Letterstone and Starr International have created a Netherlands-based investment company called LS Real Estate Ventures, which will be used as a vehicle to buy real estate developments in Hungary, Slovakia, Romania and Ukraine.
The pair will invest about €250m – although most of the equity will come from Starr International – into the venture, which will create an acquisitions and development war chest of up to €1bn including bank debt.
The new venture comes against a backdrop of falling property values in many parts of Europe, although countries in the east have not seen the same sort of falls as in western regions.
The fund will look to buy mostly land, or property with redevelopment potential, which Letterstone will then develop into new commercial buildings.
This is seen as generating a higher income than simply acquiring existing property in a region where many cities are seeing strong growth rates and a need for commercial property. LS Real Estate will buy sites in the bigger cities and growth locations in second-tier cities.
“[Letterstone] are able to utilise their own on-the-ground operations in the countries where they are investing to source deals which offer excellent value,” said Maurice R “Hank” Greenberg, chairman of Starr International.
“Their focus for development projects is in locations where demand outstrips supply and where value can be added through changing of use.”
LS Real Estate will use an initial tranche of €100m to acquire up to €500m of assets in 2008 and 2009. Starr will have the option to increase the equity by a further €150m in increments of €50m. The fund will have a targeted rate of return of above 20 per cent.
“Starr has a long history of investing in emerging markets and we can provide a platform in the area,” said Simon Hill, chief executive of Letterstone. “We will look to do a lot of development, covering all sectors from offices to industrial to hotels, to create a portfolio of quality property across the countries.”
Mr Hill added that a number of potential acquisitions had already been identified. The fund will have an initial term of five years, after which its board will evaluate the fund’s continuation. There is no fixed exit strategy, although Mr Hill said that options such as a flotation, or straight sale over a two-year period, would be considered.
