Blackstone German Housing Sale Signals Peak: Real Estate

Blackstone Group LP and Goldman Sachs Group Inc. are among private-equity investors selling the most German housing assets since they plowed into the market in 2005, a sign that price gains may have peaked.

Investors plan to sell at least 5 billion euros ($6.5 billion) of apartments and shares of property companies this year, according to company statements and people with knowledge of the deals. Private-equity firms divested about 3.8 billion euros of housing in 2007, when there were no share sales, data from broker Jones Lang LaSalle Inc. show.

“We’re using the attractive market to clean out and reposition our portfolio,” said Olaf Claessen, director of asset management at London-based Round Hill Capital LLC, which owns about 2.5 billion euros of German homes. “We don’t think there’s an urgent need to exit, but certain properties have gained in value and could make sensible exit scenarios.”

The German housing market has changed since private-equity firms started investing at the beginning of the last decade, creating opportunities for buyers with different objectives. Investors like Blackstone, the world’s largest buyout firm, and Goldman initially struggled to make good on bets that they could buy apartments in bulk and then raise rents or resell at a profit to individuals.

Delays in government plans to open up the market and the financial crisis stifled gains until about 2009, when prices began a four-year climb and German home ownership increased.

Rental Returns

Today’s prospective buyers, including pension funds and insurers, may be more focused on annual returns from rents as they seek to offset low interest rates on European fixed-income assets. A German 10-year government bond yields about 1.4 percent, according to data compiled by Bloomberg.

For those investors, returns of about 5 percent from rental income are sufficient, according to Matthias Moser, head of alternative investments at Patrizia Immobilien AG. The company buys large apartment portfolios on behalf of pension funds and insurers. It’s one of the bidders in talks to acquire 32,000 homes from Bayerische Landesbank for about 2.5 billion euros, two people with knowledge of the matter said in January.

“What you get at today’s prices are reliable long-term returns, but not the 20 percent that private equity seeks,” Moser said.

Publicly traded German property companies such as Deutsche Wohnen AG, TAG Immobilien AG and GSW Immobilien AG are also buying, taking advantage of their ability to raise capital on the stock market at favorable terms.

Sales Jump

Housing portfolio sales and equity offerings by private-equity firms are set to jump from 108 million euros in 2012 after prices rose by 17 percent from a 2009 low and rents increased by 9 percent. The firms are cutting back now as price gains slow, funds reach maturity and opportunities for higher returns emerge in areas such as distressed debt sold by banks.

Apartment values in January fell for the first time on an annual basis since December 2009, according to data compiled by Berlin-based online mortgage broker Europace. The housing market has “lost some vigor,” Germany’s central bank said in a February report.

“They’re taking advantage of the opportunity,” said Andre Adami, head of the Berlin office at research company BulwienGesa AG. “They see very clearly that you can get top prices at the moment and the window of demand for German homes will close at some point.”

Biggest Sellers

Three companies, New York-based Blackstone, Lincoln Equities Group LLC of New Jersey and a Deutsche Bank AG unit that invests in real estate and infrastructure, expect to sell 23,000 German homes combined this year, according to people with knowledge of the plans.

Blackstone plans to sell almost 8,000 Berlin apartments valued at about 400 million euros, two people with knowledge of the matter said in February.

In the U.S., private-equity firms are buying single-family houses with plans to rent them out, taking advantage of property prices that fell by more than a third from a July 2006 peak and growing demand from families to lease homes. Blackstone, the largest investor in the industry, has spent more than $3.5 billion to purchase 20,000 homes across the country.

In addition to selling homes outright, some German landlords are cashing in through the stock market. Terra Firma Capital Partners Ltd. may sell 30 percent to 40 percent of Deutsche Annington, Germany’s largest landlord by number of apartments, in an initial public offering, Guy Hands, founder of the London-based buyout fund, said in an interview earlier this month. Terra Firma will probably exit the company altogether within two years, Hands said.

Property IPOs

Goldman’s Whitehall Street Real Estate unit in January raised about 1.3 billion euros in an IPO of LEG Immobilien AG, creating Germany’s largest landlord by market value. Whitehall is included in the estimate for sales by private-equity companies this year.

Spokesmen at Blackstone, LEG, Goldman Sachs and Deutsche Bank declined to comment. No one at Lincoln or Deutsche Annington responded to a request for a comment.

The sale of German real estate to private-equity firms began in December 2000, when Terra Firma bought 64,000 homes from Deutsche Bahn AG, the state-owned railway, for $2.6 billion. Government-owned institutions and companies including utilities EON SE and RWE AG also sold assets. Deal volumes peaked in 2005 as private-equity firms took advantage of a 10-year slump in the housing market to purchase 4.9 billion euros of properties, according to Jones Lang.

More Homeowners

Investors were counting on a revival of the market as lenders offered homebuyers a wider variety of mortgages, enabling landlords to sell apartments to the occupants for more than the price they paid. German home ownership increased by about 1.7 percent from 1998 to 2006, when it reached 41.6 percent, according to the Federal Statistics Office. By 2010, ownership climbed to 45.7 percent, still one of the lowest rates in Europe.

As government delays and the financial crisis hurt home sales, rent restrictions limited companies’ ability to increase income and attempts to cut maintenance costs were challenged by tenants.

“Many of these PE firms’ plans didn’t pan out in the end,” said Peter Papadakos, an analyst at Green Street Advisors in London.

Private-equity firms don’t publish their returns from German real estate investments.

Publicly traded German property companies including Deutsche Wohnen, TAG Immobilien and GSW Immobilien are also buying, using their shares as currency, Papadakos said.

Small Window

“The listed companies are the predominant buyers,” he said. “They know there’s a short-lived window of opportunity when their share price trades at a premium to the net asset value.”

The FTSE/EPRA NAREIT Index of German property stocks rose 24 percent in the past 12 months. Three companies climbed by more than 40 percent, led by Patrizia with a 69 percent gain and TAG Immobilien AG, which increased by 42 percent.

Deutsche Wohnen, the country’s second-largest residential landlord by market value, raised 195 million euros in January to finance acquisitions. The previous month, TAG Immobilien, a Hamburg-based residential property owner, raised 270 million euros to purchase 11,350 east German homes from the government.

GSW Immobilien, the country’s No. 4 landlord by market value, is issuing convertible bonds with coupons of less 2.5 percent. In November, the company raised 185 million euros.

IPO Glut

The additional supply of property stocks is already weighing on the market, Green Street’s Papadakos said. That may limit the ability of private-equity firms to take advantage of home-price growth through share offerings.

“There’s probably a bit of new-issue fatigue among investors,” he said. “Once you have five or six listed residential companies, there’s less of a scarcity factor.”

The NAREIT property company index, which rose 10 percent in the first quarter of 2012, has gained 0.6 percent this year. Shares of LEG Immobilien, priced initially at 44 euros, closed at 42.6 euros yesterday. The underwriting banks bought back shares every day for a month following its Feb. 1 listing to stabilize the price, Goldman Sachs said on March 6.

LEG’s pricing and the stock’s lackluster performance may prompt Terra Firma to price a Deutsche Annington IPO more conservatively, said Torsten Klingner, an analyst at Warburg Research in Hamburg.

“With LEG, there was little breathing room in the price,” he said. “With Annington, they’ll have to take investor interests into account more adequately.”

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