Extensive refurbishment

of a core property incl.
tax consideration

Practical example 4

Development

of a single-tenant property in a multi-tenant service property

Practical example 8

Transaction

involving an office portfolio with two properties in Berlin
Practical example 12

Mixed portfolio (office/commercial premises/residential) with 11 properties at 7 locations. The portfolio was acquired after the original purchase in the peak of 2007 by replacing original
asset management. The properties were affected by high vacancy levels, short tenancy agreement durations and (in certain cases) repositioning requirement.

The international investor wanted to sell off the portfolio in three to four years with ambitious ideas regarding prices and also wished to receive active asset management for enhancing value (lease-up; development).

To stabilise and sell off the residential properties in order to generate liquidity for investment measures. Fundamental repositioning or reclassification of the use of the office and commercial premises with subsequent re-letting and sale to long-term investors. Partial concept development and sale to developer.

The main challenges were to be seen in the low level of liquidity of the portfolio, an excessive assessment (release prices) as well as the portfolio of properties, some of which did not generate any realistic demand in the market (incl. empty single-tenant administration building; retail gallery which was not functioning). The property management company had to be replaced as a result of poor performance.

There was a delay in implementing the business plan as a result of the financial crisis. The lengthy period during which the properties were held (involving more tenant changes/ more tenant fittings) resulted in a two-fold increase in the original investment volume which had been set. The financing bank had classified the portfolio as “workout”, although itself was in the workout phase and therefore no longer capable of taking action.

Considerable reduction in vacancy levels, process of enhancing value by way of repositioning successfully concluded. Sale without complete investment. Selling prices of the business plan were attained, although a delay was involved.

Proximity to the market and speed due to local operational asset management.

The client was an international investor which does not have its own asset management function and which regularly looks for local partners.

Nation-wide asset management team. Track record of management team. Strong operational asset management, repositioning and project development know-how.

Micro-retail portfolio with 67 properties covering a rental area of 227,000 m², mainly in small towns with negative demographic and economic development, focus in Eastern Germany.

The customer focussed on achieving long-term stabilisation of the retail portfolio in connection with the creation and implementation of a central AM strategy/management facility with business planning at the property level.

Responsibility for asset and property management was taken on within a few weeks. AM measures were based on intensive letting management (conclusion of new agreements, prolongations and extension and refurbishment measures for tenants) as well as measures and budget planning for maintenance and expanding areas to stabilise value, closely liaising with the owner.

The saturated retail demand and (an associated factor) displacement competition at the various locations were the challenges. Most of the discounter premises no longer complied with the strict requirements of the tenants (size and quality were not adequate). Further challenges were the excessive requirements for investments in the portfolio in order to guarantee followup lettings and new lettings as well as outstanding receivables of € 300,000.

The customer insisted on in-house rendering of property management services.

Overall, despite the weak demand, success was achieved in signing new and prolonging 105 tenancy agreements for a total of 121,000 m². The WALT increased by 23 % to 8 years within
24 months. Structured and active receivables management resulted in a 60 % reduction in the outstanding amounts. Various upgrades and extensions to premises were achieved (growth in
premises of approx. 4,000 m²).

The main factors of success were an active letting performance as well as efficient receivables management, professional building management and also the various and flexible AM strategies.

The customer did not have his own market network and expertise or local presence. The customer’s own in-house AM had reached and even gone beyond the limits of his resources in terms of quantity and quality.

Letting specialist with a nation-wide network and a total of 10 locations. Local market knowhow and many years of experience in the Retail asset class.

As part of the process of restructuring a complex financing structure, the investor of a real estate portfolio had transferred ownership to the providers of debt. The portfolio (which was
originally acquired in 2006) with more than 100 properties and 600,000 m² of lettable area is invested in a range of commercial types of use throughout Germany.

The aim was to achieve an optimum “total return” for the providers of debt by ensuring constant capital servicing and also by ensuring that the debt was repaid within approximately 36 months.

Following a structured take-over of the portfolio, a detailed identification of the value drivers and also clustering of the portfolio were carried out. The management service focussed on
stabilising and optimising the letting situation, carrying out building measures designed to enhance purchase prices and also specific marketing of the properties. Effective controlling and reporting were implemented to ensure constant performance measurement.

The challenge posed by the portfolio was to be seen in the nation-wide distribution of the individual properties in different local sub-markets as well as the variety of types of use. In
addition, considerable personnel resources were tied up by the high number of properties and tenants.

In the management period, the client initiated a change of strategy involving the use of incoming purchase prices for generating and developing value-added potential. Moreover, the original volume of debt and the securitisation structure involved a high number of stakeholders with a wide range of interests.

By means of active asset management, it has been possible for the letting situation to be significantly optimised by way of reducing vacancy levels, prolonging existing tenancy agreements and expanding the premises occupied by existing tenants. Resources for building measures were also employed to boost purchasing prices. In this way, the underlying valuations were exceeded in the course of the restructuring process.

In addition to knowledge of local markets as a result of a ation-wide presence, further factors of success were adequate resources of experienced and inter-disciplinary employees as well as a clear focus on the value drivers.

Neither the providers of debt nor the property companies had their own management capacities.

The demonstrable experience with regard to taking on, managing and arranging exits from comparable portfolios as well as a nation-wide presence at five locations with adequate resources combined an efficient and profit-linked offer were crucial factors for the decision.

Older office building on the periphery of the city centre in Hamburg; after the previous tenant had moved out, the property (approx. 6,300 m²) had been empty for 6 years in 2005.

The private owner wanted to achieve a top-quality letting in order to generate a long-term income flow. Plans for sales in long term. Stringent quality requirement regarding management and building quality.

Complete refurbishment and addition of further storey in 2005/2006. Also involving refurbishment of underground parking facility and a new glass façade. The period until the new tenant
moved in (major auditing company in Germany) was bridged by way of a five-year interim letting arrangement with one of the client’s own companies. Before new tenant moved in in 2012,
densification of the premises by establishing an office tower in the inner courtyard. 15-year graduated rental agreement with new tenant.

The older building had to be upgraded in all technical and structural aspects to meet modern high-quality office standards. Initially involving extensive redevelopment, followed to a certain
extent by new building measure for subsequent tenant. The task involved releasing the new tenant from an old rental agreement. Restructuring of redevelopment without incurring property
purchase tax.

The process of implementing both building measures was challenging. The interim letting arrangement had to be co-ordinated smoothly with the construction work for re-letting the premises. The equity structuring was determined in line with legal and tax considerations of the investor.

After completion of the building and letting measures, 94 % of the shares in the property company were sold to a professional pension scheme. The investor will receive annual distributions
in the long term, of approximately 6 % before tax on average. Graduated rental agreement guarantees long-term inflation protection. Successful sale from the point of view of the previous
owner.

The smooth co-ordination of the wide range of individual tasks was vitally important. This was achieved by means of in-house skills in the fields of asset and property management, letting,
structuring as well as product sales and product management.

Stringent quality requirement which had to satisfy the special nature of the long-term upgrading and management task. The full service provider nature of HIH meant that it was possible for the broad requirement structure in the project to be handled entirely in-house.

The transaction task was handled centrally and responsibly by the AM, so that the investor did not suffer any interface losses. Structuring and marketing competence.

An international investor was looking for a new investment management platform for a portfolio of 11 existing commercial properties in Germany with an investment value of approximately
€ 350 million.

Greater pooling of the entire service relating to the portfolio, incl. research, portfolio management, financing and asset management. The portfolio mainly comprises retail properties as
well as offices and residential properties, including certain refurbishment/redevelopment elements.

Delivery of a detailed inter-disciplinary portfolio analysis, which was put together as a result of close liaison with acquisition, asset management, research and finance. This comprised precise hold/sell analyses and recommendations for development/refurbishment measures at the property level. It also identified approaches for stabilising the cash flow via lettings and
refinancing.

The overall portfolio comprised very complex corporate structures in conjunction with a problematical letting situation and financing arrangements which were about to expire. In addition to stabilising the cash flow by means of an active letting strategy and reducing costs, property management was restructured.

A redevelopment project was initiated and carried out during ongoing operation of a retail property (project volume approximately € 11 million) during the phase in which the mandate
was being taken on. The process of passing on information and documentation of the previous asset manager was not ideal. The complex corporate structures meant that it was necessary for various tax issues to be resolved.

Successful completion of the project, with the property being virtually fully let during the construction phase. Refinancing subject to much improved conditions. Re-letting/prolongation of approximately 14,500 m² during the first 12 months. Considerable reduction of open items and stabilisation of the cash flow. Clarification of unresolved litigation.

The inter-disciplinary approach involving the intensive co-operation of all teams was the main driver enabling all optimisation potential to be fully utilised. Very close, open and transparent communication with the investor was of crucial importance in this respect.

International client without own asset management structure in Germany.

Existing client relationship (international client). A further crucial criterion for the investor was the ability to obtain the necessary package of services from a single source.

An outdated complex with 282 apartments on floors 1 to 5 with approximately 18,000 m² and approx. 11,000 m² retail passage on the ground floor located in a good area of Düsseldorf. The property was in poor condition and the retail sector, apart from two anchor tenants, was weak. Acquired in 2011 as part of a forced sale, socially subsidised housing with rents fixed until 31 December 2014.

The customer and joint venture partner was a real estate private equity fund. The joint idea was to acquire the property and then to unlock the value-added potential by means of full revitalisation and
re-letting of the retail premises as well as the general areas and façades as well as free apartments. The rent level was considerably lower than the general market level.

After partial termination of tenancy agreements in the retail sector, complete refurbishment of the retail premises and letting to good tenants. The general residential area and 56 free apartments were also modernised to a high-quality standard. New tenant structure, rent increases for retail and residential premises as well as cost and process optimisation. Reduction of service charges and costs
for owners by way of optimising the service agreements, etc. Signing of new tenancy agreements and introduction of branding.

The forced sale process meant that only limited due diligence (DD) was possible; there was thus no reliable estimate of the costs involved as a result of acquiring the property. The property had a difficult tenant structure, combined with a negative property image and press, rent controls and a huge backlog of repairs. Because the property was built in 1978, there was an outdated mall concept, unattractive retail tenants and also a slightly excessive percentage of retail premises for this location.

The restructuring process of the retail premises involved greater complexity and higher costs than originally planned in due diligence, but also resulted in better rents. Letting of the refurbished apartments was much better than originally planned (more attractive tenants and rents). The project was realised and the property was sold after three years instead of the originally planned five years.

In the final analysis, as a result of higher rents and a better factor, the project produced a higher economic success than originally planned. The property eventually generated an IRR of almost 30 %, and the capital employed was doubled. The purchaser was a German pension fund.

The property is situated in a good district close to the city centre. The tenancy agreements of the anchor tenants EDEKA and Aldi were prolonged on a new and long-term basis. Notice of termination provided to the other retail tenants due to a forced sale permitted a high-quality refurbishment process to be carried out. Rent controls expired after three years due to a forced sale . Active AM with own technical competence.

The customer, which is based abroad, fundamentally only works in joint ventures with very entrepreneurially-minded partners. However, in view of the complex nature of the AM task, it would also nothave been possible without a local presence and without development experience.

We have identified the property and presented it to the investor with the idea of revitalisation and unlocking the value-add potential. He obtained references regarding our track record and was able to see that we have previously successfully realised projects of this nature in the past.

Retail portfolio with more than 50 properties at more than 40 locations. Examples of conditions at the time of taking on the portfolio: low financial reserves, high vacancy levels, backlog of
maintenance, financing in default, considerable influence exerted by financing banks.

The level of debt was to be reduced by way of a rapid sales programme, and the price expectations were ambitious. Further objectives included enhancing value by way of active asset management (lease-up, development, retention) as well as completion of the process within three to four years.

Asset management focussed on the large properties with the potential to unlock value and also on major tenancy agreements. The smaller properties were sold off rapidly, some were even sold at a discount. Where possible, tenancy agreements were prolonged or projects were “initially developed” and then sold.

Challenges at the property level were the low liquidity in the portfolio, short/excessive lease contracts, a high appraisal (release prices) and the portfolio with some properties for which there was no demand (part ownership/lease).
Complex interfaces and unclear objectives at the project level.

Database, e.g. Rent Roll, was errored and was not able to be used for sales. This resulted in delays in sales.

Long-term prolongation of crucial tenancy agreements. Successful “initial development” of properties which needed to be developed. Rapid sell-off of small properties.

Asset management activities clearly focussed on mid-size and large properties with the potential of unlocking value, rapid sell-off of small properties, existing contacts with large retailers, local asset management.

The financing bank demanded the closure of the internal unsuccessful asset management department of the client in Germany, and demanded that the responsibilities be awarded to an external asset management company with a track record.

The crucial factors were the retail know-how, the nation-wide presence as well as the track record of sales of individual properties in sub-prime locations.

The AM mandate was acquired for an existing property which had undergone a core refurbishment programme between 2007 and 2009, incorporating new building standards, with approximately 22,000 m² rental office space as a single-tenant property in a good location of Munich.

The focus was on establishing asset management, on the basis of a 100 % vacancy level with the objective of achieving full letting status.

The creation of a marketing strategy, development and implementation of the letting concept and also converting the property into a multi-tenant property, incl. implementation of all tenant fittings. The crucial measures also included the establishment of a website with extensive information concerning the property and the tenancy arrangement, as well as intensive co-operation with sales partners (agent events, letting competition, etc.) and direct marketing combined with events designed to enhance the property visibility.

This was not an established office location. The subsequent effects of the economic crisiswereevident in the tenancy structure. In addition, the single-tenant concept posed problems for a necessary multi-tenant letting arrangement.

Continuous development of a service property.

Financial success was achieved by boosting the letting ratio with the conclusion of 13 tenancy agreements (most of which were of a long-term nature: > 10 years) with well-known tenants and also by extending the areas occupied by existing tenants. Extensive and transparent reporting enabled the property budget specified by the client to be fully monitored for planning purposes relating to building measures and measures relevant for letting purposes. At the same time, existing tenancy and service agreements were optimised to a considerable extent.

The tenancy ratio was considerably increased by way of active letting services. Development of multi-tenant service property.

The client did not have (his own) market network and expertise or a local presence with relevant letting skills.

AM as comprehensive letting specialist with clear ideas regarding the concept for reclassification of use (single-tenant to multi-tenant), local market know-how and many years of experience in the Office asset class.

At the time at which the asset manager was engaged in May 2012, 4,550 m² (13 % of the lettable space) was empty. Tenancy agreements for a further 10,865 m² (31 %) were due to expire in
the near future (within six months) or were to be prolonged. The property with mixed use (hotel, office, retail) with 34,500 m² was let to 43 tenants. The owner company was already insolvent.

The aim was to stabilise the property in the long-term and to prepare for the property to be sold out of insolvency. By maximising the proceeds of the sale, the amount of the outstanding loan to be repaid in the near future (12-18 months) was to be maximised.

The focus was on actively letting the property in a structured manner in order to reduce/avoid the (threatened) vacancy levels in the immediate future and also to maximise total rental revenues,
thus enabling the basis for the sales valuation to be maximised. For this purpose, the existing tenancy agreements were reviewed and a modified new rental strategy was developed. Close contact was established with the relevant existing tenants.

The challenge was to be seen in the relatively short response time for individual letting measures, the considerable reduction of vacancy levels and the reduction of the accumulated backlog of maintenance in the course of active insolvency proceedings, of course in conjunction with no liquidity or extremely limited liquidity.

Insolvency proceedings were initiated in relation to the assets of the property company at the beginning of June 2012. In the same month, a major office tenant (1,500 m²) exercised his special right of termination, and terminated the tenancy agreement. Many of the agreements which were not profitable for the owner still had medium terms to run in conjunction with tenant options.

Significant improvement in the results of operations within a period of 9 months due to prolongation of existing agreements and new lettings. Provision of liquidity required for letting and maintenance, mostly by way of new lettings. Compensation agreements for tenants leaving the property and collection of rent arrears. Total increase of 27 % in the value of the property.

As a result of the knowledge of the local market and the close contact with agents, the existing (letting) problem was rapidly identified and remedied. The local presence enabled contact to be
established rapidly with the relevant tenants and assured the existence of agreements which were due to expire in the near future.

Neither the provider of debt nor the insolvency administrator of the property company based in Munich had their own management resources. As a result of the convincing advice analysis results from the phase of the imminent insolvency, the company was convinced that a local asset manager would be able to meet the objectives.

As a result of the convincing advice analysis results from the phase of imminent insolvency, the provider of debt and the insolvency administrator were convinced that the AM with the local presence would be able to meet the specified objectives. Customer convinced by extensive expertise and inter-disciplinary team. Service provided from a single source and pooling of interfaces.

Main tenants Degussa and E.ON left the property at the beginning
of 2008, the property was completely vacant (approx. 19,600 m²). The building was initially tailored specifically to meet the needs of Degussa, and the fittings reflected the year of construction of 1974.

The owner (special fund) wished to adopt a value-add strategy and achieve a market positioning as a core property which could be occupied at short notice with high standards incl. new building services. In addition, pollutants were to be cleaned up and the façade was to be refurbished.

Project planning was carried out between June and October 2007, headed by the AM, with the aim of achieving viable and profitable letting and project realisation. The project was implemented in 2008 and 2009, the property was fully let in mid-2013 and sold in 2013.

Completion of the design-ready structure at the end of 2009 - the rental market in Dusseldorf had virtually hit rock bottom at that time as a result of the financial crisis. High-quality competitor properties in the immediate vicinity (e.g. Sky Office) resulted in strong competition.

Extensive levels of pollution (asbestos) were identified and remedied during the construction period. The company was able to cope with the insolvency of one contractor. The main potential tenant for whom the building had been originally planned withdrew from the tenancy arrangement in mid-2008; this means that the revitalisation process was carried out on a speculative basis and without any pre-letting.

Despite the difficult market situation in Dusseldorf, two initial rental agreements for the building were concluded shortly after the completion of the design-ready structure (show room and auditor). Further lettings were gradually achieved, enabling the building to be sold fully let as a core property subject to market conditions in 2013. Successful implementation of the owner strategy.

Good fit-out quality of the building subject to arm’s-length rents, high flexibility of the rental spaces and attractive visual overall concept (contemporary modern façade).

Strong local letting competence of the AM as a result of the branch based in the same location. Lack of in-house skills for carrying out extensive revitalisation measures, high-quality requirement, a wide range of real estate skills was required for the property.

Many years of experience in project development business, demonstrable letting skills at the location, open communication/central responsibility of the AM.

Acquisition of a site in 2007 with the aim of carrying out a speculative project development with approx. 34,000 m² office and retail space for an opportunist fund managed by the AM.

The property was part of a closed opportunist fund. The aim was to complete and let the property and sell it to an institutional investor.

Definition of the building and space design in close co-operation with the joint venture partner and external advisors, focussing particularly on the flexible division of a range of sizes between
400 m² and 4,000 m² and also certification in accordance with the LEED Gold Standard.

In the first two years following completion, the development of the rental market was particularly challenging as a result of the financial crisis. After a major user had withdrawn from an arrangement in relation to approx. 20,000 m², the entire concept was restructured, with the premises being let to a number of smaller tenants.

Very sluggish rental market with low number of letting arrangements and vacancy levels directly after the property was completed. Reclassification of special-use areas on the ground floor (conference providers, fitness operators, catering concepts).

The building was sold fully let and without any defects in 2013 to an institutional investor with excellent financial success.

The rapid and unbureaucratic co-operation between the AM project team and all agents involved made a vital contribution to the letting success. The aim of being able to submit a tenancy offer to potentially interested parties within 48 hours after viewing was of crucial importance in this respect, and was supported by an external office planner.

The project was part of an opportunist fund managed by the AM.

The AM is one of the leading independent investment managers in the world in the real estate field, and benefits from a broad, established and global real estate platform with 670 employees who in turn have established good networking in their local markets. The AM has had a presence in Germany for more than 15 years with a broad inter-disciplinary platform.

The vendor with two distressed properties had a clear schedule for the sale. Liquidation of both properties (one attractive property, one less attractive property) by means of bidding process. Property 1: in Lichtenberg, approx. 15,000 m², built in 1995, 100 % vacant, not office location. Property 2: approx. 30,000 m², built in 1996, 88 % let, “up-and-coming” office location on the banks of the river Spree, main tenant Federal State with approx. 50 % of the space and rents approx. 50 % lower than current market levels. Purchased in 2013 as a share deal.

Immediate sale or rental of property 1 and “manage to core” of property 2 with minor (mainly “cosmetic”) revitalisation measures, image improvement and improvement in occupancy levels, optimisation of tenant structure and rents, long-term prolongation of main tenant with rent in line with market rents/re-letting and sale.

Implementation of the revitalisation project, contract prolongations incl. main tenant with market level rents, re-letting, optimisation of service provider and supply agreements, tenant restructuring, completing fire protection measures, repositioning/branding, improvement of overall image and building structure.

In the case of property 1, the main challenge was the fact that the property is not situated in an office location and that the district has a poor image. Property 2 is situated in an attractive location, but the layout is somewhat narrow and cramped. In addition to the main tenant, there are some relatively small existing tenants. The condition of the property was moderate due to the failure of maintenance to be carried out, and fire protection issues had not been tackled properly. Considerable room depths in certain cases.

Prolongation ahead of schedule with one tenant, although there was still time until 2016 to speak with the owner with regard to the tenancy agreement. The process of implementing the concept took longer.

It was much easier and quicker for the property 1 to be sold to a private investor. The WALT of property 2 was successfully optimised on the basis of a higher rent, and the revitalisation programme as well as the positive market development were factors which enabled the value of the properties to be  considerably increased. The business plan was again considerably exceeded in this respect.

The fact that the local team was well networked in the Berlin market was very important. Good location development and good infrastructure were helpful, as were the attractive main tenant with a new and longer-term agreement, the flexible floor layouts, the moderate rent level, adequate parking spaces and also the revitalisation programme.

The customer, who is based abroad, fundamentally works only within the framework of joint ventures with local and entrepreneurially-minded AM partners.

Good experience in recent years and further co-operation elsewhere. The Berlin office provided convincing arguments with access to the market, experience and a motivated team. The asset manager had sourced the transaction at an early stage with the existing network, and thus had a lead in terms of time and information.

Media

Press releases

Dates

Downloads