Global pedigree

After more than a decade in the market, Deutsche Bank knows how and where to identify undervalued assets. By John Elledge

DB Real Estate Opportunities Group (REOG) is the global private equity real estate arm of a German bank, yet the real estate team was founded in New York and is headed by an American. So London is perhaps not the city one would expect its world headquarters to be based.

But David Brush, the global head of the group, believes that it's the obvious location from which to run the operation. “We moved to London in 1998 as the business moved offshore and became global,” he says. “It's easier to manage it from London, because it's more central in terms of travel and time zones. It means I can talk to Asia in the morning, Europe in the middle of the day and the US in the evening.”

REOG began life in 1992 as a unit of the Bankers Trust Company, which Deutsche Bank acquired in 1999. Today it manages more than $4.4 billion (€3.6 billion) of real estate assets in the form of direct property investments, real estate companies, and non-performing loans in markets ranging from Mexico to Korea.

The group is part of DB Real Estate, an organization that, with more than $50 billion under management globally, is one of the world's largest real estate investors. REOG sits at the highest point of the risk return spectrum offered by DB Real Estate, which also provides core and value-added funds, as well as securities and mezzanine products.

“We've allowed our structures to change over time, and we've found experience to be the best teacher.”

Brush says that being able to provide such a range of products brings the firm important advantages in terms of scale. “We have a single marketing and investor relations arm, and promote ourselves as a business with multiple product lines that can give our clients different exposures along the risk return spectrum,” he says.

The firm's breadth also allows the different arms of DB Real Estate to help each other source deals: “If an opportunity doesn't quite fit our profile, we can pass it to the valueadded group,” says Brush.

Although REOG has been operating for more than a decade, its first fund dates back only to December 2003, when it raised $1.2 billion from US and European investors, most of which was used to acquire a portfolio of 68 assets in Europe, Asia and North America already held by its parent company Deutsche Bank. A sister fund followed almost immediately, raising $360 million from a portion of the cash proceeds distributed by the first fund; DB Global Real Estate Opportunities Fund II is still being invested today.

A key part of the firm's strategy is to exploit dislocations and corrections in international markets in order to acquire assets at discounted rates. It began operating in the US in the early nineties at a time when the property market was in a major trough. The firm then expanded its operation as distress in US real estate subsequently rolled around the world. “The UK market saw a correction in 1992 to 1993, mainland Europe followed in 1994, and then the Asian currency crisis hit,” says Brush. “We've tried to follow those opportunities.”

Not surprisingly, emerging markets are currently playing a key role in REOG's strategy. The firm has recently been active in Poland, Hungary and the Czech Republic, and is now moving into more far-flung markets like Romania, Bulgaria, Bosnia and Croatia. The same investment philosophy has also taken the firm to India and China.

“There are great opportunities in central Europe,” Brush explains. “The new EU countries all have higher growth rates and deepening credit markets, which is giving people a multiple on their previous purchasing power. There's still a lot of convergence waiting to happen, particularly in the residential and retail sectors.”

In a business that often seems to be dominated by commercial real estate, the group's commitment to those two sectors stands out. Yet Brush argues that in growing markets they can provide the best returns: “They're much less volatile than the office sector. That market is still driven by foreign and multi-national companies, so it's the global economy and the company's own success that drives it. The retail and residential sectors are disconnected from that – they're a pure play on economic growth over time.”

Despite the firm's commitment to following the tides of the global economy, Brush insists that its strategy isn't purely a market play. “We're always focused on value, but it's not purely momentum growth.”

Brush notes that the firm is also very active in France, Italy and Spain – three countries that haven't undergone a correction since the mid-nineties. In such markets, the firm's focus is on finding under-priced assets, or highly motivated sellers such as governments or corporations looking to restructure their balance sheets.

Two of the REOG's recent European investments demonstrate these different types of deals. The firm is currently backing a large high-end riverside residential development in central Prague, to be marketed both to domestic and international buyers. REOG's business plan focuses on the profit that will come from the high yields currently available in the local real estate market as well as strong growth in the Czech economy.

The firm's purchase of New Real, the real estate subsidiary of the Italian energy company Enel Group, in June 2004 is rather more complex. The €1.4 billion purchase price was something of a discount to the subsidiary's total value, as the parent company was keen to sell quickly. While the deal was mainly a sale and leaseback, Enel has the opportunity of cancelling a certain percentage of the leases each year, making the deal unusually complicated to value and finance. Brush says the firm's profit is coming through a combination of the yield differential created by breaking the portfolio up into smaller units, asset fixing and cost reduction.

Befitting a private equity real estate firm of its size and global reach, REOG generally draws a line between the deal originators, who have the primary role in finding, financing and executing the deals, and the asset managers who implement the business plan once a deal has closed. Brush emphasizes that both these groups are involved throughout an investment, but argues that this division of responsibilities allows the firm to capitalize on different skill-sets.

“Asset management can't just be your second line – it's not an efficient way to run your business,” he says. “The two roles require very different personality types: the originators are running around meeting people, focused on a very compressed time frame, while the asset managers are more detail-oriented and thinking of the next five years. If the same person does both, they probably won't be the right guy for one of the roles.”

Brush stresses that the bifurcated team is one that evolved over time. He cites the longevity of the business, and the continuity of its management team, among the firm's key competitive advantages. “We've allowed our structures to change over time, as it's important to maintain flexibility within overall disciplined structures, and to find a balance between having rules and not restricting creativity,” Brush says. “And we've found experience to be the best teacher.”

KEY PERSONNELDavid BrushGlobal Head of REOGMatthew BernsteinFund Chief Financial OfficerKurt RoeloffsHead of Americas & AsiaStephen ShawChief Operating OfficerAlistair DixonCo-Head of EuropeDaniel RignyCo-Head of EuropeSusan SwanezyClient Relations