Through its American subsidiary MICHELANGELO PROPERTIES, the Sorgente SGR, Michelangelo Fund has acquired a 27.7% share in the company controlling (75%) the CHRYSLER BUILDING, skyscraper icon of New York and one of the main examples of art déco. Sorgente SGR will have the option to increase their stake. The remaining 25% is held by the United States Group TISHMAN SPEYER. The building, built between 1928 and 1930 by Walter Chrysler with William Van Allen as architect and project engineer, was valued at $3,700 per m2 making a total value of half a billion dollars.
It has a gross yield of 60 million dollars per year (12%) which after commission, taxes, maintenance and amortization of the mortgage gives a net figure of 6%. "It was a very complex operation," explains Valter Mainetti, Sorgente SGR S.p.A. CEO. “We bought the stake through German firm TMW, controlled by PRUDENTIAL. TMW had set up a fund subscribed to by 4,000 German doctors part of whom have sold to us. We therefore had to reconcile our action, taking Italian, German and SEC regulations into account." "We must thank all those who have made this initiative possible," Valter Mainetti went on to say, "especially Luciano Magri who singled out the operation and maintained contact with America and Stefano Cervone who led the contractual negotiations between Munich Bavaria based TMW and the American lawyers.
The president of Sorgente Holding S.p.A., Paolo Emilio Nistri also congratulated those who had worked on the acquisition of the significant stake that made it possible for the many Italian investors in the Michelangelo Fund and the many German investors in TMW to obtain a share in the Chrysler Building to whose construction between 1928 and 1930 many Italian technicians and workers contributed.

“I should like to comment on the subject of constructive finance. Putting the two words together generates two connotations: the first draws on the attitude in the finance world of coming up with solutions to support the development of projects in the field of construction with the use of an adjective, the intention is to emphasize the difference from creative finance; the second is linked to the perspective of the investor who is called on to make a rationally based appraisal of the how far it is worth putting it into effect for construction development projects.
In discussing these implications with the organizers of the conference, it appeared that both perspectives were pertinent subjects for discussion for the manager of real estate investment funds.
I would like to mention a few brief considerations regarding the first point. The property fund is assuredly a suitable product to offer an innovative financial solution to the equation of financial requirements in building development projects especially in urban development. Significant experience in this area already exists. It is certainly a product that can convey equity resources towards the realization of projects in the construction industry including infrastructure and highly complex projects.
With regard to alternative solutions, in these cases the real estate investment fund guarantees: 1. the presence of a highly professional player for the evaluation and continual monitoring of the adherence to the economic and financial fundamentals of the operation; 2. full transparency regarding the performance and results of business practice; 3. maximum efficiency at the participatory level also, but not only, with regard to fiscal planning.
Competence is certainly a critical factor in this regard. Also in these terms it seems to me more than ever convenient to decline the double semantic meaning: when I speak of competence I am referring to the abilities and capacities needed to plan and control the important activities in development but I would also like to highlight the distinction between roles, responsibilities, the precision of the respective and reciprocal practical tasks and the delimitation of the extension of the fields of action for the players involved.
The savings management company is and indeed should remain above all a savings manager with the specific factors that this entails and that integrate those suppositions and the results of professional, transparent and effective practice I indicated before. In this way, the savings management company can appropriately become part of this chain of values in the strategies for urban development and only in this way can it take up its own place in the chain, becoming indispensable in extending the range of financial solutions available.
I read the recent statistics regarding the industry as positive, where the number of real estate investment funds has risen to the respectable figure of 35 and I am also pleased to note the emergence of trends which are indices of a diversification of the product and an increasingly dynamic and professional approach such as the relevant importance in the entire property investment funds market, of subscription in kind real estate funds and the increased recourse to leverage which is tending towards 60% of the total permitted.
On the negative side, I note with some apprehension that the increase in the number of funds shows a peculiar correlation with the number of savings management companies and, even more so, with "players that aspire to become savings management companies". I am and will remain among those who believe that competition is good for the market. However, sometimes I have the impression that this fervor to start up conceals a difficulty to understand the extent of competence required to distinguish between the roles of the various players in the system.
Allow me to dwell on a concept I have already mentioned implicitly in my introduction. I stated above that the real estate investment fund is a product, and as such lends itself also to becoming a solution to "constructive" finance, but it is a product that originates in the finance sector and should remain in that sector. The vertical integration that is talked about in some areas, according to which the developer "creates its own real estate management company" or rather realtors, qualified investors or institutional holders of major real estate assets "create their own management companies" is to my mind the result of serious underlying confusion.
Rather, all these players could be users of the product and should insist upon the professional, transparent and efficient practice that make up the cardinal quality requisites of which the management companies, in their position as intermediaries and within the confines of their role, are institutional guarantors. While their urge to become management companies themselves determines an unnatural of the vital role of intermediary, with a vocation to bring a collective of savers into contact with a more or less varied choice of professionally selected investment opportunities.
The extension of this consideration to expertise takes me on the second proposition I put forward as relevant in my introduction, and that is ability, the capacity of the real estate management company to invest in development projects. Since its inception, Sorgente SGR has made its specific expertise in property investments a key success factor. The credentials that Sorgente can, today, exhibit as manager of ordinary funds with an annual yield in the order of 10% - among the highest in the sector - over a period of 5 years savings management, represent the best proof of our particular conception of expertise.
Sorgente, indeed, favors a wider reaching, more profound vision of real estate investment opportunities, without abandoning highly precise and stringent principles and criteria of selection. First of all, seeking out opportunities capable of maximizing created value for the investor is of fundamental importance. Such a search implies a marked aptitude for understanding the many steps to producing property wealth: from the urban potential of a green field lot, to designing a building, engineering development plans and/or adding value through to the letting and trading of more or less perfect objects.
This ability to understand cannot but be the result of a sound experience of work in the real estate sector. The Sorgente investment philosophy is based on the identification of economic potential, the achievement of which is guaranteed by an accurate view of urban planning strategy. Such an approach to property investment entails the evaluation of interconnected elements, conveniently integrating purely quantitative valuation processes based on current earning power, elements arising out of sensitivity to the dynamic of a given community setting, to the architectural, esthetic and cultural value of a building and the integration of a project in the area in question.
The main guideline for selecting real estate opportunities is based on the "unrepeatable" characteristics of the investment: as far as possible, the property should have connotations of uniqueness for its intrinsic value regarding location, function and construction. This unique quality is verifiable, as I mentioned before, primarily through the positioning of the initiative as part of the urban morphology and evolution. For the general rules regarding fast tracking, for example, I should like, not so much to announce the Sorgente's pioneering initiatives for future development, but rather give an account of what Sorgente has done since the launch of its investment activities in 2001.
In accordance with the above mentioned philosophies, the first investment carried out by the Michelangelo Fund involved a property development operation for which it is possible to summarize the results in full. On a circumscribed tract of land between the Parco degli Acquedotti and the Parco dell'Appia Antica, to the south east of Rome, Sorgent managed a complex building program creating a business center with over 100,000 m3 of office space. The evaluation of the investment was made above all with regard to the urban potential of the area in question, taking into account urban planning and the fact that an important rail terminal was soon to be built. Moreover the office complex is adjacent to the Rome Underground A Line rolling stock depot.
The initiative found approval for its unrepeatable particularities: the site is surrounded by an area subject to strict limitations for archaeological reasons; it is at the intersection for three main trunk roads into Rome (Via Appia, Via Tuscolana and Via Casilina) and lies within the main ring road (Grande Raccordo Anulare). The site covers a surface area of 80,000 m2 and the business center's three buildings are set in a rotational axis with careful landscaping including a large pond and fountain to create a considerable aesthetic impact and archaeological remains from imperial Rome restored and displayed to full advantage in accordance with the Heritage Superintendence.
The project involving a building site employing over 200 people took about 30 months to complete and required a major tour de force on the part of Sorgente for the valuation and monitoring of the works.
The whole process came to an end in early 2004 with the transfer to an end user in the Business Center achieving overall added value of 60% on the investment for the Michelangelo Fund. I should like to end on this concrete example of a successful operation, hoping that I have managed, through the use of a tangible monetary yardstick, to give an sense of what a product combining an adequate mix of applied expertise and constructive finance actually is.

Eight real estate investment funds of the 16 already operational in 2004 hit their annual minimum target yield declared by their management companies as a reference for the calculation of their variable fees. The data in the half year reports from last June show the Sorgente SGR Caravaggio Fund in the lead with 11.96%.
They are partial results as the major part of the return on capital will only be visible on expiry. It's a long wait as the average residual duration is around 8 years and there are a number of unknown factors for those investing in bricks and mortar through collective investments, not least of which is the trend in real estate prices "however, the supply and demand ratio," reassures Stefano Cervone, CED of Sorgente SGR, "produces prices that already take into account future market opportunities." On the other hand, it cannot be denied that the best deals are struck at the time of purchase and concentrate on the early period in the life of a fund. Consideration should then be given to the fact that funds make it possible to diversify into segments of the market that are not easily accessible to single savers. "The fund manager can also exploit the alternate phases of the economic cycle in different geographic areas," Cervone points out, "because the property market is not yet globalized. We, ourselves, are looking particularly at New York."

Increase in assets held by products in Europe and the United States. In Italy assets exceed 12 million. Thanks to good yields and the latest changes to the tax system. Internationalization however is at risk due to differences between countries.
With the funds at least, Italy seems to be standing up to international competition. This is what emerged in a survey, the third carried out by Morningstar and Sorgente Sgr on real estate investment trust funds. The study looked at the performance of the funds recorded between 2002 and 2004, net assets at December 31 2004, the launch date of the funds, the savings management companies and the type of product in 9 countries. To make the comparisons uniform the yield was calculated as the difference between the NAVs for the different periods under examination. The absolute returns criteria was used for the American funds and their performance also takes into account the dividends distributed. Funds were also ranked according to their assets taking into account the top five from each market.
Who is first in Italy? Total assets for the country, concentrated in 27 products, exceeded 8 billion euros in 2004. Of funds in circulation there has been an increase in those aimed at qualified investors (up 197%) whereas there was also a partial increase in products aimed at the retail market (5,107 million euros). The overall total business from the sum of all the financial instruments, real estate and real estate rights, credits, bank deposits, net liquidity and other assets and activities was 12,209.9 million euros at December 31, 2004, twice that of the previous year. Of that figure, 85.5% comes from properties and real property rights, and 10% from stocks and shares and liquidity. In 2004 acquisitions and transferals amounted to 6,697.5 million euros, most of which connected to funds launched during the same year. Sales instead, amounted to 732.2 million.
Italian funds invested mainly in office buildings (74.4%). This is followed by commercial space (11.7%), industrial (4.1%) tourism/leisure (2.3%) residential (2.1%) and logistics (2%). Most of the properties are in the regions of the north west of Italy with 40.2%, immediately afterwards is central Italy with 37.3%, and the south and north east with around 10% each. The company with the highest assets is Investire Immobiliare Sgr (Banca Finnat Euramerica) with 1,522 million euros, of which 1,326.4 is property in the Fondo Immobili Pubblici (Fip). In second place is Pirelli RE with 1,375.6 million and in third place Bnl Fondi Immobiliari with1,011.9 million.
Excluding the Fip, the largest is Unicredito Immobiliare Uno (Pioneer Investments) with 478.3 million euros, followed by Tikal Real Estate Fund, a Sai Investimenti SGR reserved fund, and the Pirelli RE SGR Tecla Fondo Uffici (472.5 million). Best performance goes to Tecla Fondo Uffici (Pirelli Real Estate) +46%, followed by Polis (Polis fondi) and Securfondo (Beni Stabili). Considering performance over the last 3 years, the best fund is the Michelangelo (+36.5%), managed by Sorgente SGR, followed by Securfondo (+27.8%) and Polis (+23.4%).
National borders and the opening up of markets. In the United States, as always, the market is bigger, capitalization on the stock exchange rose to almost 305 billion dollars compared to 220 in 2003. In Europe, apart from Germany, funds have increased in popularity and returns, in terms of adding increased value of the shares have been an average of 7%. The Japanese J-Reit have repaid both long term investors, in so far as the share value has increased at an average rate, as well those who have bought shares on the stock exchange (+13% average growth over the past year).
At an international level there has been a strong opening up of markets with the exception of countries like Spain which are mostly tied to the domestic market for legislative and cultural reasons. The American, German and Dutch operators are the most active. London and Paris figure as the most popular cities in Western Europe though interest in the east and Asian markets is growing. Italian funds however have little propensity to go international and foreign properties make up just 2% in fund portfolios.
One of the main difficulties arises out of a lack of uniformity of regulation and tax systems. The problem doesn't only concern emerging markets as there are also differences within the eurozone where convergence is proceeding slowly. For example, some Dutch REITs have recently applied for Société d'Investissements Immobiliers Cotéé (Siic) status in France in order to benefit from the tax exemptions this kind of company offers.
In Italy the modifications to the tax law contained in legislative decree 269/03 have played an important part in increasing the appeal of real estate investment trusts, thanks to the fact that from January 2004 the company tax no longer applies but rather a tax of 12.5% is deducted from the proceeds distributed as with other trust funds. However there remains a difference between Italian and foreign investors as the latter pay no taxes.

A new arrival in Autumn from the world of real estate investment funds. And the first to launch a new instrument had to be Sorgente SGR which will launch the Baglioni fund between October and November. This is the first subscription in kind real estate investment fund intended for the hotel sector. It is aimed at institutional investors and will have an equity of 150 million euros. Properties from Bari, Rome, Venice and Verona in Italy as well as London and Paris in Europe will be transferred to the fund. Besides the Baglioni Group itself, a luxury hotel chain, bank foundations, health insurance companies including the Cassa del Notariato and l'Empam (the pension fund for doctors) and Cassa di Risparmio di Cuneo bank will also invest in the fund.
The minimum stake is set at 100 thousand euros and the expected yield is 6 -7%. Furthermore, the savings management company run by Valter Mainetti has no intention of stopping its activities in the hotel sector here. "We have currently turned our attention to the restructure of a building in Via del Tritone in Rome (part of the Caravaggio Fund portfolio) which we intend to turn into a hotel and rent out to the Baglioni Group," stated the managing director of the company which has a strong belief in the sector thanks to the good revaluation opportunities and the 6% yield on the rental of the building.

The Sorgente SGR board of directors has approved the half year report as at June 30, 2005 for the Caravaggio Real Estate Investment Fund, a fund open to private savers which showed an increase in NAV (€ 134,998,997) of 12% compared to its placement value (€ 120,560,000). At 30/06/05 the unit share value stands at € 2.799,41 compared to € 2,714.12 on December 31, 2004 (+ 3.14%). The performance of the fund which was floated on the Milan stock exchange on 12 May showed management revenues of € 4,113.28, which was "due to the profitable property acquisitions that have enabled the fund to invest its entire subscribed equity in less than 12 months," according to Stefano Cervone, CED of Sorgente SGR.
Real estate purchased includes buildings in the historic centers of Rome and Milan as well as in the South, in particular the Sicily Regional Council Urban Planning offices in Palermo.
The total funds invested in real estate, both direct and indirect amount to approximately 147 million euros at today's rates; mortgage linked debts amount to 23.2% of the total invested with a potential credit leverage of around 100% on the real estate investments. The fund's liquidity amounts to € 1,538,530, enough to satisfy the financial needs of the fund with the consequent optimization of the composition of the fund's portfolio. An event of particular note during the first half of 2005 was the release of the prestigious building in Via Senato 28, in Milan belonging to SAITES S.p.A., and 100% controlled by the fund, by the existing tenant, a circumstance which made an extremely advantageous repositioning of the building possible through rental at current market values
Enclosed is summary of the fund's assets and brief management data for the first half of 2005 duly distributed to the press (dated July 29, 2005)

"This is the yield expected from the rental of hotels, barracks and a kindergarten in the Caravaggio portfolio which is counting on stock exchange stability."
No specialization but a search for high prestige buildings offering high revenues. This is the strategy for the Sorgente SGR Caravaggio Fund, "because a building with architectural value and a central location offers good revenues for the present and interesting added value for tomorrow. Then there is the added advantage that you can easily sell it at any moment," explains Stefano Cervone, Chief Executive Director of the savings management company. Since its launch in January 2004, the Caravaggio has already entered the stock exchange ahead of the classic two years envisaged by the regulations. In the last few months investments using the funds equity of 120.56 million euros and leverage in the order of 30-35% have been made leaving part of the leverage available for further investment. To present 11 buildings have been purchased with preference going to luxury hotels, even though, as stated, the fund has not declared any particular a priori specialization because it is felt that diversification is important both by sector and geographical location.
Investments, therefore, range from a building in Palermo rented out to the Sicilian Regional Council to two barracks buildings in Lombardy and Piedmont respectively. In between are two hotels in Milan that are part of the Accor chain (Ibis and Novotel) and a further two in Rome, the large Baglioni Hotel in Via Veneto and another in Via del Tritone which is currently undergoing requalification. Again in Rome there is a historical building with significant cultural interest in Via dei Villini (just off the Via Nomentana), today a kindergarten for children of the Italian Railways employees, while in Milan, purchases included the ex headquarters of the Versace fashion house in Via Senato, a very central historical building currently undergoing requalification.
It is thanks to its architectural quality and location that "rental yields for the various properties currently stand at about 7%," stated Cervone. "However we aim for significant added value over and above those expected from the evolution of the real estate market. In fact, before the expiry of the fund in 2012 we are counting on renewing the entire portfolio at least once."
In any case , the Caravaggio Fund will not begin to distribute proceeds until 2007 as the first three years are only intended for accumulation. On the stock exchange the share is currently quoted around NAV level, that is at 2,714 euros per share. It's placement value was actually 2,500 euros. Two thirds of subscribers are institutional investors and the rest private investors. "It is indeed thanks to the substantial level of institutional investors that we expect shares to recover quite soon on the stock exchange following a period when it could be discounted against the NAV," Cervone concluded by saying. "Possibly in parallel with the release of half year figures."

From today it will be possible for shares in the closed real estate investment fund to be traded on the stock exchange's electronic market (MTF, class 2). The Caravaggio Fund has a duration of 8 years and a unit share price of 2,714.2 euros. Besides institutional investors, it is also aimed at private savers. It started operating in January 2004 with an initial equity of 120,560,000 euros and in during the first year achieved a performance of 8.57%. The fund arrives on the stock exchange with a real estate portfolio worth 142 million euros, purchased in under 12 months activity. The portfolio comprises 11 properties which differ by geographic location (situated in North, Central and Southern Italy) and type (offices, hotels and public administration).

The savings management instruments at which it excels are no longer enough for Sorgente SGR. The company is considering how it can take advantage of the new plans for urban renovation that are appearing. With a listed company based on the French tax model. It's a warning: those who rely too heavily on leverage could end up getting burnt.
Sorgente SGR is one of the pioneers in Italy. The real estate investment fund market holds no secrets for the company that has a managed equity of well over a billion euros (which could however reach 2.5 billion including leverage) and which has the charming habit of naming its products after the most famous artists of the past. The Michelangelo Fund had yielded over 10% by December 3, 2004, Caravaggio, preparing for floatation has a variation of 8.57% NAV compared to its placement value. Recently the Bank of Italy has also authorized the subscription in kind product Donatello with a value of 300 million euro. But there is something new on the horizon: Sorgente also wants to include real estate operations with a preference for development, to be carried out through a listed company, in its core business.
"One of our next objectives is the creation within the group of a listed real estate company. We have two paths we can take: either to create it ex novo and then float it, though this would take two to three years, or acquire control of an existing company. To this end we have contacted Mediobanca," CEO Valter Mainetti tells us.

Why so much interest in a listed company?
Because we have come across many opportunities for development and it would be rather unconventional to exploit them through an investment fund. Many of our subscribers are urging us to form a company instead of a fund that can concentrate on development. We can, therefore already count on two partners ready to guarantee capital.

However this would not form part of your core business. And then aren't you worried about the tax penalties for a property company compared to a fund?
We have always carried out fairly unconventional property acquisition operations in the search for buildings to partly restructure and then rent out. During our searches we have often come across opportunities that, with a higher level of risk, could bring home much higher yields than those we are used to. We have chosen not to take advantage of them either because the risk level was to high for the fund or because they were too complex from an urban planning point of view. I must admit that the tax element does worry us somewhat. We are used to managing funds for which we absorb lower tax costs and in the meanwhile we hope that the real estate business will soon be modified at legislative level.

On the one hand there has been a negative view of instruments available to the real estate operator, on the other, the choice to back up the fund with a different product. This means that in the near future you envisage increasingly narrower yields.
Not exactly so. Recently we have come across many more operations regarding development projects compared with those with standing income and we'd like to exploit them using an instrument that is more suitable that the fund. We do not come from the banking division like many savings management companies but rather we have a consolidated history in real estate and we believe that to be able to invest at 360° in the real estate market you need to have a traditional property instrument that is highly developed from a financial point of view and recourse to a listed company, therefore, seems to us to be the right course of action.

Don't you think it a choice that runs counter to current trends that see many listed companies are switching over to becoming management funds like Aedes which is turning to the property investment fund sector in its new business plan.?
It's not that we want to transform the savings management company, that certain. We have a holding company that controls the management company to which we'd like to add a listed company. We have also considered opening a speculative fund through the listed company with the authorization of the Bank of Italy. However a listed company can lend a certain weight to the group which is just what an operator like ourselves with 2.5 billion euro of potential investment needs. Considering the enormous value of the properties, it will, moreover, also provide an instrument to enable us to find solutions for the properties rather than selling them off, once the fund has expired,.

Today, funds are a very popular investment instrument, how do you interpret the increase in recent years.
The growth of savings management companies and funds is something to be hoped for as the more the market expands the more mature and developed it is and the better guarantees it provides for subscribers. However we don't agree with the so-called "tax funds" that is products with one or two subjects who use the OEIC merely to cut costs, transforming a collective organism into an individual one for personal gain. Certainly, there may be a single shareholder behind a fund but it should be a listed company or a foundation with thousands of members. Instead, I believe that the fact that real estate dealers could consider transferring their properties into a fund only to obtain the best tax benefits to be technically improper, even if it were allowed within the law.

But the authorization process for the creation of these funds is a complex one and they are subjected to very strict limitations …
Indeed, I'm not sure that the Bank of Italy can authorize funds whose only purpose is to save tax… I hope this doesn't happen. For example, our Michelangelo Fund has just thirteen subscribers but they are institutional investors that have millions of members.

Don't you think that the regulations governing funds are lacking in clauses that block tax evasion operations or on conflicts of interest in transferring the buildings?
I don't think that the Bank of Italy or the Consob regulations are lacking. I believe that these watchdog authorities are capable of blocking certain operations based on mere tax interests. It may be necessary for the Ministry of Finance to issue a clarification forbidding management companies from setting up funds simply to save on taxes. A bit like when the ministry clarified that cooperatives should not seek profits but rather the interests of their members. When the fund is not a proper OEIC then it should become a property company.

Looking beyond the tax problem, what principles do you think should inspire any eventual reform of property companies?
To my mind, the reference model should be the French one which could guarantee the particular qualities of property companies. In order to avoid the abuse of funds, the ideal thing for tax purposes would be to legitimate a company that fits midway between a fund and a traditional non property company.

After 5 boom years the market panorama for operators has changed a lot. There are large companies like Pirelli RE that didn't exist before, then there are the developers like Risanamento. How, on the other hand, can we rate the new players like the real estate dealers who nowadays are taking stakes in large banks and are interested in funds?
They are not developers in the traditional sense. There are listed property companies, there are large investors. Then there are a whole lot of newcomers who it's impossible to classify and that only time will be able to crystallize into a category. Among them, some will remain and others will change sector. When a sector goes through a boom period new operators that didn't exist a few years before spring up.

At national level you are cautious and negotiate many deals abroad. Is it a sign of globalization or is Italy too small for you?
In realty we are putting our know how and experience of situations we know particularly well to good use. That is why we took advantage of the opportunity in Manhattan. There we are buying at approximately 2,000 dollars per square meter in an area near Wall Street, whereas in Italy prices are less advantageous.

So that means our market is stronger than that in America or maybe it's less flexible with more standardization of prices towards the top end?
The Downtown New York market is still feeling the influence of the attack on the twin towers. We are talking about obsolete office blocks to transform into condominiums. We can't generalize for the whole country. As far as the Italian market is concerned, I don't think we've reached exasperation levels for the price of "professional" buildings, we still come across buildings with a yield of 7%. Without doubt, yields are falling especially around town centers which are the most interesting for us but it is within acceptable levels considering the revaluation there has been to date. And this also depends on the number of new operators that have joined the market. These players are prepared to pay much higher sums to purchase properties and have a very different approach to our own.

In what way do they differ from yourselves
Despite considerable available liquidity we are more cautious than they are. It wouldn't be wrong to call us "old economy". We don't believe in being easily transported. We set ourselves targets of one and a half billion even though with leverage we could rise to two and a half billion. There is massive recourse to loans also in the U.S.A. There are entrepreneurs who control properties worth 150 million dollars with an equity of just 10 million. They complete transactions very fast and are content with lower margins. Their approach is justified by the maturity of the American market and the derisory tax costs. In Italy the rhythms are much slower, the market is more tired and exaggerated stamp duties discourage fast trading. It is in fact the younger players who tend to buy at over-inflated prices and hold onto the property for too long, thus paying increasing levels of interest. I don't know how they manage to keep going. Maybe then we shall will be the ones to buy from them.

If a property is not only beautiful but also unique, either for its intrinsic features that are impossible to copy or because of its location, then it's value can only rise. This type of market law, verified by the experience of generations of realtors, forms the basis for the investment strategy employed by Sorgente SGR, always among the top performers in the real estate investment fund market in Italy. Their focus is prestigious buildings and properties in or close to the center of major cities or in any case in unique positions and capable of generating revenues after any necessary renovation and renting out to similarly prestigious tenants.
With one billion and one million worth of equity, which with financial leverage amounts to 2.5 billion investment potential, Sorgente is the third largest Italian group operating in this sector. It has launched three funds, two, the Michelangelo and the Raffaello for institutional investors and the Caravaggio, a fund open to private investors which is about to be floated on the stock exchange. A fourth fund, already authorized by the Bank of Italy and currently signing up in kind property subscriptions, has also been named after another great painter, Donatello. Behind this choice of names lies CEO and main shareholder Valter Mainetti's love of art. However, the stamp of the Mainetti family is more especially to be found in the very nature of the company and makes it stand out from its competitors. It has the heart of a realtor, being born therefore, not out of a bank or financial group's initiative on the lookout for new opportunities but from the experience and sound knowledge of the real estate market with which the necessary financial expertise was combined to create Sorgente SGR in 1999 when real estate investment funds were introduced in Italy.
Back in the 1920s, Mainetti's maternal grandfather, Luigi Binda, owner of a steel frame construction company in America, participated in the whirlwind urban development of New York. In fact, he was responsible for one of the most famous skyscrapers, the Chrysler Building as well as the steel frame of the so called addition to Wall street, the extension to the most famous stock exchange in the world.
Valter Mainetti's father , Sergio, carried on the interest in real estate through utilities installation. Valter Mainetti himself has always been involved in the property market, promoting initiatives in Italy and abroad. He was also CEO of Sagefim Partecipazioni (currently Tiberiade Servizi Finanziari) a finance holding company for real estate companies with over a billion euros worth of assets. It was his know how in the New York market which led him to take a close interest in property investment funds well before 1999. "I was hoping to it would be possible for these funds to develop and play an important role here too, as they do in the American market."
So when the law on such funds was passed, for Mainetti the choice of creating a savings management company was a logical consequence of that attentiveness and expertise. It's not surprising that Sorgente was the first management company to come out with a real estate fund reserved for institutional investors. Following the launch of the new subscription in kind fund named Donatello and the opening of its first operational arm in America, the strategic choice for Sorgente is for further diversification into new international markets. The first objective is the Far East. "Not so much to purchase property," clarifies Valter Mainetti, but rather to create funds with banks and local partners. We are not aiming only to invest but also to attract investors". However, the Sorgente CEO points out that internationalization is also important for another reason. "If one market finds itself in crisis it's possible to switch the center of interest to another. The worldwide propagation of property crises is actually much slower than for financial ones."
The president of Sorgente SGR is Rodolfo Cutino, previously the director of the Bank of Italy's headquarters in Rome, Central State Treasurer and director for a number of finance houses. Vice-president is Paolo Emilio Nistri, a director of the Fondazione Cassa di Risparmio di Roma and many Italian and international companies. The Sorgente SGR Board of Directors also includes another former Bank of Italy top executive, Claudio Patalano, who was also Central Director for the BNL bank. The management structure is headed up by CED Stefano Cervone. The president, vice-president and CEO make up the investment committee which evaluates both real estate and financial opportunities.
The focus of attention for Michelangelo Properties, the New York operational arm of Michelangelo Italy, is American neo-gothic, the typical architectural style of the pre Second World War period and also the Wall Street area for which increases in value are expected. In America too, Sorgente's target includes buildings offering unique architectural or location based features. At the helm in the New York office are currently three people: Paul Stern, Guido Pompilj and Veronica Mainetti, 26, who joined the company, following in the footsteps of her father Valter, while business adviser is Luciano Magri.

Areas to upgrade, new development areas, shops and conference centers. Here's where…
There are a number of leading players in the commercial real estate market currently wanting to invest in the regeneration of run down areas in the main cities in Italy.
Not to be forgotten are also the funds which put their money on the office sector like those managed by Sorgente SGR (Michelangelo, Caravaggio, Raffello and Donatello).
Sorgente SGR, which currently has an investment potential worth 2 billion euros, has decided to put its money solely into the office sector preferring central areas. "Buildings in the suburbs haven't seen the same rise in prices as those in Via Senato in Milan or Via del Tritone in Rome for example," explains Valter Mainetti, Sorgente CEO. "We buy buildings in need of renovation currently rented out to important financial institutions or ministries," continued Mainetti who believes that the real estate investment fund sector in Italy has great opportunities for growth. Offices in these areas have never faced crisis times. Indeed, in contrast to residential buildings, they are rented out to important clients. In future the Michelangelo Fund, through its New York based company vehicle Michelangelo Properties, intends to develop its financial and property activities in the United States.

Investing in bricks and mortar through the wide choice of specialist funds capable of generating a two figure profit. It's the promise made by Sorgente, the savings management company founded and guided by Valter Mainetti who is soon to launch new real estate funds thanks to which he should be able to achieve his investment plan target (1,5 billion by the end of 2006 which rises to 2.5 billion when full financial leverage is included) as well as maintaining a leading position in the sector.
"We are one of Italian savings management companies with the largest number of funds and one which can boast the best performance levels," explains Mainetti, pointing out that the targeted investment policy fashioned by the company which numbers several foundations amongst its subscribers and which recently became the owner of the building in Via Senato in Milan, current home of the Versace fashion house headquarters.
But after 3 years experience in Italy (the sector had 14 Savings management companies competing for an overall market worth 7 billion), Sorgente is warming up ready to strengthen its position in the United States. A challenge that seems to take on the flavor of a "return" for Mainetti given that his family was active in the New York construction industry in the early 20th century. In any case, Sorgente will be able to count on the results of the Michelangelo Fund which is reserved for international investors which since its inception in 2001 has achieved an average annual growth rate of 10%. After this there is the Caravaggio Fund which is also open to private investors, the Raffaello Fund (a 20 year fund open to institutional investors), the Tiziano Fund which specializes in investments in international property companies and the Donatello which will mainly invest in office properties.
These are all products with frontline performances which were partly helped by the positive performance of the real estate market but also because Sorgente was able to build them up brick by brick thanks to its experts who are well able to marry finance with the secrets of the property sector.
And in the United States it could be just a first step for new international footprint Mainetti intends to create for the group in order to capture the most inviting investment opportunities for its funds. Sorgente, in so many words, has begun to look beyond national confines in the conviction that the weakness of the dollar provides an added motive to take advantage of the full potential of the American market which is very promising in the Manahattan area.
The performance of the fund which is soon to be floated on the Milan stock exchange is "determined by the profitable activity of property acquisitions which made it possible to invest the total subscribed capital in under 12 months" explains Stefano Cervone, Sorgente SGR CED. Acquisitions include buildings in the historic centers of Rome and Milan as well as the South of Italy, in particular, the Urban Planning Offices in Palermo.
The results of the Caravaggio Fund were approved by the Board of Directors that has also received the green light for its new subscription in kind real estate fund, the “Donatello” (300 million euros). Thanks to this approval the total equity managed by Sorgente is now over one billion euros. "A figure," stated Sorgente CEO, Valter Mainetti, "that makes us a leader in the real estate savings management sector and brings us closer to the 1.5 billion euro target established following the launch of the first fund, the Michelangelo Fund that had achieved a yield of 10% by the end of last year."
With an authorized equity of 1.1 billion euros for the investment fund, Sorgente SGR has a potential, in terms of real estate investments, of approximately 2.5 billion euros when full use of the permitted financial leverage is made.

The total managed “equity” will amount to over one billion euros. The Sorgente SGR Board of Directors approved the financial statement for the Caravaggio Real Estate Fund, open to private savers, which highlighted an increase in net asset value of 8.57% compared to it's placement value. The performance of the fund which is soon to be floated on the Milan Stock Exchange, is "determined by the profitable real estate acquisitions which made it possible to invest all the total subscribed equity in less than twelve months," reports Stefano Cervone, Sorgente SGR Executive Director. Acquisitions included buildings in the center of Rome, Milan and the South of Italy in particular, the Urban Planning Offices in Palermo. The Sorgente Board of Directors also took note of the Bank of Italy authorization for the new subscription in kind real estate fund, the Donatello for a total sum of 300 million euros which brings the total equity managed by the management company to over one billion euros. "A figure," stated Sorgente CEO, Valter Mainetti, that makes us a leader in the real estate savings management sector and brings us closer to the 1.5 billion euro target established following the launch of the first fund, the Michelangelo Fund that had achieved a performance of 10% by 31/12/2004." With an authorized equity of 1.1 billion euros for the investment fund, Sorgente SGR has a potential, in terms of real estate investments, of approximately 2.5 billion euros when full use of the permitted financial leverage is made.

In 2004 the Sorgente SGR real estate Michelangelo Fund reserved for institutional investors achieved a year on year performance level of over 10%, a record since it started operating in December 2001.
Indeed, net assets for year ending December 31, 2004 rose to €149.633.530 from €143.180.865 in June the same year, with a share value of €142.508,12.
Approving the Michelangelo financial statement for December 31, 2004, the Sorgente SGR Board of Directors emphasized the substantial liquidity achieved with the sale of the “Lucrezia Romana” property complex which consolidated the fund's good performance through the conversion into cash of substantial added value. The fund will soon also be developing initiatives in the US.
Over the year, Sorgente has established a corporation in the USA which will become the operational branch of the Michelangelo fund. Negotiations with important local realtors are already underway for the acquisition of buildings in the Manhattan area.

Sorgente SGR has launched its winning idea; to buy office blocks to convert into apartments. Neogothic New York will be renovated to suit European tastes. And the new fund is preparing for revenues of 10%.
The company is Italian but it has a decidedly international flavor. Star Source Financial Services, already owned by the Holding company contributes to its promotional activities in the United States. However the frontier has been fully breached thanks to the Michelangelo Fund which has acquired a stake in Michelangelo Properties, which operates under American law. This is the company's vehicle to flank Star Source and is destined to develop the funds' activities the other side of the Atlantic. The choice to initiate their international dealings in America was dictated by a precise calculation: "We were convinced by the fact that prices are falling, not to mention the weakness of the dollar," stated CEO Valter Mainetti. "We will buy buildings to restructure that are historical, in the sense that they date back to prior to the Second World War, in order to renovate them to create added value and business opportunities. Our objective is to build up a portfolio that is able to yield a higher revenue than possible with the performance of the Italian market.
Sorgente is therefore hunting down historical buildings in the Big Apple, the "must-have" for many Americans and more especially for foreigners who choose to live there. "We turned our attention to Manhattan in particular because there are millions of people who love New York and would like a pied-à-terre in the Big Apple. They all love this part of the city, especially the Europeans. We've had to focus our efforts also because New York is so big that it is necessary to concentrate our search in order to operate. Indeed we have chosen the Downtown area," added Mainetti, Buildings to purchase will be office blocks to retain for their rental value and also company headquarters that can be converted. In this case it would be a condominium conversion, a formula Americans are already familiar with for which the building would be freed up and converted into a condominium.
It is a much easier solution for company headquarters because once the rental contract has expired the company can move offices. Also because these historical American neo-gothic style buildings are beginning to become obsolete and adapt well to residential conversion. The Sorgente bet was not based purely on chance: "the margins are very high, over 10%. The properties can be rented out or sold. We are still examining two purchase proposals. On average each building costs 100 million dollars and has a surface area of 400 thousand square feet which is $250 per square foot. This would be $2,500 per square meter. Calculating that it resells for $800 per square foot following renovation (approximately $200) we can achieve definitely interesting levels of performance.
Forty thousand square meters can be turned into approximately 500 apartments of 70-80 square meters each. Buildings in New York have an average of 20 floors and are therefore bigger than those we are used to seeing in our cities. The end users of these residences are yuppies working in the stock exchange: "they're not intended for the luxury client as would be the case with apartments around Central Park. We will rent or lease them as elegant units for young professionals working on Wall Street. The fund which owns them will be open to European and American institutional investors." This will therefore be the only SGR fund to operate under American law.
Besides the Michelangelo Fund, Sorgente also has two other active funds, the Caravaggio which invests in office space and the Raffaello which will involve both office and residential properties. The assets managed by the funds amounts to one thousand million euros excluding those that will form part of the most recently created fund, the Donatello, which has just received approval from the Bank of Italy. The new fund geared to the US market will open to subscriptions in 2006 following the purchase of at least two buildings.

The real estate market continues to be the main form of investment for savers although it is also a highly interesting time for the real estate investment fund sector.
In Rome there is a savings management company called Sorgente that was incorporated in the capital in 1999 following the introduction of the law regulating savings management companies.
"The fund sector is monopolized by the banks, but we have managed to carve ourselves a space," states constructor-financier Valter Mainetti, main shareholder and managing director of Sorgente SGR.
Following the performance of our Michelanagelo Fund, which is among the top earning Italian real estate investment funds, and the imminent floatation of the "Caravaggio" Fund, Mainetti now has other ambitious targets. Supported by family tradition, particularly his maternal grandfather who, after establishing a firm in New York in 1919, over the space of a decade, built the historic steel buildings from the Chrysler to the Van Allen and the extension to the New York Stock Exchange, Mainetti is aiming at investments and new initiatives in the United States.
"It's a particularly favorable time," he goes on to say, "The weakness of the dollar, a definite incentive to purchase real estate on the other side of the Atlantic is countered by the trend in the property market which is inversely speculative to that of the money market, providing a sort of natural protection from exchange rate risks."
You manage assets worth 500 million euros and investment programs worth 1.5 billion euros, combining personal know how in the real estate sector to that in the finance arena. How did this initiative come about?
"I was about to venture into the New York market with the idea of starting up a company when the law introducing real estate investment funds, that we had been waiting years for, was approved. The American were therefore put on the backburner. In 1999 Sorgente was created and Rodolfo Cutino, ex watchdog chief at the Bank of Italy became its president.
Why is it that in Italy the propensity to purchase houses is not accompanied by the same propensity to invest in real estate funds?
"Because of the public's diffidence towards financial products in general. A diffidence that is even more evident in those who turn to bricks and mortar precisely as an alternative to the stock market. There is therefore a preference for investing directly in property itself rather than mediating investments through a fund. The results the funds manage to obtain will be the best means of convincing potential subscribers in the future."
What is the secret to make a real estate investment fund perform well?
We have always sought to achieve added value in every operation. We have completed, restructured buildings and then we have re-rented them out. We will do the same for the Caravaggio Fund. With the Michelangelo Fund also begun to resell to re-invest.
What led you to give the funds the names of great painters?
A love for art has always run in the family. So, when we had to decide what to call our funds, I suggested the names of Michelangelo, Caravaggio, Donatello, Raffaello and Tiziano as a propitious start.”