German Market Proves Tricky

Patrizia in a Bind After Buying Spree; Perils of Stable Prices

In 2006, German real-estate company Patrizia Immobilien AG stepped on the gas.

The Augsburg-based company had been slowly converting apartments into for-sale homes, but two years ago, it raised €118.4 million (now equivalent to $187.2 million) in an initial public offering and began borrowing heavily to increase its pace of acquisitions.

Patrizia Immobilien has increased its holdings of apartments and debt since going public in 2006. One of its projects in Germany is the Pressestadt in Munich.

The strategy proved ill-conceived. Today, with sales slowing dramatically, Patrizia is holding about 13,000 units, compared with roughly 1,300 in late 2006. Furthermore, this year, it must refinance €656 million in debt from its acquisition spree, and some analysts have questioned whether it can pull that off in today's tight credit environment. If it can't, Patrizia may need to dump apartments at discount prices to raise cash.

Patrizia's shares, which were first offered in 2006 at €18.50, fell more than 77% last year and are now trading below €3.50.

Patrizia's problems demonstrate that housing woes are hitting even countries that didn't see a sharp increase in prices. Much of the German market stagnated in the past decade, while home prices in countries like the U.S. and the United Kingdom rose sharply. In 1997, the average price of an 864-square-foot flat in Berlin was €206,960; in 2007, it was €209,600, according to Tobias Just, real-estate analyst at Deutsche Bank AG in Frankfurt.

Still, by the middle of this decade, private-equity firms were spending billions of euros snapping up residential-property portfolios in Germany, expecting the boom to spill over its borders. Buyers included Fortress Investment Group LLC, which spun off its Luxembourg-based German-residential-property unit, Gagfah SA, in an IPO in October 2006. Gagfah's stock price is now in the €11 range, down from a closing price of €23.35 on the day of its IPO.

From 2004 through 2006, British and American companies bought 560,000 units of German residential property from municipalities that needed to raise money, Mr. Just says. The market looked compelling partly because of the low rate of homeownership in Germany, analysts said. Only 43% of the country's housing stock is owner-occupied, while the figure for Western Europe in general is about 60% and for the U.K. about 70%, Mr. Just says.

"People thought this would pick up," says Gerhard Orgonas, an analyst at Citigroup in London. "There was a lot of optimism at the time about the German residential market."

Although Patrizia's primary business is buying apartment buildings and selling the units, it also buys and upgrades apartment buildings and sells the rental units in block deals. The company was founded by Wolfgang Egger when he was 18 years old. Now 42, Mr. Egger is chairman and chief executive and owns a majority stake in the company.

Patrizia says the past year's problems have been caused largely by rapid expansion. Last year, it took over two portfolios of about 9,700 units combined and hired 110 people to manage and sell them. "To integrate all these people, to optimize the processes and to integrate these two big portfolios; this was harder than we calculated," says Klaus Schmitt, Patrizia's chief operating officer.

It also took longer than expected to obtain permits that allow the acquisitions to be sold. The result: Most of the new portfolio wasn't available for sale until the mid-2007, Mr. Schmitt says.

Last year, Patrizia sold 487 units, down from 2,250 the previous year. Some analysts say part of the problem has been the company's difficulty in exporting its formula from Munich, where it has been successful, to other cities. "In our view, it's difficult to scale this model," says Jochen Schmitt, analyst at Frankfurt-based private bank B. Metzler seel. Sohn & Co.

Patrizia's Mr. Schmitt says other market forces bode well for the company. He notes that the number of building permits being issued in Germany is historically low and construction costs are rising, factors that could boost the sales market for existing apartments. Also, interest rates are still low, and there has been no change in the mortgage availability for buyers, he says.

Still, the sales slowdown is particularly problematic because of the €656 million of debt Patrizia must refinance. Citigroup's Mr. Orgonas says the company isn't bringing in enough rental revenue to cover debt service. "They need to [sell] flats to break even," he says.

Patrizia's Mr. Schmitt says the company already has been able to refinance "a very big part" of the debt, but he declined to provide details.


By: Beth Carney (special to the WSJ)
Wall Street Journal; April 16, 2008