GUF-I GERMAN USUFRUCT FUND
CES Investments is currently in the market to raise Euro 100 million of equity for its German Usufruct Fund (GUF) which invests into existing German residential real estate in A1 locations in the major German cities, predominately in Berlin.
GUF has a base fund term of 5 years during which the management will enhance the value of the underlying real state and will dispose the assets either to individual buyers or all or parts of it to institutional investors. GUF has already a pipeline of around Euro 70 million in assets secured.
German property law allows to split the real estate ownership rights into a usufruct right which is a right to use the property and the bare ownership right which includes the right to sell it during the usufruct period. This law exists since centuries and is a common legal instrument in the market of real estate in Germany and elsewhere in the world.
CES Investments addresses a fast-growing challenge of the older society i.e., people who are retired and in cash needs to generate cash as this group doesn’t qualify for a bank financing anymore. Those retired people live in real estate build in the 1960/1970 on sites which where back then in the outskirts of those major cities but now - as the cities have grown in the last 50 to 60 years substantially - are all in prime inner-city locations. The owners are asset rich as they repaid their mortgages but cash poor as the pension, they receive is lower than expected because of demographics. The pension gap in Germany has already reached Euro 159 billion.
The solution which CES Investments offers is to acquire from this group their existing real estate at a discounted price (pre-paid rent) but to allow them to stay and use their house till the usufruct contract ends.
The German residential property market has a market value of around Euro 6,2 trillion. 52% of the society owns their property which represents a value as of today of Euro 3,1 trillion. 20 % or Euro 700 billion of this market segment is owned by retirees - the targeted group of GUF.
The German real estate usufruct market is growing every year into new heights. It is expected that the transaction value for this market segment in 2021 will be around Euro 1,2 billion - an increase compared to 2020 of more than 40%.
GUF has a three-step value creation strategy:
- A major discount at property acquisition in form of pre-paid rent. The calculation of the pre-paid rent is based on the same algorithms as life insurance companies use it for calculation the premiums of their life insurance policies.
- A property enhancement strategy by increasing the build up area substantially. Typically, the size of those sites is between sqm 1,500 to sqm 2,000 whilst the villa built on it has only an area of sqm 150 to sqm 200. With the immediate change of the ownership at the singing of the usufruct contract GUF will be able to increase the buildup area rights for the site acquired to sqm 600 to sqm 800 depending on the site location. This has a substantial impact on land value.
- Last but not least GUF will benefit from the capital appreciation of the land during the holding period.
GUF is handcrafted for investors who want a low investment risk, but higher returns compared to the bond market.
As a summary an investment in GUF provides investors with a bond like security with a fixed income and PE like returns. GUF will distribute an annual cash dividend of 6% and is anticipated to deliver an IRR of more than 12% in the base case scenario.
About the author:
Jurgen Herre is one of the Managing Partners of CES Investments, a fund management and financial service company located in the DIFC and regulated by the DFSA. Previously he was Managing Director of Hines Europe and member of the worldwide investment committee of the Hines real estate funds. Currently he is also a Board Member of various companies.