Consistently travelling against the grain of common opinion to take advantage of the right economic opportunity appears to have been the key to success for Yakir Gabay, the private Israeli billionaire founder of German property giant Aroundtown. And there has been plenty of success.
Since listing Grand City Properties in mid-2012, in which Aroundtown holds a 40% stake, the value of the business has increased from an initial EUR 150 million to an impressive EUR 3.5 billion, a truly spectacular return. Since listing Aroundtown in mid-2015, the market cap increased from EUR 1.6 to 9 billion.
Gabay, who was appointed to the Board of Directors of EPRA in 2020, is keen to apportion all the credit for company performance to the expertise and talent of his homegrown team. However, it is difficult to look past the man who led the company and his experience outside of the property industry, where his career began, when trying to understand the catalysts responsible for Aroundtown’s staggering growth since its foundation 17 years ago.
“I actually started out as an investment banker,” says Gabay. “And I learned a lot about business, generally, doing M&A and equity and bond issuance.”
“When I was an investment banker,” he remarks, “I was doing everything! Finance, technology, property, it didn’t matter. What really mattered was that there were opportunities, and we found them wherever they were.”
In time, Gabay became head of the largest investment bank in Israel, and it was here that he learnt the fundamentals of business. “When I left the bank to start my own business venture, I was successful immediately as I made a fast profit from M&A, but it was really beginners’ luck,” he admits.
“Later on, I stumbled on a deal where I introduced US investors to buy one of the largest asset managers in Israel, Gmul Investments (which at that time had USD 30 billion assets under management (AUM)). They wanted me to stay and become a partner in the deal, and I stayed as a chairman and a partner.”
Not long after, Gabay decided to go it alone, using the capital from his successful M&A deals to fund his own venture in European real estate.
In 2004, Berlin was in a terrible economical situation. Everyone saw the negative, but, Gabay explains, he saw what he calls the first ‘major shift’ that he was able to capitalise on in the city’s real estate.
“Residential and hotel property assets were being sold at ridiculously low prices,” explains Gabay. “This meant that rental yields were high. Interest rates in Germany were low, which made the rental yield spreads even more attractive.”
“And on top of all this, vacancies were also high. To me, there was only one direction this could go, and that direction was up.”
And indeed, while the world called Germany ‘The Sick Man of Europe’, Gabay executed the purchase opportunity of a lifetime and began business in real estate.
In-built adaptability part of the winning formula
Not only were the economic conditions for purchasing hospitality and residential assets ripe between 2004 and 2015, aside from a downturn during the Global Financial Crisis (GFC), but the assets had the added benefit of interchangeable adaptability. When conditions altered slightly to favour, for example, residential over hotels, hotels can very easily be physically converted into residential and vice versa.
“Strange as it sounds now, before the GFC, there was a major surplus of residential in Berlin in particular,” explains Gabay. “So, we converted the buildings from one to the other at that time.”
After the GFC, the tables turned, however, and many assets needed to be converted back in order to maximise profitability in a market where demand for residential units was high.
While this arrangement shows the adaptability of the assets themselves, Gabay is sure that the agility to convert existing assets in this way is rare, if not almost unique, for a business of its size. “The ability to upgrade or convert Aroundtown’s portfolio makeup without offloading large numbers of assets, which comes with considerable costs, is a phenomenal advantage when trying to maximise shareholder value,” according to Gabay.
That said, he is keen to stress that, for the most part, the business is not a developer or a greenfield builder or has not been until very recently.
“We have never been a developer in the classic sense. We don’t buy land and build,” Gabay says. “But we still have very intensive operations. We buy partially vacant buildings, make these more efficient and effective spaces to fill up, and then use these to generate income. And it has been a very successful business model until now.”
Interestingly, these operational skills are, Gabay highlights, even more useful during times of distress and economic difficulty, because it provides a business with the option to adjust if it wants to, and the means to do so if it must. And this, to some extent, provides some explanation for the company’s success through difficult economic realities in Germany both before, during and after the GFC.
Interestingly, if you look at Aroundtown’s current portfolio compared with the period between 2004 and 2015, the asset split really is like comparing apples with oranges. Where it began heavily weighted towards residential and hotels, over half of the portfolio is currently in German office assets.
Gabay explains that “at the beginning of the company’s history offices were not the main segment of our portfolio. We started with residential and hotels, and it was successful for a time, but the economic winds changed, and offices became a phenomenal opportunity. In 2015 we identified the office segment in Germany and the Netherlands were undergoing a major shift.”
Due to the fallout from the GFC, both countries had an enormous oversupply of offices. As a result, rents were extremely low, even in comparison to Eastern Europe, according to Gabay. Then there was a change in the economy – near the time Aroundtown listed on the stock exchange. The economy had been growing consistently since 2010, and high office vacancies began to decrease steadily. Like its investment in Berlin hotels and residential the previous decade, the economic opportunity suggested there was only one direction of travel.
It was a good move. “Since then,” points out Gabay, “Germany has had the strongest economy in Europe. Unemployment has been at record lows, and so have interest rates. The conditions have been perfect.”
The pandemic has thrown a spanner in the works here, but Gabay is not pessimistic. Instead, he is focusing on the future of the economy and of the industry. “Things are no longer clear, so for now, we are on hold,” he says. Since the pandemic crisis, Aroundtown’s strategy has been to sell assets above book value and buy back shares at a deep discount to net asset value (NAV). We sold EUR 2.7 billion of mainly non-core assets and did a share buyback of EUR 1 billion at more than a 40% discount to EPRA NAV.
But, as a man who has made his fortune in property finding good economic opportunities during difficult economic times, it seems likelier than not that one will present itself soon.
