With a 75% allocation to Europe, Soros’ international fund will target operating companies in niche sectors and markets that have potential on a relative value basis
As capital raising begins to get tougher for opportunity funds targeting Europe, Soros Real Estate Partners believes its success in raising $1bn equity for its first dedicated international fund has been down to a combination of its distinctive strategy and some good timing.
The fund, Soros Real Estate Investors (SREI), fully closed in late spring, reaching its equity target of $1bn. SREI will be 75% allocated to Europe with the remainder to be invested in Japan. The biggest single source of capital for the fund is the US with other investors from Europe, Canada, Japan and the Middle East.
“When we started fundraising last year the US economy was still strong. People were increasingly allocating not just to real estate but to European real estate,” says Richard Mully, managing partner, Europe, for Soros. “We got going at the right time; 2001 saw a change in sentiment and appetite to take risk.”
Mully, the ex-Bankers Trust director, adds that investors have been attracted to SREI’s strategy to invest in operating businesses; an approach he undertook at Pricoa before joining ex-Goldman Sachs managing director Richard Georgi at Soros. “Our business is about building operating businesses rather than just real estate,” says Mully. “We invest in businesses with a fantastic competitive advantage and a clear niche.” It then looks to build the businesses by investing in management expertise, market positioning and branding. “It is definitely the right strategy for the market conditions.”
Over 20% of the capital has already been invested with Soros acquiring the operating businesses over the past two years and these have now been transferred at cost to the fund. It has so far invested in six businesses in Europe and one in Japan.
The crux of SREI’s strategy is the integration of ownership of assets and the business. “We invest in a company because we are a better buyer of assets,” says Mully. “Investors are quite nervous where the investment in the business is realising the enterprise value.”
With this strategy SREI’s underwriting of the assets assumes that the value is in those assets; an exit is looking to be made via the capital markets, but returns can already be fully realised through the break-up value. SREI’s first investment was in property outsourcing specialist Mapeley (see panel) in June 1999. The company has since won two UK contracts to take on large portfolios with the government and UK bank Abbey National.
In the UK, Soros invested $22m for a 25% stake in quoted storage company Safestore in May 2000. The company is the third largest operator in the UK in this fledgling sector. Under the leadership of ex-Delancey director Philip Lewis, the company has entered a joint venture with car park operator NCP to locate storage facilties throughout its portfolio. Safestore, which has 23 facilities in the UK and one in Paris spread across 30,000m2, is looking to further expand on the continent.
SREI’s final sector investment in Europe is Dolce, which operates conference hotels (see panel). The fund has also made three investments that take advantage of relative values in the property markets. Its latest push has been in Italy where it has set up Esperia, an operating platform that will look to forward-fund good-quality suburban offices in Milan; buy office portfolios from corporate outsourcing opportunities; and target the industrial market.
“In the next six months we will spend a disproportionate amount of time and energy in Italy. It has tremendous relative value. It is fundamentally cheap,” says Mully. Patrick Parkinson, formerly at German asset manager TMW and GCI’s Rafik Souidi will manage the business, in which SREI has more than a 90% stake. SREI aims to have around $100m to $150m equity in the business but with leverage and capital from partners, its portfolio in Italy could build to more between $1bn and $1.5bn.
Its office development strategy in Italy will be on similar lines to its asset management operating partner Awon in Paris. Awon, run by Robert Waterland, has made a big push in forward funding suburban office schemes in Paris. SREI owns a majority stake in the business, which is likely to increase as it provides additional capital for the business.
Its schemes include a 25,000m2 office scheme in Clichy and a 30,000m2 scheme in St Denis. “We’re anxious not to take development risk but are very comfortable with leasing risk,” says Mully. Its strategy is to offer large floorplates off a low rent in Paris suburban locations that have good transport connections.
Its final country-specific operating platform is MedGroup in Spain. One of Soros’ earliest investments for the fund in 1999, MedGroup will focus on leisure development for the planned residential community, hotel and resort sector. The key, says Mully, is finding land and rezoning it for this use. “We are beginning to see product come to the marketplace and all our assumptions of value are being met.” He adds: “This will remain our exclusive focus in Spain. We are negative about the commercial markets; they look overheated on a relative value basis.”
Its one Japanese investment ties in Georgi’s expertise in the hospitality sector. SREI has joined forces with Westmont Hospitality to establish the Ishin Hospitality Group, which will buy distressed hotel assets and create value through repositioning and rebranding. Ishin, of which SREI owns 90%, aims to be a leading hospitality business in Japan.
“The beauty of the business is buying at a very attractive price which can be financed aggressively, and then make good returns with better management expertise,” says Mully. The strategy does not rely on improvements in the recessionary Japanese economy. “The economy is a further upside. This is about good returns without dramatic assumptions.”
SREI is now looking at other sectors and locations for investments for the fund. Mully is keen on Germany and is attracted to its multi-centric structure, but acknowledges the difficulties of such a tight domestic market. “There are stresses and strains, and it has opened up to foreign capital and new ideas.” SREI could enter via a start up or an existing operating partner, but plans are more on the agenda for 2002. Sector-wise, Mully is interested in “healthcare in its broadest sense” as well as the logistics sector. The fund has a 10-year life, which generally assumes a four-year investment period, four-year exit and a two-year cushion. The average holding period for a business will be five to seven years, looking to achieve opportunity-type returns for investors.
The exit period is an issue Mully is glad he does not have to face now. “We are happy we are not in exit mode today. There is a reasonable appetite for debt financing, reasonable liquidity for assets but the public markets are a no-go area,” says Mully. Securitisation will also offer one exit route, particularly for the contracts secured by Mapeley. These have a long-term cashflow, critical mass and tenants with a high credit rating so securitisation is a natural exit route. It will consider this route for the Abbey National contract next year.
While Mully predicts that liquidity in the European market will reduce further before it improves, he is bullish on the longer-trend for the region, which still has scope for much structural reform.
The slowdown being seen, says Mully, is a mid-cycle correction rather than the end of the cycle although Europe will need to recover from external shocks such as the tech market collapse and the US economy slowdown. “It could take a year or two to absorb external shocks; this will have an impact on real estate. We have only invested 20% of our capital, so can take advantage of the relative softness of two years and use it to our advantage. Europe is still the best growth opportunity in the world.”
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Mapeley Mapeley is a 50/50 start up with US investor Fortress Investment Group and was designed to win contracts from public entities or corporates to own and manage large real estate portfolios. Mapeley has already won two major contracts. In October 2000, it won a 20-year structured sale-and-leaseback contract which saw the transfer of Abbey National’s 1,320-property estate. The deal with the UK bank was seen as a blueprint in the market, allowing Abbey to change its lease requirements and give it occupational flexibility. Mapeley was also successful in winning the second major UK government real estate contract awarded under its private finance initiative. In April, Mapeley won STEPS, which sees the transfer of ownership and services of the 725-property portfolio of government departments the Inland Revenue and Customs & Excise. The contract is said to be worth £20bn over the 20-year period. Mapeley recently lost out to its main rival Land Securities Trillium for telecoms company BT’s 7,500-property portfolio. |
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Dolce SREI’s investment in Dolce heralds a new hospitality concept for Europe. In January this year it took a 33.3% stake in the private US company, and styles itself as a hotel and conference centre owner and operator. The emphasis is on hosting conferences such as management meetings and corporate retreats rather than the hotel element. “Most of the big companies in the US who use it are multiple users – corporates such a Arthur Andersen and JP Morgan. They have some need, if not a greater one, in Europe than in the US,” says Mully. Dolce turned to SREI when it was looking for additional capital to expand into Europe. SREI will invest specifically to fund the European expansion. It plans to invest up to $100m to expand the business in Europe as it rolls out 10 or 12 centres in the region. Dolce already has four sites in Europe. |
Soros Real Estate Partners
83 Pall Mall
London SW1Y 5ES
Tel 44 20 7451 2029
Fax 44 20 7451 2031
