Case Study: Halle an der Saale

Investment Type: Multifamily and Assisted Living

Location: Halle Neustadt
Purchase Price: EUR 95.03m
Units: 2,709
Sq Ft: 1,517,761
Vacancy: 4.0%-7.5%
Cap-Rate: 6.75%
Projected IRR: 22%

An apartment and assisted living residential portfolio located in a B city, Halle an der Saale in Eastern Germany, is comprised of eleven high-rise buildings, containing 2,698 residential units and 11 commercial/retail units. The buildings were designed and built between 1966 and 1983 with a cluster-like infrastructure and substantially refurbished in 1997 to 1999 and in 2004 to 2005. They were in good overall condition and have low outstanding capital expenditure requirements. The portfolio was acquired in 2006 and separated into a leasehold/freehold structure.

One of the portfolio's buildings was adapted and refurbished in accordance with an earn-out clause to meet assisted living standards, creating an attractive and comfortable living situation for the elderly. The conversion increased the marketability of the adapted apartments in light of an aging population and helped create jobs in the Halle Neustadt sub-market.

The properties were acquired at a 6.75% capitalization rate and structured with an excellent two-year interest-only, 10 year term non-recourse loan behind the ground rent interests. The investor secured 47% of his initial investment within three months of acquisition through pooling the ground rents into an AAA-rated ground rent securitization.

The properties suffered an increase in the vacancy rate from 4% to 10% during the financial crisis beginning in 2008, but have since stabilized after switching out the property manager and reevaluating letting practices and investments in vacant units. The new property manager opened a central leasing and management office in a mall at the core of the properties to reposition the units more into the public eye. The property manager's unwavering commitment to customer relations helped tenants identify with their apartments, improve arrears management, and provide tailored renovations. This proved to be the right strategy in a tenant market where 20% vacancy for renovated apartments was not uncommon. The occupancy level soon rose to 95%.