Internos grows via German buy and LSR liquidation deal

Manager buys German firm and wins mandate to wind up UK retail REIT

Fund manager Internos is to buy Commerzbank’s German real estate institutional funds business, has been appointed to run Local Shopping REIT in the UK and has raised more equity for its European hotel fund.

It will acquire Commerz Real’s spezialfonds operation, which manages €1.6bn of assets in nine property funds. No price has been disclosed and the sale is pending approval by German funds regulator BaFin.

The bank, which is also selling Eurohypo’s UK loan book, said the real estate spezialfonds business was low-margin and barely profitable.

It is keeping its retail property division, manager of open-ended funds including Commerz Real HausInvest – Germany’s largest – and will also invest in infrastructure via club deals.

Some Commerz Real property funds are severely distressed, such as CG Malls Europe, which invested in southern Europe (see fund terminations analysis, May issue, pp10-12).

 Internos, led by Jos Short and Andrew Thornton, has been targeting Germany for expansion and last year won a KAG licence from BaFin to operate German institutional funds.

The first Internos KAG fund was the Hotel Real Estate Fund. Last week, Internos said a second closing had raised another €135m, taking the hotel fund to €210m of equity.

The money came from three new German pension fund investors, plus four other founding investors that nearly doubled their initially committed cash of €75m.

The fund is now closed but investors’ total equity committed is likely to reach €225m-230m, giving fund manager Jochen Schafer-Suren’s team gross capital of €400m to invest. In its first year, the core fund paid distributions equivalent to an 8% dividend.

Schafer-Suren said the fund’s success was down to the right assets, low interest finance and “its club nature of a few German investors with a coherent regulatory, legal, accounting and reporting framework”.

In the UK, Internos has been appointed to sell Local Shopping REIT’s £173m portfolio in an “orderly” four-year liquidation, repaying debt and returning capital to shareholders.

The decision to liquidate LSR follows last year’s review by non-executive shareholders, prompted by the company’s low rating – the convenience retail specialist floated in April 2007 – and the difficulty of growing it in today’s market. The REIT’s market capitalisation is £24m.

Internos will receive annual asset management fees of 0.7% of gross asset value, subject to certain minimum amounts, and performance fees of 20% of recurring profits.

Aggregate sales of over £50m attract fees of 0.5% up to £150m and 1% above that. There is a 5.7% terminal fee of cash returned to shareholders over a hurdle of 36.1p per ordinary share, rising after the first year.

The board estimates that the new fee structure will save it around £600,000 annually in administration costs.

LSR managers embark on new ventures

Chief executives Mike Riley and Nick Gregory, and finance director Victoria Whitehouse, have resigned from Local Shopping REIT.

Riley and Gregory have set up Waypoint Asset Management, with backing from a family office, and will asset manage LSR’s joint ventures with Pramerica – which they are investing in – Schroders and Gracechurch Commercial Investments.

Advised by JP Morgan Cazenove, LSR’s non-executive shareholder committee decided a sale was the best option, but a corporate one would not maximise value for share- holders, partly because of swap breakage costs.

The committee said it “received several credible proposals from third-party managers well placed to execute this revised strategy in a cost-efficient manner”.

It decided that outsourcing the management and administration would make savings and “following a rigorous selection process” appointed Internos.

Internos is not a ‘related party’ as defined by Stock Exchange listing rules, but chairman Jos Short previously served as a non-executive director Of Big Yellow, where LSR non-executive director Nick Vetch is chairman.

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