OFhEurLex-2 en Deutsche Finance Group tried to disrupt the US real estate market and focused on Manhattan’s main corridor.
In August 2018, a new subsidiary of a German investment firm in the United States acquired the top floors of the Gucci building, along with New York developer Michael Shve and Turkish real estate magnate Serdar Bilgili for $ 135 million. The partners plan to convert 25 floors on 685 Fifth Avenue into luxury Mandarin Oriental residences overlooking Central Park and the Midtown skyline.
Over the past 24 months, Deutsche Finance – unrelated to Deutsche Bank – has partnered with 13 U.S. real estate businesses from Boston to San Francisco, totaling approximately $ 2 billion. This means one of the largest foreign purchases in recent years, after Chinese investors withdrew.
The recent wave of direct investment by the group in the United States has led to a dramatic expansion of the company’s scope. Deutsche Finance quadrupled its assets under management to € 6.9 billion from € 1.5 billion at the end of 2017. Although the company has invested in 47 countries since 2005, its recent growth has focused on more developed markets in the US and Europe.
“They were thinking about North America and I think the Shvo-Bilgili thing was a catalyst for it – it allowed them to make a deal and create a platform around it,” said a source familiar with the company’s history, who asked to be named. Deutsche Finance declined the interview for this article.
Although the pandemic has slowed down the volume of transactions and caused property owners and creditors to question valuations, Deutsche Finance seems to be sticking to its strategy. In October, the company and a group led by Shvo completed the acquisition of Transamerica Pyramid in San Francisco for $ 650 million. And some of Germany’s recent investments, such as the Boston Life Sciences Project, may even benefit from the current environment.
Once the ball starts to roll in the US, the huge amount of German capital waiting to be deployed – driven abroad by domestic low to negative interest rates – will soon lead to one revolutionary trade after another.
“They have lower return requirements and a lot of capital, so if they trust you – as is the case with Deutsche Finance – then it’s a pretty interesting source of capital,” the source said.
The birth of a club deal
The nature of Deutsche Finance’s business is not so easy to determine.
The group has been active in real estate, private equity and infrastructure since its inception in 2005. “We are a business platform and not a business in the traditional sense,” said Thomas Oliver Müller, the company’s founder and chairman, for a German business publication in Interview of January 2019.
Deutsche Finance is backed by at least 15 financial institutions, including some of Germany’s largest pension funds, as well as more than 35,000 retail investors in Germany.
Since 2008, Deutsche Finance has closed more than a dozen funds for private investors. However, as part of its expansion in the US, the group is experimenting with “club trade” funds that allow small investors to invest alongside financial institutions.
The first such fund was established in 2019 to raise $ 40 million in capital for the development of life sciences near Boston. The fund increased its target within three weeks.
“This is a truly entrepreneurial real estate investment in which investors are actively involved,” said Theodor Randelshofer, head of Deutsche Finance’s business division, in an interview with the German trade publication Finanzwelt earlier this year. “Retail investors did not have access to this – until our first club deal in November 2019.”
Deutsche Finance is not alone in raising significant amounts of capital from retail investors in Germany. For example, Jamestown LP – a subsidiary of the German company Jamestown US-Immobilien GmbH – has closed 38 US real estate funds with capital from more than 80,000 retail investors in the last three decades.
Deutsche Finance has sought investment opportunities around the world and built an extensive network of properties from Brazil and Chile to Indonesia and Vietnam, covering not only office and residential properties, but also hospitals, petrol stations, casinos and ports.
“Basically, all countries are on our shortlist of investments,” said Müller and 2018 interview. “We certainly always pay temporary attention to a country, but it has less to do with the country itself than with an asset manager because it offers us an interesting investment opportunity.”
But after suffering in Turkey suffered significant book losses in the middle of this country currency crisis, Deutsche Finance began laying the groundwork for its great pressure on the United States
“We will make more investments in euros and focus more on Europe and the US overall,” Deutsche Finance Investment Director Sven Neubauer stated va 2018 interview. “It also means that there will be fewer emerging markets in the portfolio.”
The first signing of the agreement with Deutsche’s new Euro-American strategy was concluded in early 2017, when its newly established London subsidiary Deutsche Finance International acquired a landmark in the British capital, the Olympia Exhibition Center for EUR 330 million in cooperation with the British private capital company Yoo Capital, the Bavarian Supply Chamber and the Insurance Chamber Bavaria.
The acquisition and planned refurbishment of Olympia marked “a successful start to a number of interesting” club shops “and joint ventures for investors,” Neubauer he said in time, when.
This pipeline would include Deutsche Finance’s first direct investment in the United States
In August 2018, Deutsche Finance America, led by former Amstar Group President Jason Lucas, launched.
Shoes on the ground
It was the Turkish connection that led Deutsche Finance to the first agreement in the USA
Shvo and Bilgili sat down to dinner with a broker who would eventually help the partners raise the funding they needed to get the Gucci deal across the finish line.
Mitch Sikora, CEO of Manhattan-based JTP Capital, suggested that Bilgili turn to Deutsche Finance, with which the developer has an existing relationship. (One of Deutsche Finance International’s co-founders, Frank Roccogrande, co-founded and spent seven years as a senior managing partner of BLG Capital, according to the company’s website.)
The Munich private equity company then brought the largest German pension company into the agreement.
The Shvo-led group then expanded its reach to buy a total of three hotels in Miami Beach, Miami $ 243 million and a 54-unit residential and retail development site in Beverly Hills for $ 130 million in 2019.
The group then focused on high-end office real estate, starting with the Coca-Cola building at 711 Fifth Avenue in Manhattan, which they acquired for $ 937 million just months after Coca-Cola sold it another buyer.
The last pair of Deutsche Finance office purchases differed in one respect from previous deals: Bilgili’s BLG Capital was no longer involved.
In the summer, a Turkish developer filed two lawsuits against Shvo and Deutsche Finance, accusing them of intrigue to cut him out of $ 376 million an agreement to buy Chicago’s “big red” office building at 333 South Wabash Avenue and acquire a $ 650 million Transamerica building.
In Bilgili’s second lawsuit against Shve, which had already been discontinued, his lawyers claimed that Bilgili “helped secure” the group’s German institutional investors, who were “initially reluctant to do business with Michael Shve because he was accused and found guilty” of tax fraud. ”
Shva’s lawyers rejected the allegations, arguing that the lawsuit was “a transparent attempt to cover up his defamatory allegations against Mr. Shva with judicial immunity.”
The pandemic, meanwhile, also led to further headaches for Shvo and Deutsche Finance in a lease dispute with a major retail tenant on 530 Broadway, which they bought for $ 382 million in March.
Ralph Lauren, a subsidiary of Club Monaco, which represents one-fifth of the annual basic rent of the mixed property, sued the landlord in September to prevent the termination of his lease, claiming that the purpose of the lease had been thwarted by a pandemic. In mid-October, the court issued a court order blocking Shvo from evicting the tenant.
The lease dispute also caused some complications in the $ 210 million mortgage that LoanCore Capital provided to finance the acquisition.
In response to the suit, Shvo said in October affidavit“It is completely unfair and against the law [the] the landlord must continue to pay the mortgage on the building with its significant monthly debt service [the] intentionally deprives the tenant [the] the lessor of his current rent, which is necessary for the payment of debt service. ”
Part of this $ 80 million debt was to be included in a commercial mortgage security agreement. But in June there was a loan removed from the package, according to Fitch.
Work better together
Mom-and-pop investors appear to continue to support Deutsche Finance’s US investment, even in the midst of a pandemic.
The company cooperates with developers DLJ Real Estate Capital Partners and Leggat McCall in part Boynton Yards complex in Somerville, Massachusetts, including a 289,000 – square – foot laboratory building at 101 South Street and nearby package with 600,000 adjustable square feet.
The development in Boston is proof of the concept of Deutsche Finance’s new offer. The company raised $ 40 million in capital for the project through a “club business” fund, receiving contributions from investors for only $ 25,000 – and managed to close the fund in just three weeks.
While the first Deutsche Finance club shop has given retail investors a chance to bet on new developments in the upcoming asset class, the group’s second offer – again covered by US assets – is more traditional.
The company is now raising $ 50 million in capital for the Big Red Building, an iconic 45-story office tower measuring 1.2 million square feet in a central loop in Chicago.
The fund was provided by the German rating agency Scope Analysis high marks for the credibility of the tenant, the recent reconstruction by previous owners and the highly developed competence of Deutsche Finance in the area of structuring club shops. However, she also warned that the impact of coronavirus on American office market remains unclear.
In addition to Deutsche Finance, German institutional investors have generally been major players in real estate in the United States for a long time. According to Real Capital Analytics, in the first three quarters of 2020, Germany was the second largest source of foreign real estate investment in the United States after closing $ 2.2 billion in deals with Canada.
In addition to transactions involving Deutsche Finance’s institutional partners, the figure was supported by the sale of an office tower at 330 Madison Avenue in Midtown Manhattan, which the German insurance company Munich RE bought from the Abu Dhabi Investment Authority for $ 900 million in March.
German investment has slowed significantly since the outbreak of the pandemic and put the country in third place behind South Korea. And all recent acquisitions of Deutsche Finance were already under contract before the pandemic.
However, in early October, Deutsche Finance announced that it had already raised $ 41 million for the Big Red Fund, a sign that the fund is well on its way to closing before the end of the year.
“Will German investors continue to invest in the US for the foreseeable future?” It would seem to me that their investment activity will still be limited in the near future … due to the continuing chaos of Covid-19, “said Jim Costello of Real Capital Analytics. “This means that as cross-border capital comes to the US, the German capital will continue to be the main source of capital.”
Editor’s note: All citations from the story from German trade publications have been translated.