Arete buying for 3rd fund after €113m exit to Cromwell

Robert McLean

#cee, #proptech, #development a #architecture

At the beginning of December, Arete Group was managing a portfolio of 11 industrial properties for its fund ARETE INVEST CEEII. But by the 10th, the company was announcing that it found a single buyer for the assets – a Singapore stock exchange listed entity in deal JLL assisted it with. Arete co-founder Robert Ides admits that plenty of people have expressed amazement at their decision to sell, asking what the company will do now with no assets to manage. But he claims that unfamiliarity with the closed-end fund structure in Arete’s home markets of Czechia and Slovakia is one reason the company ended up going abroad to find initial investors.

“You don’t really have these types of funds here in the region,” he says, even though closed-end funds are very common investment vehicle in international landscape. “The point is ultimately to deliver a profit to the investors who give you their trust over a certain time period.” The time period he’s speaking about was five years: three to collect and deploy capital and another two years to optimize and restructure the acquired assets. ARETE INVEST CEEII was set up in April 2016 and Ides says that assuming all goes to plan, the deal just agreed should close in Q1 2021. In other words, right on time.

The buyer, a euro-denominated fund that’s listed in Singapore, is Cromwell European REIT. It paid a reported €113.2 million for the industrial assets reflecting a net operating income yield of 6.7%. The total volume of Czech and Slovak industrial assets was over 125,000 sqm, virtually 100%-leased, with Arete having developed roughly 34,000 sqm of the space and acquired the remainder.

Speaking by phone on the way back from Slovakia, where he’d been wrapping up the acquisition of a 10,000 sqm industrial property in Kežmarok for Arete’s next fund, Ides said the timing of the deal, along with the price, were key for the company going forward. The point, he said, was to fulfill their promises to investors first so that you can go back to them in the future or point to your track record when speaking with new investors. Asked how he would have felt five years ago making those promises if he’d enter the disposal period in the midst of the worst global pandemic in a century, Ides was honest: “I’d be shi**ing bricks,” he laughs.

But in the next breath, he points out, the closed-end structure is designed to be more resilient to stress than most funds set up in CEE. “Imagine funds that have waves of investors that require an exit and are asking to redeem their shares,” he says. “From what will those funds pay them? From the equity of new investors? Probably, because the accumulated cash on underlying assets is being reallocated back into the investments or servicing the debt. But that’s paying equity through equity. In the US on the stock market that’s something you end up behind bars for. So unless there are cash reserves, created through operational profit in the fund to cover average annual level of anticipated redemptions, or price per share calculation reflects net value of portfolio. In all other cases, it is a virtual value.”

By this point in the phone call, Ides has gone into full investment geek mode. That means he’s more than willing to explain what he means by ‘virtual value’.

“In real estate funds, the key component for calculating share values is the real estate asset valuation that’s done at least once per year. It should represent gross value for which particular asset can be sold. But is gross isn’t the same as net value. Any institutional transaction discounts latent tax liability, as well as all unexpired lease incentives provided to tenants. So the difference can be signifiant. Unless those are included in the share calculation, there will be always gap between reported and paid amount unless a particular asset or portfolio is divested.”

Arete’s goal, said Ides, was to take a conservative approach to creating returns, as it was targeting investors interested in the safety aspects of property as an asset. “Our strategy was always to service the capital on a rather more cautious basis because even if the NOI decreases you still have the physical value of the asset itself. Even if valuations fall, you don’t have to worry so much because you have cash-on-cash delivery which is servicing the senior level debt.”

Ides says they will continue with this policy of transparency in their third fund, ARETE INDUSTRIAL, which recently initiated its investment phase. He says the planned third fund’s structure is in place and this time will seek either a stock exchange listing or a divestment of the overall portfolio over the next 5 years. Either way, the approach would once again be quite conservative. Investors, says Ides, are already asking him and Arete’s other co-founder Lubor Svoboda what’s next.

“What’s next is first to have a proper sleep, second to celebrate the New Year and third let’s start delivering on new promise for third fund.”


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