IPE D.A.CH Editor-in-Chief Frank Schnattinger spoke with Prof. Dr. Hartmut Leser, Partner, Spokesman of the Management Board Germany and CIO of the FREO Group, about his move from Aberdeen Standard Investments to the private markets specialist and the current challenges in real estate investments.
IPE D.A.CH: How did you come to switch to FREO, which focuses on the real estate sector?
Leser: FREO sees itself as a provider in the private markets sector, but the historical origin and the largest business area is indeed the real estate segment. In my 15 years as CEO of Aberdeen in Germany, I was able to gain a lot of experience with real estate and have developed an affinity for this asset class, and private markets in general. Here, in contrast to the liquid markets, you still find a lot of inefficiencies that, with a top team and a very disciplined approach, you can translate into an excellent risk-return ratio for clients, especially if you are outside the core segment. Another reason is that FREO originated about 20 years ago through a management buyout at Feri and I have known FREO’s founder, Matthias Luecker well, since my Feri days. I have followed the development of FREO since then and have always been impressed by his entrepreneurial spirit, with which he has made the company what it is today.
IPE D.A.CH: Can you tell us a little more about the history of the company?
Leser: From the beginning, FREO wanted to be a real estate developer, mainly with offices and retail in Germany. The problem was that no institutional investors could be found for a quasi-new company without a significant track record. Matthias Luecker, who already had good connections in the USA at that time, then mobilized investment funds from Anglo-Saxon private equity and alternatives houses and realized the first projects. The pre-requisite for cooperation with these investors was that FREO’s investment methodology and set-up corresponded to their extremely demanding ideas. That is why FREO today is positioned more like a provider of alternative investments than a classic German developer. The circle of foreign investors, including many of the world’s leading names in the alternatives sector as well as large sovereign wealth funds, has expanded more and more in the years that followed and still represents FREO’s dominant source of capital today. This development explains our current starting position in Germany: Our house meets the very highest standards in terms of investment methodology and track record, but is almost completely unknown among German institutional investors. Since 2014, we have been successfully pursuing the Europeanisation of our investments. Today, our project portfolio of more than 2 billion euros is pan-European and our more than 80 employees are spread across 11 offices in 7 European countries.
IPE D.A.CH: How can you describe FREO’s strategy?
Leser: Geographically, our investment focus remains Europe and we only work with institutional money in the office, residential, logistics and retail sectors. In the future, we also want to work with German and European money. In Germany, we offer development and re-development services tailored to local conditions for institutional investors. And we are convinced that we have excellent growth opportunities with institutional individual funds and club deals in the value-add segment, for example, manage-to-core funds, develop & hold funds, as well as with funds from our subsidiary Green-Only-Development in the “super green” sector. Part of our strategy is also to expand our product offering in the private markets segment. Our subsidiary Avelios is already active in this area with renewables and infrastructure.
IPE D.A.CH: Do you see changes in the strategy due to the changed market environment such as the massive rise in interest rates?
Leser: The ongoing normalization of the interest rate landscape is certainly worsening the environment for almost all types of investments and entailing a revaluation of all asset classes. This also applies to real estate. In addition, the economic outlook is not the best. For offices, many market participants expect a structurally lower demand for space due to the home office wave. In commercial real estate, we are seeing noticeable price corrections across Europe, so far mainly in the office sector. Since the beginning of the pandemic, we have seen price reductions, some of them significant, and have since launched a number of projects in the value-add sector, which are also paying off well in the current environment. Here we are also helped by our very good deal sourcing.
IPE D.A.CH: Let’s talk in more detail about the type of funds you offer in real estate…
Leser: We primarily offer individual funds, such as special funds, for institutional investors with whom we jointly determine the details of the strategy and the investment guidelines. Of course, club deals with a few like-minded institutional investors are also conceivable. In the commercial sector, we offer various concepts: With our manage-to-core concept, we can upgrade properties in good locations in many respects and prepare them economically for the future. In view of the structurally very high prices in the core segment, this is a good way to achieve an attractive performance. This is a sensible area of activity, especially nowadays, when a growing part of the old stock needs to be upgraded and retrofitted. With our Green-Only-Development concept, we offer the best solution here in ecological terms. Develop & Hold offers a good opportunity to mix development opportunities with returns from holding and improve fund performance. Our Green-Only-Development concept allows investors to invest in funds with only super-green emission-free properties that also prove to be economically attractive. In addition to individual funds and club deals, we also offer multi-investor funds. At the moment, we are on the market with a manage-to-core product for institutional investors, in which smaller amounts can also be invested. In the residential sector, we are working on a product that invests in the emerging rental property market in some European markets outside Germany.
IPE D.A.CH: Are these funds in a different risk class than conventional real estate funds?
Leser: Our strengths lie in our mastery of the technical, operational and commercial risks of complex construction or refurbishment projects. Accordingly, our products are not in the core segment, but in the value-add segment. This means somewhat higher risks, but our strength lies precisely in having these risks well under control and largely protecting the investor from them. Of course, we also have a risk management and reporting system tailored to our needs.
IPE D.A.CH: I would like to talk about your Green-Only concept again…
Leser: The sustainability of real estate is increasingly becoming the focus of tenants and investors. Especially in this field, we are very well positioned with our Green-Only-Development concept due to our close cooperation with ETH Zurich: We are able to develop buildings that are CO2-minimal in construction and completely CO2-neutral in operation. The buildings also have considerable cost advantages over conventional construction methods. This puts us on an ecological level that is clearly above the widespread certifications. In addition, we can use our instruments to renovate properties in such a way that they become sustainable again. We offer our Green-Only-Development concept for individual properties as well as in the form of super-green funds.
IPE D.A.CH: Back to you personally, what specific tasks do you perform in your role as Chief Investment Officer of the FREO Group?
Leser: As CIO, I am first of all part of our 4-member Investment Committee, which has to approve all investment projects and accompany them as they progress, as well as keep an eye on the risks. Of course, my experience in the real estate business helps me here. Since I have not only dealt with real estate in my previous activities, but with practically all asset classes, I also try to bring the overall picture of the financial markets, which are all interrelated, into the discussion. In addition, as spokesman for the management in Germany, I am in close contact with the clients. Of course, it helps to be close to the product and the decision-making processes.
IPE D.A.CH: Prof. Dr. Leser, thank you very much for these insights!