Lincoln Equities Germany

Germany Investment Overview:

Lincoln Equities has been targeting the multi-family property market in Berlin, Germany for significant new investment. Assembling a local platform of lenders, attorneys, tax and financial advisors, and property managers, and cultivating relationships with the active property brokers, Lincoln Equities has already succeeded in acquiring 930 residential units worth €60,000,000 ($80,000,000) in seven transactions since April, 2005.

I. Why Berlin?

Lincoln Equities believes that targeted investments in the Berlin real estate market have tremendous upside potential with little downside risk. The Berlin market seems rife with opportunity for the following reasons.

- Rental Rates in Germany and Berlin, in particular, are extremely low as a percentage of personal income when compared to other major cities in Europe. These low rents are the result of 60 years of significant government housing subsidies that have yielded a landlord mentality of managing from a welfare perspective as opposed to profit motivation.  With the more competitive global environment, Germany has been forced to eliminate many of these social programs. In properties owned by Lincoln Equities, flats that have recently vacated are being re-let at rents that are as high as 10-20% higher than previous rents. Existing rents can be increased as well, but are generally limited to 20% increases over a three year period.  Obtaining these increases seems to be the “low hanging fruit” as they are merely the result of minimal capital investment in the vacated spaces and more active and attentive management.

Another factor which will contribute to rising rental rates is the fact that government institutions which own vast amount of public housing units have over the past five years begun selling off large housing portfolios to raise much needed cash. This trend is expected to continue. It is anticipated that private, profit motivated owners of these units will look to increase rental rates to more reasonable levels. 

-Prices per square meter for quality residential real estate in Berlin are extremely low for a major city by global standards. In most major European cities multifamily properties trade for prices representing between $400 and $700 per square foot. Lincoln Equities is purchasing excellent, well located apartment buildings in Berlin for approximately €800 per square meter which is approximately $100/ft.

-Over the last two years, major foreign investors have taken notice of Berlin real estate investment prospects, and have completed major transactions. Until early 2005, stabilized multifamily properties were selling at cap rate ranges of 9 to 11% (or using more common language in the market, multiples of 9 to 11 times) on year one rental income.  Starting in 2005, rent multiples have increased significantly reaching over 18 times rent (cap rates of sub 5.50%), due to the influx of foreign investors in the market place. 

Berlin has had a vast auction of state- and city-owned apartments. In 2004, Goldman Sachs and Cerberus, a New York-based hedge fund, bought 66,000 units for $2.5 billion. Gagfah, a state-owned company, sold 80,000 apartments to Fortress for $4.4 billion. In the largest transaction to date, Terra Firma, a private equity firm based in London, paid $8.8 billion in 2005 for 138,000 units owned by a subsidiary of E.ON, the German utility company. This added to a very competitive investment environment resulting in increased attention on the market and higher prices. As these investment giants focused purely on large transactions, opportunity remained for private investors to acquire quality properties in the small to mid size range (up to 50 Million Euros) at reasonable price levels.

-The owner occupancy rate in Berlin is very low, at 15%, and overall in Germany at 43% as compared to the average ownership rate in the European Union of 65%. The increasing rate of home ownership in Germany is expected to continue. This will contribute to a decreasing stock of rental units and upward pressure on rents.  In Berlin, this trend is also expected to contribute to higher valuation for residential units since the average price for current conversions (privatizations) in the markets Lincoln Equities is targeting is in the range of €1,800 per square meter (By comparison, the average price in Munich is €3,650 per square meter.).

-Vacancies in the Berlin submarkets targeted by Lincoln Equities are typically less than 3.00%.

II. Berlin Market

With Berlin serving as the capital and political center of Germany, the country is staged for an economic comeback in 2007. The unprecedented investor interest for the German residential real estate market includes major corporate ventures totaling over $20 billion from companies such as Morgan Stanley/Corpus, Terra Firma, Fortress, The Blackstone Group, Whitehall (part of Goldman Sachs) and GE Real Estate Germany amongst others.

Distinctive to Berlin is the city’s cultural attractions. Berlin offers a wide variety of culture within the city, housing three opera houses, two-concert halls, more than 150 theatres, 265 cinemas, 170 museums, 300 galleries, more than 250 public libraries, and eight symphony orchestras. The city is also the center for education -- housing three universities, four colleges of fine arts, nine schools of applied science, as well as some 250 non-university research institutions.

According to Deutsche Bank Research, “the new planned development of the international airport at Schonenfeld, Berlin will make the city the hub between East and Western Europe.” With this new development Berlin is expected attract higher real estate investments from large companies wanting to position themselves in the country’s capital.

III. Lincoln Equities Local Expertise

Lincoln Equities has studied the Berlin market and has gleaned a great deal of understanding and insight into the subtleties of location and submarkets from a network of local professionals.

Lincoln Equities has built an impressive team comprised of local real estate and business experts in Berlin to help effectively source opportunities and manage investments with the utmost financial control and operating efficiency. From attorneys to accountants and tax advisors, lenders to brokerage professionals, Lincoln Equities has assembled a very strong local management team in Berlin.

In 2005, Lincoln Equities established a network of local managing agents and developer relationships who exhibit “hands-on and entrepreneurial” approach to operating real estate. Their local relationships with banks, owners and brokers complemented Lincoln Equities’ experience in the dealing with investment banks and institutional funds. Lincoln Equities’ extensive track record in the USA and references from US lending institutions gave Lincoln Equities instant credibility with local banks, international brokers, large and small local property owners, capitalizing on their partners’ existing relationships.

Naftali Wachsman, a principal of Lincoln Equities, resides in London where most of the international investment banks are located. He spends a considerable amount of time in Berlin, seeking out “below the radar screen” acquisition opportunities and developing local relationships.

The melding of Lincoln Equities, Naftali Wachsman, and local partners has produced a Berlin operating platform that is consistent with Lincoln Equities’ hands on approach to all facets of the investment process. 

IV. Berlin Investment Strategy

As the global investment giants are focusing purely on large transactions, opportunity remains for private investors to acquire quality properties in the small to mid size range (up to €50 Million Euros) at reasonable price levels. Lincoln Equities is leveraging broker relationships to obtain “early looks” on well located small to mid-size properties. In addition, Lincoln Equities is utilizing a local presence which boasts 15 years of local development and management relationships to source attractive “off – market” opportunities.

Lincoln Equities will actively look to increase below market rents for existing tenancies, and push rental rates on initial vacant spaces, by making selective, cost effective capital improvements. 

Lincoln Equities will look to group assets together to sell on a portfolio basis, as sale proceeds seem to be maximized in larger transactions.

Lincoln Equities will take advantage of attractive debt markets to target minimum cash on cash returns of 5.00% and total investment returns of 17% over five to ten year holding periods.

In summary, Lincoln Equities believes investments in Berlin will achieve solid initial returns with very low downside risk, and enjoy very strong prospects of significant near term appreciation through growth in property rents and improving market valuations.  

For more information on Lincoln Equities Germany, please contact: info@lincolnequities.com

 Lincoln Equities Germany - Portfolio