One plank of Pirelli & C Real Estate’s strategy is to take minority stakes in big partnerships, but it has further ambitions to make the company pan-European
Pirelli, one of Italy’s great industrial giants, fastened on real estate about 10 years ago as a means of escaping what Carlo Puri Negri, deputy chairman and chief executive of parent company Pirelli & C, describes as “a difficult period”.
Pirelli & C Real Estate is 90% owned by Pirelli & C, while the remaining 10% is shared among the management. The line- up at the top of Pirelli & C Real Estate has not changed in 10 years. Carlo Bianco manages the residential portfolio, while Emilio Biffi handles the commercial portfolio and related assets. Giulio Malfatto, the third general manager of the company, joined five years ago and is in charge of real estate services. The number of people employed by the real estate division has grown massively over the past 10 years, from 12 at the start to over 500.
Pirelli & C Real Estate manages assets totalling around €12.5bn (L24.2trn). A total of €7.5bn of this belongs to third parties, €5bn to companies held by US real estate funds and Italian investors, in which Pirelli & C Real Estate has a minority interest.
Last year Pirelli & C Real Estate sold almost €500m of residential real estate, mostly from the former Unim and Risanamento Napoli portfolios. The push into property began about a decade ago. “At the outset of the 1990s we happened to have a lot of land to sell, and no-one wanted to buy it because the market had just peaked and there was a lack of professional investors. The Bicocca development project, on a large industrial area previously occupied by Pirelli’s factories, was a set of lines drawn on a piece of paper,” says Puri Negri.
“So we decided to develop those areas by ourselves and to manage the real estate of Pirelli, the industrial arm of the group,” he says. “In the beginning, Pirelli & C Real Estate was a subsidiary. Now the parent group accounts for barely 5% of the overall business.”
The Bicocca project is one of Italy’s most significant urban land regenerations. It was the historic site of Pirelli Group headquarters and in 1987 the group held an international architectural tender. Work started on the €1.4bn redevelopment covering an area of 700,000m2. A total of 70% of the site, which is in the north of Milan, has been redeveloped for commercial, retail, entertainment, residential, education and research uses. Using this experience as a platform, Pirelli & C Real Estate has a development programme of 2.6m m2 in the Milan and Rome metropolitan areas in partnership with a variety of international institutional investors. Projects include a 30,000m2 multiplex and entertainment centre at Bicocca, a similar sized shopping and entertainment centre in Turin and two multiplex and entertainment complexes at Milan Linate and Varese.
“Pirelli & C Real Estate’s business model is very peculiar: we are an asset manager that operates in close partnership with investors,” says Puri Negri. “Our task is to find the investment opportunity because we know the Italian market better than foreign investors do. Usually we acquire an important minority stake, around 25%, and we manage the required assets. This makes Pirelli a special case because we not only receive service fees but also part of the investment yield if the investment is successful,” he says.
The Italian company provides a string of specialised services ranging from agency and project management to property and facility management. “This business model enables us to dampen the volatility of the investment. Above a certain level of internal rate of return – our weighted average cost of capital – extra profits are distributed between investors and managers. The difference with private equity funds is that here the manager’s participation in the investment is larger because the market is less mature and transparent. In the non-residential market, only foreign investors operate under that framework,” explains Puri Negri.
He says the business risk in his company’s approach is not that high. “We manage a portfolio worth €5bn. Rent revenue from the non-residential space we manage services debt, which is swapped, so the interest rate risk is hedged. Pirelli & C Real Estate’s equity investment is in turn funded with debt, mainly for purposes of tax optimisation,” says Puri Negri.
A big new step in Pirelli’s property evolution came in 1998 when Morgan Stanley knocked at the door. “A bit later other US-based investors called us. We were the only Italian company to embrace a business model which is similar to the Anglo Saxon practice,” says Puri Negri.
The first joint venture with the US investment bank was made in 1999 – a €2.5bn tender for Italian property company Unim. The joint venture with Morgan Stanley ultimately secured Unim’s commercial portfolio while the residential assets were acquired by a vehicle set up with the Peabody fund – sponsored by America’s JP Morgan Chase – Goldman Sachs, and Italy’s Monte dei Paschi and Banca di Roma. Puri Negri says the deal was “a particularly positive one” considering the relatively low price paid and the fact that the market was just on the cusp of recovery.
A joint venture between Pirelli & C Real Estate and Morgan Stanley to acquire offices has amassed property worth a total of €2bn. The joint venture is 75% Morgan Stanley while Pirelli & C Real Estate holds the remaining 25%. The assets are mainly in Milan and Rome, but the partners have bought in the other principal Italian cities as the tie-up is opportunity driven.
Since 1998, Pirelli & C Real Estate has consolidated its service divisions by acquiring companies such as Cagisa, the services branch of Unim and Risanamento Napoli, property managers Agied and agents Mediacasa and Progetti Creativi. It has also established an agreement with Gabetti for the break up and divestment of residential property, and with Bovis Lend Lease for project management and financing.
Early this year Edilnord 2000 Group, operating in agency, property management and project management, was integrated into Pirelli & C Real Estate. The company also has a joint venture with quoted UK serviced office provider Regus. The Italian group sources properties and uses some of its own and others which it manages, while Regus operates the centres.
Meanwhile, Pirelli & C Real Estate has ambitions to participate in setting up a fund with Olivetti and Telecom Italia. The three parties plan to combine €3bn in property assets into a new company that will be turned into a closed fund. Pirelli & C Real Estate has a 40% stake in Telemaco, a company formed last September to dispose of Telecom Italia’s real estate assets. The largest part of the new company, which will be transferred into the fund and will be listed, will be sites held now by the property joint venture between Pirelli & C Real Estate and Morgan Stanley, which describes the fund as being in “very preliminary stages”.
Last autumn, Pirelli & C Real Estate bought a portfolio spun off by Banca di Roma for €568m. The residential properties, worth €206m, will be sold to a company 14% owned by Pirelli, 38% by Morgan Stanley and 48% owned by Banca di Roma. The rest was divided between Pirelli (16%) and Morgan Stanley (68%).
There has been speculation that Pirelli will float its real estate group. Puri Negri is non-committal and will only say that the division could float in the medium term if it were successful in becoming a pan-European player. Presently, it is focused purely on Milan, Rome and Naples.
“In the past the leverage ratio for our company was three to one on average, and thanks to a couple of investment ventures which proved particularly fruitful we have managed to post average returns on equity of 40%. I cannot say that we will maintain this level of profitability in the future. I am confident a company like ours with a more reasonable debt to equity ratio – between 1:1 and 2:1 can post returns on equity of between 20% and 25%.”
Pirelli & C Real Estate
Via Negri 10
20123 Milano
Tel 39 02 85351
Fax 39 02 8535 4451
www.pirellirealestate.com
