It’s a good time to be raising equity for property funds. Lehman Brothers has shut the doors on its latest global opportunity fund, Lehman Brothers Real Estate Partners II, after raising $2.4bn and the investment bank is looking towards Europe to invest a substantial slice of that capital.
The European real estate private equity group, headed for the past year by Gerald Parkes, has already begun investing some of the cash, getting involved in residential property ventures in Sweden, Italy and France. As an opportunistic global vehicle, the new fund does not have specific allocations, but is expected to invest 30-40% of its capital in Europe. The fund has invested €9bn in European deals.
With leverage to a maximum of 65% and equity participations by partners, the fund could spend €15-20bn globally, says Parkes. As with the first fund – which Parkes says has beaten its targets after successful exits from investments, such as the flotation of French group Nexity – Lehman Brothers is targeting 20% net returns for its new fund.
Prior to joining Lehman Brothers, Parkes was chief executive of Invesco Real Estate Europe. He sold his boutique investment firm, Parkes & Co, to Invesco in 2001. After setting up Invesco’s European property business he was keen to get back to doing deals. “We have a small, very focused team of 23 people for Europe,” he says.
Like many opportunistic investors, Lehman Brothers is keen to take on local partners. “A driver of our business is that we like to have very good local partners; the strength of these arrangements is a unique selling point for us,” he says. “We like to do a huge amount of repeat business in the years following the set-up of a joint venture. We reckon that about 80% of Lehman Brothers’ real estate work – investment, lending or advisory – is repeat business with partners.”
However, getting to be a Lehman Brothers partner is not the easiest of tasks. “It tends not to be a very comfortable experience,” says Parkes with a smile. “Reputation is very important to us. We have a very tough due diligence process, but it is worth it in the long run. We have never had any problems with out partners in Europe.”
Parkes expects to have set up at least 10 new partnerships by the end of the year and says the company is “working on a number of projects in Germany”, where it has already made two major acquisitions.
The fund is unlikely to look at big German residential portfolios because of fierce competition in the bidding for, and pricing of, such deals. “We can’t meet our internal rates of return with those deals,” says Parkes. “I’m sure they are sound investments for people with a lower cost of capital, but it is not worth it for us right now. You can never say never, though; 40% of our first fund was in residential, so it’s a sector we are very comfortable with and know a fair bit about.”
Confusion about Germany
Parkes thinks international investors have not quite worked out Germany yet and points out that in some deals, there has been 100% difference between the highest and lowest bids. “This suggests there is still some confusion about Germany and a lot of different assumptions,” he says.
Whatever Lehman Brothers buys in Germany, it will not enter deals requiring it only to use gearing to buy assets then hold them in the hope of yield compression. “We’re not a player that buys core or core-plus buildings and leverages them to the hilt,” says Parkes. “There has to be an active management opportunity — we don’t like to rely on passive capital and rental growth.”
For the new fund, Lehman Brothers is looking across all of Europe and as far as Turkey (where it has bought a non-performing loans portfolio). However, unlike many property players, it will not be investing in Russia yet. “The fund has the capability but we won’t be investing there,” says Parkes. “The political and legal situation is too unstable at the moment.”
The fund is still interested in eastern Europe – it has made its first investments in Poland, a €40m residential development opportunity, and has three or four other deals in the pipeline. “There is very high demand for residential property in Poland,” says Parkes.
The first fund did at lot of deals in the UK, including the privatisation of listed firms Burford and Haslemere, but Parkes says it is hard to find good value deals in the UK now. Similarly, the re-rating of European listed property companies in the face of a rising market, and the prospect of more REIT-type structures, means the new fund is unlikely to take more companies from the public to private realm.
Office locations of interest to the bank include Paris, Stockholm and Hamburg, but Parkes is cautious over locations such as Milan, Rome, Barcelona and Madrid. Looking at the office sector in general, he says: “No-one is expecting substantial office employment growth.”
In retail, “the right locations will get good demand”, he says. “Many countries have had a good run of consumer spending but while this is fading in some it is recovering in others.”
The hotel sector has caught Lehman Brothers’ eye – it was a part of the £1bn consortium, along with GIC Real Estate and Realstar Group, which bought the UK portfolio of Intercontinental hotels. Parkes says the sector has more opportunities than others. “Clearly we believe there is upside in the Intercontinental deal, partly as a consequence of the substantial refurbishment Intercontinental carried out.”
The new fund will also take advantage of portfolio sales by corporations and governments. “German states and the Italian government have assets set to come on the market, as do more corporations,” says Parkes.
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