Case Study: Gera-Lusan

Investment Type: Multifamily Redevelopment

Location: Gera-Lusan
Purchase Price: EUR 23.95 MM
Units: 1,055
Sq ft: 903,897
Vacancy: 7%
Cap-Rate: 6.72%
5-Year IRR: 35.48%

Gera-Lusan, located south of the city center, is the largest sub-division of Gera with a population just over twenty five thousand inhabitants. Gera is a B city located about a 1-1/2hours by car from vibrant Leipzig in former Eastern Germany. The properties are located near a demolition zone (Rückbaugebiet) designated as such by the Gera Urban Planning and Development Department and the East German Urban Reconstruction Committee (Stadtumbauost). Gera's demographic shift and declining population created high structural vacancies from 1989 forward. The planned demolition surrounding the properties offered an opportunity to greatly increase the net operating income through additional investments in the property, which could be debt financed at very low interest rates through the KfW (Kreditveranstalt für Wiederaufbau), a government sponsored reconstruction loan corporation.

The portfolio was comprised of partially refurbished pre-fabricated GDR building blocks between 4 and 11 stories high, holding 1,052 residential units, 5 commercial/retail units, and 392 parking spaces. The properties were primarily built between 1977 and 1981. At the time of acquisition in the Spring of 2007, refurbishment works had been executed for approximately half of the properties between 1997 and 1998, whereby approximately 50% of the portfolio's apartments and common areas were renovated.

One of the portfolio's properties, an 11-story building with 80 units and a vacancy rate of 35.5%, had yet to be refurbished and represented a value-add opportunity as the center piece of the portfolio. The total cost for the project was EUR 2.2m or approx. EUR 38/sqft. Work included the replacement of all balconies and electrical systems in the units and apartment make-ready works including new flooring, paint, tiling and kitchens and the renovation of common areas.

In addition, EUR 540k was invested in new exterior elevators on five-story buildings to attract families to lease three- and four-bedroom apartments. Unrenovated apartments were successively renovated for tenants that could not be placed in apartments that had just turned over. In doing so, tenant retention was very high with yearly tenant turnover of only 15%.

10% of the net operating income was pooled into ground rents and securitized in an AAA-rated bond transaction allowing the investor to realize a significant return on investment shortly after acquisition.