German real estate company Elystan is seeking to generate returns in the high teens by building up a portfolio of up to EUR 300 mln in value in Munich. The aim is to actively asset manage properties that have high vacancy levels or require refurbishment.

The company is focusing on Munich and its submarkets. Unlike Frankfurt which is dominated by a few large financial institutions, Munich is a deeper and more diverse office market. A recent report by property adviser Savills indicated Munich recorded the highest office take-up in Germany over the first six months of 2011.

Investment manager Elystan was founded in 2009 by Keith Fischer, a former principal of Lehman’s real estate private equity group, and supported by trans-Atlantic private equity firm GI Partners and its EUR 2.7 bn Fund III.

Fischer has been located in Munich for about 20 years which gives Elystan a marked advantage. Elystan's strategy is to be a rooted real estate company rather than an opportunistic investor going from city to city and from one asset type to another in search of deals. Fischer: 'Germany is a big country and it is not possible to be the smartest investor in each of its markets. There is the occasional project outside Munich that might be interesting but it needs to be in Southern Germany,' he said.

Elystan acquired its second deal within 12 months in July, buying the 21,000-m2 office building, known as F10, in Munich. The financial details were not disclosed. Eric Lemer, director of capital formation and investor relations at GI Partners, said that the sweet spot for deals is below EUR 100 mln but that the firm would consider much larger portfolio transactions if they have high exposure to Munich.

Fischer told PropertyEU that the property's 50% vacancy rate is an opportunity in the current market cycle as F10 is the largest and is considered the best building in its submarket. 'Elystan focuses on assets that offer lease-up potential and above average returns. This compels us to take more risk and the strategy has been reinforced by the market recovery.'

Elystan took control of leasing at the building four months before the sale was completed. In that time it has leased 1,000 m2 to two tenants. Fischer believes the occupancy rate can be increased to 70% by the middle of next year and 90% in 2013.

Last November Elystan bought a property with 70% occupancy in the submarket of Munich Riem where the MesseMunchen exhibition centre is located. Eight months later occupancy stands at 90%.

Elystan acquired F10 from a 'motivated seller'. The building has 13-14 tenants, most of which are financial service providers, but the building requires about EUR 3 mln of additional investment to bring it to full occupancy. The former owner was not in a position to do this and the lending bank was unwilling to provide the money. Another lender, HSH Nordbank, provided leverage in the 50-70% range for the acquisition.

Elystan also has a strong equity partner in its corner. Lemer said Elystan will remain GI's real estate investment platform in Germany and there was theoretically no limit to the amount of capital GI could provide given its access to capital from its Fund III vehicle and other sources.