Plenty of ideas on the road to success
From a Netto supermarket to a child daycare centre - this profitable, welcome change of use in Recklinghausen was preceded by complex considerations. In the process, we were able to more than double the impending square metre rent of less than 5 Euros to over 10 Euros.
20 years of contract period
"Actually, it was already one year too late to stabilize this portfolio," Uwe Dieterich, Team Leader Asset Management Frankfurt, JLL, remembers. He is referring to the overall portfolio of Immo Fest Fonds, comprising over ten different properties ranging from a residential building through a care home to a gym. The financing bank wished to familiarize itself with JLL Asset Management's services based on a preliminary study. The team was able to convince the bank with its analysis, developing a strategy to stabilize the portfolio within three years, and then sell it off. The outcome was the awarding of a contract to JLL for comprehensive asset management. The assessment included business planning, reporting, cash management, service provider management, leasing management, and transaction management.
Our cooperation with the client
Contact with the client came about through the JLL Valuation Team, which initially valued the portfolio, establishing its poor performance in the process. From the outset, JLL Asset Management's declared goal for the Recklinghausen property was to create value and sell the property to pay off the loan. The building's condition at that time, however, meant that it was, quite simply, unsaleable. The space where children now play had initially been used by a supermarket and then stood vacant for many years. Full reletting of the apartments on the upper floors proved to be possible thanks to intensive efforts. Rents were reasonable and, thanks to the proximity of the nearby Westfälische Hochschule, a University of Applied Sciences, there was no shortage of potential tenants.
The Asset Management Team initially considered whether the vacant ground floor area could continue to be let to retailers by subdividing the large space into three to five units. With the assistance of local estate agents, a number of potential tenants ranging from a greengrocer through a car dealer to a dog groomer were identified, all of whom were prepared to pay € 4.50/sqm. The future of the remaining space, however, remained unclear, making this option unworkable. A change of use to a restaurant or bar did not make economic sense.
A discussion with the city's business development unit and the Department for Children, Youth and Families was the first step towards a breakthrough. Why not convert the space into a child daycare centre and lease it to the City of Recklinghausen? A key factor behind this proposal was the fact that German councils have been obliged by law to provide sufficient childcare services since 2016.
With the help of the City of Recklinghausen it was possible to fulfil the diverse requirements relating to building regulations, the fire protection concept, and planning permission for a child daycare centre. In addition, it was also necessary not only to find an operator, but also to develop a concept which included the number and size of daycare groups. Even possible soil contamination - the register of land charges included a former petrol station - was unable to stop the project. "We dug down half a metre more than required, removing all the soil and replacing it with a protective layer," explains Patrick Voigt, Expert Asset Management at JLL.
“With a keen eye for detail we were able to realize an optimum solution using unconventional means.“
The next issue which had to be resolved was the leasing relationship. The alternatives were either for the City to lease the property from the owner or for it to find an operator and provide a lease guarantee. The outcome which the Asset Management Team was able to present to the client was a 20-year leasing contract with the City of Recklinghausen. Only one question remained to be answered before the objective - to sell the property - could be achieved: Would the agreed leasing contract be enough to achieve a good price for the client or should the property first be converted and then sold, thus generating the highest possible sum to invest in the remaining portfolio?
In this case, the best solution appeared to be somewhere in between. It was decided that negotiations regarding the finished product would be completed before the property was sold to the buyer, a private investor, who would then have cost certainty. Just one year after receiving the assignment, the purchase contract was signed with a planning permission on hand and the negotiation of prices for the construction work almost completed.
This hands-on strategy made it possible to achieve a 25 % increase in the sale value compared to the valuation on hand-over. In addition to this, the new owner will bear the costs calculated for the conversion of the space into a child daycare centre, representing a further significant commercial success for the previous owner and, parallel to this, removing the risks associated with conversion. In return, the new owner now has a long-term investment product in his portfolio which will generate a square metre rent of over 10 euros from the City of Recklinghausen for the next 20 years - more than the 7 euros which the Netto chain previously paid.