Mega Deals

2 Jul, 2007, Paris

by Olivier Gérard, Head of Capital Markets Group, Paris Office

“Swifter, higher, stronger”: Pierre de Coubertin’s motto for the Olympic Games could easily apply to real estate, such is the professionalism in the industry, the globalisation of strategies and the increasing size of sums invested which increases daily .

The real estate market has seen continuous growth in investment volumes over the past 10 years, driven by global economic growth, increased capital from pensions and, for most the majority of worldwide capital investment, by the increased necessity to balance risk and opportunity.

The growth in funds invested in commercial real estate is a global phenomenon. The main players in this market are pension funds and private equity funds, as well as hedge funds originating predominantly from the North American market, supplemented more recently, by Australian capital. These leading players have been able to diversify their investments and over many years have extended the boundaries within which they play: for the largest funds this now encompasses the entire planet. These specialists dominate the market for very large transactions due to their understanding of the specifics of each economy and the establishment of locally-based teams, combined with their use of Anglo-Saxon and financial analysis tools, now common to all markets. The strategy of these funds consists in taking on debt to acquire companies or assets, in managing them to the best of their ability and then re-selling them a few years later so as to maximise profits and shareholder value. The increase in wealth and easier access to loans, facilitated by lower and stable interest rates, have allowed investment funds to raise ever more capital. This has enabled fund managers to diversify their investments and to offset the unpredictability of stock markets by proportionally increasing the volumes invested in commercial real estate, which now stands at between 10% and 15% of assets handled by most fund managers and is a major factor in the increase in investment volumes and in the size of transactions.

Over 2006, global investments in commercial property assets increased by almost 33%, hitting a record investment level of 500 billion Euros. All markets have experienced a sharp increase in turnover, principally stimulated by Europe and Asia, with rises of 50% and 48%, respectively. Europe is the leading geographical destination this year with 45% of global turnover and 223 billion Euros invested, ahead of the United States, which slipped from 46% of global volumes in 2005 to 38% in 2006 (191 billion Euros), followed by Asia with 16% of total turnover.

One of the driving forces behind this development stems from the growing proportion of cross-border investments, up sharply in 2006 and now accounting for 29% of the international market, compared to 25% in the previous year. Once more, Europe has taken the lion’s share of cross-border investment, with 50% of all investments.

On a pan-European level, Great Britain bolstered its position as leader by attracting the largest share of the capital invested, more than 80 billion Euros, despite a decrease of over 5 billion Euros compared to the previous year. Britain is followed by Germany, which overtook last year’s second place, France, by quadrupling the volumes achieved in the previous year, at almost 48 billion Euros. Meanwhile France dropped to third place with 24.5 billion Euros invested, up 39% compared to 2005 and double the figure recorded in 2004.

This increased turnover was accompanied by an increase in the size of the transactions handled, which has been growing continuously over the past 20 years.

For those who remember the champagne years of the late 1980s and the last property boom, which collapsed in 1991, the largest transactions seen then rarely broke the 100 million Euro barrier. Over the golden years of the recovery, prior to the events of September 2001, transactions of over 500 million Euros were few and far between. Yet now we have had to change our units of measurement, as during 2006 no fewer than 25 property asset (real estate or portfolio) transfers exceeding a billion Euros were handled worldwide, equivalent to two per month.

As we have previously seen, Europe attracts most of the larger investments, but it is the United States that still holds most of the records, notably the record for the greatest number of billion-Euro transactions, with 17 deals breaking the billion-Euro barrier last year. This global market for billion-Euro-plus deals is heavily dominated by the North American players themselves, who have a particular taste for large assets, for markets strongly centred on the service sector and for diversified portfolios with value-added potential.

Europe, which recorded five transactions each valued in excess of a billion-Euros, is led by Great Britain, which accounted for 3 of them, with one such transaction apiece for Germany and France, where the largest deal involved the sale of the Kanam portfolio to Compagnie La Lucette for 1.181 billion Euros.

In 2006 Europe bore witness to almost 400 property asset sales valued at more than 100 million Euros, with a growing number of portfolio transactions. It was Great Britain that handled the greatest number of transactions, accounting for 179, followed by France with 56 transactions and Germany with 42. In the 500 million Euros and over segment, Europe notched up 33 transactions, with Great Britain leading the way again and handling 16 operations, Germany accounting for 9 operations and France 4 deals. The set is completed by Poland, with two deals of over 500 million euros, and by Sweden and Belgium with one deal apiece.

On a more general note, barely a quarter goes by without the announcement of a new record connected to the real estate sector. In the United States, just a few weeks after the announcement of the record acquisition of the MetLife Stuyvesant buildings in Manhattan, New York, by Tishman Speyer for 5.4 billion dollars in late November 2006, Blackstone announced the acquisition of Equity Office for 38.3 billion dollars. This was by far the largest transaction in the property sector since KKR acquired the Hospital Corporation of America network of clinics for 33 billion dollars in summer 2006.

Since then, on a European level, following a competition between the Terra Firma fund and KKR in late April, KKR announced the 16 billion Euro acquisition of the Alliance Boots chain of chemists, with its European network of 3,100 shops and 380 warehouses. This came just a few days after Unibail’s announcement of its merger with Rodamco, which aims to create the leading listed European property company, with an asset portfolio valued at 22 billion Euros.

There seems to be a long-term trend towards both increased volumes and mergers of companies. In the first quarter of 2007 in France, the market has seen 16 asset sales valued at more than 100 million Euros, of which two exceeded 500 million Euros, namely Coeur Défense and the CB 31 Tower.

As a reminder that records are there to be beaten, the record for the most expensive asset in history was handled in Manhattan earlier this year and involved 666 Fifth Avenue, an office complex that Tishman Speyer sold to the Kushner Group for 1.33 billion Euros. That record was beaten two months later, in March, by the Coeur Défense deal. Coeur Défence is the largest office building in Europe, with an area of 180,000 m² and was sold to Lehmann Brothers and Atemi by Goldman Sachs and Unibail for 2.110 billion Euros, now the latest world record to beat.

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