General Electric Co.'s real estate unit, one of the world's biggest property investors, this year plans to focus more on development and buying assets in European cities like Berlin to boost returns as prices rise.
The gain in European real estate prices makes it harder to find suitable investments in the region, Michael Pralle, GE Real Estate's CEO, said at Mipim, the world's largest real estate conference, in Cannes, France. „Price levels are pretty high in Europe, we have had to be a little more creative about how we implement our investment strategy,” said Pralle in a March 14 interview on the chartered 143-foot luxury yacht Costa Magna that's available for hire for €90,000 ($119,000) a week. „Berlin is going to be a good market, it is the capital, we are going to be buying more offices there.”
GE Real Estate has $54 billion of real estate assets in 24 countries, including $30 billion in equity and the rest in debt. Half its equity assets are in Europe, including $5 billion in France, more than anywhere else in the world. Pralle, who has worked for General Electric for 19 years and has headed the real estate unit since 2000, expects development in Europe to be more profitable than existing real estate assets, he said. European real estate returns in 2005 were the best in at least four years, according to London-based researcher Investment Property Databank Ltd. The IPD Pan-European Index, which covers 13 countries returned 11.8% in local currency terms in 2005.
Returns in 2006 advanced in Ireland, Sweden and the Netherlands, while falling 1 percentage point to 18% in the UK IPD plans to publish the 2006 index in June. In January, GE Real Estate bought a property fund that owns offices in Germany's largest financial centers for €420 million. Last month Rainer Thaler, managing director of GE Real Estate Germany, said it wanted to double its investments in the country to €2.3 billion over the next two years.
As well Berlin, GE Real Estate continues to favor offices in Paris and the Nordic region, where it own properties in Finland and Sweden, including sites in Malmoe and Gothenburg. GE Real Estate, which is based in Stamford, Connecticut, also is looking to central European countries such as Poland, the Czech Republic and Bulgaria as well western European countries such as Italy and Spain for investments in shops and malls. „Places like Sofia in Bulgaria, where there is a growing middle class, are under-retailed,” Pralle said. „We are investing in retail in Italy, which is going from High Street shopping to shopping centers. We like to participate in that.” Pralle doesn't see many opportunities for takeovers of publicly traded real estate companies or real estate investment trusts in Europe because the shares are not trading at a discount to the value of their assets, he said.
In the US, GE Real Estate last year completed the $3.2 billion acquisition of Arden Realty Inc., the largest publicly traded landlord in Southern California. It also assumed $1.6 billion in debt. On the day it closed the transaction it sold $1.6 billion of Arden's assets to Trizec Properties Inc. to cut the risk of the transaction, said Pralle. „We are looking at REITs the whole time,” said Pralle. GE Real Estate decided not to bid for EOP Office Properties Trust after concluding that Blackstone Group LP was determined to acquire the biggest US office landlord, he said. Blackstone last month paid $39 billion for EOP, including assumed debt.
The real estate unit posted net income of $1.8 billion last year, with two-thirds coming from outside the US. That compares with 22% of profit earned outside the US in 1999. „That was a deliberate strategic change we undertook in the middle to late 1990s and that accelerated this decade.” GE Real Estate invests about $30 billion a year in real estate equity and debt to help meet the returns expected by General Electric, the world's second-biggest company by market value, Pralle said. The unit doesn't seek to take large market shares wherever it invests to help avoid any „significant concentration” of risk, he said.
Pralle says he was „gun shy” about New York and should have invested more in the city as well as in Japan, where he missed an opportunity five years ago to catch the real estate recovery. GE Real Estate has started investing in India and may put money into Russia and China, where it sees good opportunities. „With such a diversified business we can invest in these emerging markets in anticipation they will be generating meaningful levels of income in five to 10 years time,” said Pralle. „We have to think in those time horizons.” (Bloomberg)