APOLLO GLOBAL REAL ESTATE
The post-crash deal drought looks to be over for Apollo’s real estate arm, which is targeting prime UK residential, secondary UK and German offices, and French logistics, reports Alex Catalano
It’s been a frustrating few years for Roger Orf, head of Apollo Global Real Estate in Europe. “This is my third recession in Europe, in the UK,” he says. “The main challenge was the bid-ask spread. Sellers were looking in the rear view mirror hoping 2007 would come back and we were looking forward, knowing things were going to get worse. There was no meeting of minds.”
However, things are looking up. Over the past year, Apollo has put around €500m into London residential, UK and German offices, data centres and French logistics.
“Now I think the market is at or near the bottom,” says Orf. “It isn’t a bright outlook necessarily for Europe, but I feel that in some markets you can buy and values may not go down much further in real estate terms. Deal flow is improving off a very low base. European banks are selling off assets, which gives us and others potentially plenty to look at. The lending market is also defrosting.”
Orf came to Apollo via its 2010 purchase of Citi Property Investors, Citigroup’s $2.8bn global real estate platform, which he headed. He is a real estate veteran in Europe, having been at Goldman Sachs during the 1980s and early 1990s, founding Pelham Partners in 1995, followed by a stint at Lone Star.
“Now the combination of vendor capitulation with debt coming due means that people have to sell,” he says. “Pricing has come to levels where we think it is pretty attractive in certain situations.”
Currently, Orf prefers residential, office and logistics property, in that order. So far, the investments in Europe have been smallscale, mainly via establishing joint ventures with UK partners: M&M Asset Management, Prime Residential Ventures and Volta.
Targeting south-eastern offices
M&M, which will invest in south-eastern UK offices, brings together Kevin McGrath and Martin Sheppard of F&C REIT, plus Franc Warwick partner Matt Kelly. It has bought Eldon Court in Reading for £65m and Edinburgh Gate in Harlow for £24m, yielding 9.50% and 10.25% respectively.
Orf says: “We’re looking for very good, well-located, modern office property in secondary locations around the M25, but outside London’s Zone 1. We believe the market is mispricing income for secondary property. You can buy good credits for 10% on eight-to-10-year leases, which does not seem sensible, since the underlying bonds would be trading at 3%.
“We are contrarians. Our investment thesis is premised upon the view that these are good locations, within the town, modern office buildings and we are buying well, compared with what it would cost to build. We hope to build up a sizeable portfolio of these kinds of properties.” A €175m German offices deal is also in the pipeline.
Apollo’s residential investment is in partnership with Bruce Ritchie’s Residential Land and Ivanhoé Cambridge, the property arm of Canadian pension fund Caisse de DépÃ´t et Placement du Québec. Prime Residential Ventures is focusing on London’s wealthiest post codes and the ambition is to expand it into a £1bn fund.
But Orf also thinks that over time, there is mileage in multi-family rented housing, as the UK’s middle classes take to the concept of living in newer, US-style apartments. “We believe there is the opportunity to build those and demand is quite high outside London, in surrounding areas, where we believe there will be continued growth,” he says.
There has also been a logistics deal in France, where Apollo has bought a portfolio of 11 logistics properties from French REIT Icade for €145m; and Volta, a joint venture with David Philips’ Glebe, which has put £60m into refurbishing a BT building in Shoreditch into a data centre – a sector Orf knows from his days at Pelham Partners.
Orf has also been dealing with the legacy book. Like others, Apollo has had its share of problem investments, but some are coming good. One is central and eastern European developer Atrium.
In early 2008, Apollo teamed up with Chaim Katzman’s listed Israeli property company Gazit-Globe to buy Meinl European Land. It was renamed Atrium and there was a big mess to sort out; lawsuits flew. At its lowest point in 2009, Atrium’s share price was €1.25; today it stands at €4.48.
“At one point there was more cash on the balance sheet than the value of the shares; then the situation normalised. It’s been a big financial success,” says Orf.
A stake in Germany’s biggest landlord
Apollo also owns a stake of around 17% in Deutsche Annington, Germany’s biggest residential landlord, which was acquired by Orf when he was at Citi.
Deutsche Annington had been laden with €5.3bn of securitised debt, but last year restructured it, leaving a €3.8bn balance to be refinanced. Now, with German residential prices rising and investors keen to get in on the act, Deutsche Annington is on track for an initial public offering later this year.
Apollo has more German residential assets besides its Deutsche Annington stake: 5,000 homes in a CPI fund and another 6,000 acquired when its debt fund bought a Credit Suisse loan portfolio in 2010. “We’re focused principally on the UK and Germany,” Orf says.
Spain is on Apollo’s watch list. Last month, its European Principal Finance Fund II bought Bankia’s auto and consumer loan business for €1.bn, so the firm clearly isn’t expecting Spain to go down the tubes. But for Orf, real estate pricing there isn’t attractive enough yet.
Apollo’s debt-buying operation is run by David Abrams, who manages the European Principal Finance fund on the credit side. Orf’s team is also involved, looking at the assets backing real estate loans.
Apollo’s first big play on non-performing European real estate loans was its 2010 scoop of €900m worth of bad loans from Credit Suisse, at a 40-50% discount. And last year Apollo won Lloyds’ Project Lane, a £1.46bn portfolio of non-performing Irish loans, paying £149m.
But it was outbid for Project Chamonix, Lloyds’ €850m German loans package, by US hedge fund Marathon, which blew the competition away with a €400m bid.
However, Apollo is still in the running to buy Lloyd’s £495m Project Thames UK loan portfolio. Orf says: “We are selective about what we go after and ask ourselves: ‘do we want to own the underlying assets?'”