German property giant takes big step into the UK regions

PATRIZIA

Having bolted on a UK, French and Irish arm with its acquisition of Tamar, Germany’s Patrizia is blazing a trail beyond safe London assets into regional UK investment, reports Doug Morrison

Muir-James“I don’t know many European businesses that have opened in the UK which have made their first two investments in Bracknell and Birmingham” James Muir, Patrizia

Patrizia Immobilien, one of Germany’s biggest property companies, entered the UK market last month, not with the acquisition of a trophy London building, but with two high-yielding, provincial office blocks.

Acquired via a joint venture with Oaktree Capital Management, the office buildings in Birmingham and Bracknell represent a modest £15m total outlay. This is very much a Patrizia-style declaration of intent: regional assets with a co-investor in tow.

Patrizia means business – just not the business normally associated with powerful overseas investors that have identified UK property as a safe haven for their money, yet rarely venture beyond the South East.

James Muir, MD of Patrizia’s UK business, is resolutely set on the regional path. After joining from JPMorgan Cazenove, where in 2006 he advised on Patrizia’s flotation in Frankfurt, he has spent the past year getting ready for a UK commercial and residential push .”I don’t know many European businesses that have opened in the UK which have made their first two investments in Bracknell and Birmingham,” he notes.

Not many, if any. Yet the deals epitomise the co-investor model Patrizia founder and chief executive Wolfgang Egger has favoured in recent years. In 30 years of business, Egger has ensured that Augsburg-based Patrizia’s German assets are well spread across that country too.

The two regional deals quickly followed the completion of Patrizia’s acquisition of London-based investor and asset manager Tamar Capital Group, headed by Rob Brook, giving the German company a commercial property arm in the UK, France and Ireland.

In June, the group indicated the extent of its UK ambitions by appointing Andrew Pratt, CBRE’s senior residential consultant, ex Grainger director and a former Teesland residential fund manager, to work with Muir to expand the UK residential investment and asset management operations.

Pratt is a high-profile appointment for Patrizia, which is little known in the UK despite an illustrious track record at home, culminating in April with Germany’s largest residential property deal for years. A Patrizia-led consortium paid BayernLB €2.45bn for GBW, which owns 31,900 flats in Bavaria.

German deal points to UK strategy

That deal lifted Patrizia’s assets under management from €7.5bn to €10bn – two years ahead of its stated business plan – and was a clue to what the UK market can expect. Patrizia’s GBW consortium consists of insurers and pension funds. A big part of Pratt’s role will be to raise money from UK, continental and even US institutions.

Suddenly Patrizia has joined the same league as other big overseas newcomers to UK residential investment such as Qatari Diar, Canada’s Ivanhoé Cambridge Properties and Sweden’s Akelius. It is perhaps no coincidence that the latter was advised by Pratt at CBRE in its plan to build a 10,000-unit portfolio, which is expected to be worth more than £1bn in the next few years.

Pratt suggests that Patrizia’s impact on the UK residential market will be just as significant. Neither he nor Muir will put a figure on their target, but there is an air of expectancy and intrigue about Patrizia, not simply due to its potential financial clout, but because of the regional investment strategy that sets it apart from other overseas players.

“I joined Patrizia with a remit to build a nationwide, long-term UK and Irish business,” says Muir. “We are building a business that’s going to be here forever.”

“London and the South East are in fashion, but there are opportunities in the regions, as illustrated by our first deals. But as a business, whether something is attractive now or not, we’ve got to know about it. We’ve got the capability to invest across the UK. I want a business that is up to speed, so when there are attractive opportunities we’re ready to get involved.”

Muir adds: “The UK is a very old and established economy, and even in tough times there will be pockets of growth, and in good times pockets of trouble. I want to make sure Patrizia is absolutely on top of all these trends and can consistently look at opportunities across the UK.”

Pratt: investing in big regional cities is
Pratt: investing in big regional cities is “slightly riskier, but these cities will get capital growth if you hold for long enough”

If necessary that will mean development, commercial and residential – something else that distinguishes Patrizia from many of its competitors. “We’re going to be here for a long time, so not to have a development skill set would be crazy,” says Muir.

Pratt adds that Patrizia’s regional strategy should overcome a big hurdle for institutions keen on residential investment: sourcing good standing investments in large scale. He notes that there are plenty of private property company vendors in big provincial cities.

“Few people have been buying there because everyone’s been concentrating on London and the South East,” he says. “The intention is to buy in Manchester, Birmingham, Bristol, Edinburgh, where there is a strong, underlying demographic story. You can buy at a far higher yield. It’s slightly riskier, but these cities will get capital growth if you hold for long enough.”

Private renting offers opportunities

Muir and Pratt are looking at all aspects of UK housing, but Patrizia could really make its mark in the private rented sector, especially if it can transfer a policy Egger has favoured for years of keeping management in-house. This would resonate with a government under pressure to raise standards without bringing in further regulation.

“We’ve got a 30-year track record, great internal knowledge and a real passion for residential,” says Muir. “I don’t think there’s anything we can teach anyone in the UK per se, but I’d like to bring our knowledge and expertise into the UK to benefit investors. You must have the local knowledge, too, and Andrew is a great start to that.”

Local knowledge and people on the ground is a Patrizia mantra. It informed the takeover of Tamar and it is something Brook will develop on the commercial side.

“In a year’s time I’d like to see [operational] offices established in Manchester and Scotland, which would in turn indicate that we’ve accumulated enough assets to warrant those offices,” says Brook.

“Opportunistic partners especially want to know they’re with somebody who can not just deliver on the reporting side but really knows the local market. Not everybody believes in it or that it warrants having that operational risk, and frankly, hassle. But it’s critical for us that we do that.”

The Oaktree joint venture will target more offices with “opportunistic, 15%-plus returns”. But there will be other joint ventures, too.

Muir adds: “We’re looking at a lot of opportunities. I don’t know what will come first, but we’re very open. What drives us is whether an investment stacks up and if there is a good partner to co-invest with.”

Patrizia’s thirty-year journey from Augsburg to Birmingham and beyond

wolfgang1984: Patrizia Immobilien founded in Augsburg by Wolfgang Egger, still chief executive and a 51% shareholder. In the next two decades Patrizia becomes one of Germany’s biggest residential investors.

2006: Patrizia floats in Frankfurt at €18.50 per share, rising swiftly to €28. At its peak, the company is capitalised at €1.17bn.

2007-08: The global financial crisis drags Patrizia’s shares to €0.80, valuing Patrizia at just €50m, but it stages a slow recovery.

2011: Patrizia buys spezialfonds provider LB Immo Invest from HSH Nordbank. For the first time in Germany a financial services provider is integrated into a property business. The deal boosts Patrizia’s commercial property operation and almost doubles its assets under management to €5bn. The plan is to reach €10bn by 2015.

Feb 2012: A Patrizia-led consortium pays €1.44bn for the real estate business of Landesbank Baden-Württemberg, which owns 21,000 German apartments. Patrizia is a co-investor, a strategy the company will apply to all investments in future.

May 2012: James Muir, executive director of JPMorgan Cazenove, appointed UK and Ireland MD.

Dec 2012: Patrizia announces takeover of London-based Tamar Capital Group, which under MD Rob Brook has turned the former Kenmore Financial Services into a business managing £560m of commercial property.

April 2013: Patrizia completes takeover of 21-strong Tamar for undisclosed sum. The deal establishes a UK and Ireland platform for Patrizia, boosts its French presence and adds retail property expertise in Germany.

Meanwhile, a Patrizia-led consortium pays BayernLB €2.45bn for its 31,900-unit GBW housing arm, in Germany’s biggest residential property deal in two years of big transactions for this sector. It lifts Patrizia’s managed assets from €7.5bn to €10bn, two years ahead of schedule. The portfolio is mainly split between co-investments and assets managed for institutions, while the group sells its directly held investments. Patrizia now has 600 employees and operates in 12 European countries.

May 2013: In a joint venture with Oaktree Capital Management, Patrizia pays Aberdeen Asset Management £8m for the 80,000 sq ft Edmund House, Birmingham, and SWIP £7.03m for the 44,000 sq ft 3, The Arena, Bracknell. The deals reflect 10% and 14% yields respectively and are the first fruits of the Tamar takeover.

Patrizia’s results show (pre-GBW) revenues of €229.2m for 2012, and that more than €1bn of equity has been raised from institutions in the past nine months.

June 2013: Patrizia recruits Andrew Pratt from CBRE, his appointment “signifying the company’s first strategic step to creating a UK residential investment proposition”.The share price tops €8.65, valuing the company at €496m.

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