The Flatiron Building, the Chrysler Building, and a historic building in New York’s Soho district. Sorgente Sgr’s capital is growing and the company prepares for new challenges. Thinking about Siiqs.

In the 1930’s his maternal grandfather, Luigi Binda from Varese, who had emigrated to New York in search of fortune, built the steel framework for the Chrysler Building, in the heart of Manhattan. Seventy years later, Valter Mainetti returned to New York and spent $ 103 million to buy 30% of ProVictor, a joint venture between Prudential and Tishman Speyer, who controls 75% of the Chrysler, a building that guarantees a yearly gross return of 12%.
But that’s not all. A few months ago he got his hands on 30% of the Flatiron Building (the skyscraper in the shape of a flatiron that is valued at $ 120 million), and, a few days ago, in New York’s Soho district, paying € 30 million (including renovation costs) for a building on Greene Street that will be converted into 10 luxury lofts.
A necessary strategy in Mainetti’s opinion, owner of Sorgente sgr, the real estate management company that has four generic real estate funds (Michelangelo, Caravaggio, Raffaello, and Donatello for total amount of € 1.2 billion) and one dedicated to hotels (the Baglioni Fund, with assets of € 150 million) launched after the acquisition of four properties from the hotel group of the same name.
Through the Michelangelo Fund and its company Michelangelo Real Estate Corporation, Mainetti acquired three New York buildings with the option to go up to 75% in the companies that control the two skyscrapers. “Looking abroad today is important,” explains Mainetti to Economy. “The real estate funds in Italy aren’t finding the opportunities and the returns that they had previously seen in the last eight years.” That’s why Sorgente sgr decided to invest in other markets. Besides the United States, Sorgente has concluded important deals in France with the acquisition of four hotels (Chateau de Mirambeau located between Bordeaux and Cognac, Chateau de Codignat in Auvergne, the Royal Champagne close to Reims, and Villa Gallici in Aix-en-Provence), merged together with four hotels from the Baglioni family to create the fund of the same name.
Now Mainetti is hunting for another hotel in Paris and his intentions are to divide the hotels and the French properties will be the basis for a French fund.
“Initially we were thinking of a Siic, (Société d'investissement immobilier cotée), but now in France they are creating Spicavs (Société de placement à preponderance immobilière à capital variable). Spicavs aren’t for public investors, don’t have to be listed on the stock exchange, and provide greater flexibility in managing the real estate business.”
The same type of fund will soon be introduced in Italy, where the Siiq (Società d’investimento immobiliare quotate) were authorized by a new finance law in 2007 and are currently being defined.
They will be subject to mandatory flotation on the stock market, and mandatory distribution of 85% of the returns from rental revenues and 50% of the capital gains with considerable tax advantages. “It is another instrument, and as soon as the regulations are ready, we will be among the first to launch one” explains Mainetti, who, in the meantime, has analysed the results of the two active funds, Michelangelo and Caravaggio. The first, reserved for qualified investors, saw a 14% increase in share value in 2006. The second (also for public investors) had an increase of 8.5%. “Our global investment focus has paid off,” says Mainetti. “It has allowed us to move our investments from one market to another.”

The first is a smallish block with 2,200sq m purchased and renovated. But other projects are to follow. The aim is to restore historic buildings to their former glory.

A love of New York and more especially of Manhattan and its surroundings is common. But perhaps it’s the passion for quality and an interest in renovation that guide Veronica Mainetti, Walter’s daughter who is in charge of Sortgente SGR’s real estate investments in the USA. The young top manager adores the Soho area, with reason considering the potential of a city that is always at the center of the world – and truly believes that it is possible to preserve its mix of art and history through the galleries and ethnic restaurants that populate it today.
It’s a lively city area whose property continues to be popular for the particular care and attention paid by the local authority, which in a matter of weeks established a pedestrian only area on Broadway between Houston Street and Canal Street. The youthful veronica, on the board of Michelangelo Properties, part of Sorgente SGR’s Michelangelo Fund, is transforming a passion for the area into something more. She is in fact conducting what she herself would describe as a “pilot operation”, the first of a series: the acquisition of buildings with high potential for conversion to luxury residential complexes. Speculation is not involved: once the apartments have been updated they will be sold on to designers or no less than aficionados of art, given that they are very extensive lofts. The building in question at 32-34 Greene Street, is a complex comprising two twin buildings to be connected by an elevator. “We will create an association,” Veronica explains, “to provide accreditation for the owners of these properties. They will have to be artists because these are airy lofts that are little suited to the traditional type of client, and also in consideration of the appeal of the area.” Like may buildings in the Soho area, this most recent acquisition by Sorgente dates back to the late 19th century and is an ex-factory converted for residential purposes. The Michelangelo Real Estate Corporation, which bought the building through Goldfay and Waltson, will carry out renovations in 9 months. It will not be easy to restore it to its former splendor as the cast iron façade will have be taken down bit by bit. The five floors will include retail areas on the ground floor which are ideal as a showroom and a penthouse on the top floor.
This could seem to be small fair for the Big Apple. The building has in fact a surface area of 22 thousand feet, (that is approximately 2,200sq m.). It was bought for 15 million dollars and renovation costs will amount to a further 7 million and it is expected to fetch 32 million at sale. It is however a good testing ground for other larger purchases, in Joint venture for example perhaps with other investors with similar sensitivities.
Veronica Mainetti is not new to important property deals. Last year, following several months of negotiations, she signed the purchase contract for the acquisition of a majority stake in the Flatiron building.

He has just paid 25 thousand euros per square meter for a mini attic near the Coliseum with views over the Imperial Forum. If someone from a family that has dealt in real estate for generations was prepared to pay this price, it means that that was the right price for a view to be had nowhere else in the world. And yet Valter Mainetti, CEO of Sorgente SGR, a property investment fund company, has long been of the idea that divided residential which is jargon for the apartments market, of single dwellings has reached levels of excess. High demand on the one hand and high credit (read mortgages) on the other have pushed prices up.

Only historic centers
“I would advise first-time buyers today,” says Mainetti, “to stick to historic centers where it’s no longer possible to build and where houses have the added value of being unique”. However this advice is accompanied by some basic warnings. It’s necessary to buy in cities where a growth in population is predicted and demand is therefore destined to rise. Not to give examples, but Bologna yes and Palermo no. The Sorgente CEO goes on to suggest choosing smaller apartments, a maximum of 80sq.m, spreading the risk and accepting the idea of profitable rentals like weekly lets to foreigners can be. It is important to avoid the so-called shop window effect. If the attic costs 25 the first floor shouldn’t be paid the 20 that is often asked for.

Trophy buildings
Above all, Mainetti stresses, it is always worth investing in what the Anglo-Saxons call Trophy buildings that benefit not only from their location – usually in the center of the most beautiful and famous cities but also from their historic or architectural worth, which give them an intrinsic value.
Mainetti is well aware of this because in 2005 one of Sorgente’s funds, the Michelangelo, took on the majority share in the Chrysler building, the celebrated historic skyscraper on Lexington Avenue in Manhattan, one of the most famous buildings in the world. But even without going in for investments of this size (the Chrysler Building is worth in the region of 500 million dollars), it has been demonstrated that a building’s historical and architectural importance can mean an increase in price and ensure that more than any other kind of building, it will maintain it’s value over time. Taking 100 as the initial value of a building in the suburbs, of one in the historic center and a trophy building, it has been shown in a Sorgente SGR survey that the latter gains in value to a much greater extent - on average 15-20% more - in all the major cities around the world. And when values drop, Trophy buildings hold up best.

Rome and Milan
Compared to cities like Paris or New York, Milan and more especially Rome benefit from a heritage of Trophy buildings noted especially for their markedly superior architecture. That’s why, in the light of these considerations, the mini attic near the Coliseum that Valter Mainetti bought appears to be more coherent than the pure figure per square meter would make one think. According to the Sorgente SGR’s CEO, the reasoning on Trophy buildings is valid both for operators and private purchasers. If the view over the Imperial Forum is a personal trophy, Mainetti pursues the conquest of other similar objectives also as a businessman. So much so that Sorgente Sgr is preparing to launch a fund that will in fact be called the Historic Buildings Fund which will invest exclusively in high prestige buildings in New York, Milan, Paris, London and Rome.

Office blocks and shops in the center
Are there no other possibilities for the private investor at the moment? “Yes, with a figure of around 500 thousand euros to spend,” Mainetti advises “you can make a very good investment in a shop in the center of the city. If on the other hand you have at least five million euros to invest, I would suggest buying an entire building to convert into office space to rent out to top level clients”. Mainetti adds a word of warning, and that is to avoid the new and the suburbs, preferring semi-central areas. “Such a building, bought for a good price,” comments the Sorgente CEO, “could yield 5-6% per year plus a foreseeable conservative estimate of 2% appreciation each year (with a forecast inflation of 1.5%). More to the point with five million euros, you would be purchasing for ten because five could come from a mortgage. In the end any profits are therefore on ten.

It is known that it’s worth investing in bricks and mortar. Property ensures yields that can be among the most advantageous. In this atmosphere of certainty, in November 1999 Sorgente SGR was founded. Then, following a decision issued by the Governor of the Bank of Italy on 30 January 2001, it was authorized to manage savings funds and today is the undisputed leader specializing in property investment funds. The business formula developed by the main shareholder and CEO, Valter Mainetti is based on a close knowledge and experience in the sector backed by the indispensable professional qualities of active partners and collaborators in the financial, managerial and administrative fields. The company’s savings management activities actually took effect from December 2001 with the establishment of the Michelangelo Fund. It was the first closed property fund reserved for institutional investors and had an initial capital of 105 million euros with a minimum objective yield of 6.5%, which, at the close of 2006 had appreciated by 76.58%.
It’s a success that accompanies that of the Caravaggio Fund with similar features to the Michelanagelo but also open to private investors. The Rafaello and Donatello Funds are the other savings funds set up and managed by Sorgente SGR both aimed at professional institutional investors. Sorgente’s future plans include the Tiziano Property Fund, an open fund that will invest in shares of quoted companies operating in the real estate sector in Italy and abroad. In the course of 2005, an agreement was signed with the Baglioni Group, one of the oldest and most prestigious hotel management companies. With the purchase of four of the chain’s luxury hotels in France, the thirty-year Baglioni Mutual Fund was set up with assets of 105 million euros.
“Looking abroad is important today,” Mainetti explains, “Property funds in Italy are no longer able to find the right opportunities and profitability which allowed them to grow over the past eight years.” This is why the savings management company’s investments are now oriented towards other markets, especially the United States. The Michelangelo Real Estate Corporation, which belongs to the group has in fact purchased important majority stakes in the two most famous skyscrapers in Manhattan: the Chrysler Building and the Flatiron. More recently it has purchased a block in the Soho area of New York where, following careful renovation that will raise its value, it will create ten luxury loft apartments. Sorgente SGR’s total property equity amounts to 1.2 billion euros but business dealings offer the promise of a significant increase in the near future.

Property investment fund management companies are always on the lookout for segments or sectors to put their cards on in order to obtain that increase in profits that is always welcomed by investors. Sorgente SGR appears to have identified a new segment, that of high prestige, exclusive buildings that the Anglo-Saxons call “Trophy” buildings.
A survey commissioned by Sorgente and carried out by Scenari Immobiliari will show, and Affari&Finanza is able to give a preview of the results, the potential this sector can offer in the long term.
Scenari Immobiliari has looked at Trophy buildings, in both the residential and office segments, in some large international cities: New York, Paris, Rome and Milan. The survey highlights the fact that the cities with the highest increase in value are Milan and Rome. For Paris and New York the increase was less substantial though still well noticeable in the residential segment with hardly anything in the office segment. However, the situation is still positive when compared to non-Trophy buildings that even lost something in real terms.
Between 1985 and 2006, in real terms, the Trophy residential property index in Milan (taking 1985 as 100) rose to 474 compared to the average of 375 for the city with 335 in the suburbs. In the tertiary segment for the same period Trophy buildings rose from 100 to 320 compared to the average of 280 and 221 in the suburbs. In Rome the increase was from 100 to 445 for residential (compared to a city average of 370 and 313 in the suburbs) and from 100 to 335 for the business segment (compared to a city average of 300 and 262 in the suburbs).
For the same period in Paris, residential Trophy buildings increased from 100 to 155 (compared to 136 average and 134 in the suburbs). In the tertiary/office sector the rise was from 100 to 110 compared to a general average of 100 (with no appreciation in real terms but only nominal) and 93 in the suburbs (hence a loss in real terms). In New York, the appreciation of Trophy residential buildings was very good (from 100 to 265 compared to an average of 240 and 195 in the suburbs) but for the Trophy office blocks the increase was slight (from 100 to 110 over 21 years) with real term losses both average and in the suburbs.
These figures show that even considering the above differences, the luxury buildings asset class remains particularly attractive for investors, especially because of its greater ability to hold its value when markets contract.
Taking this research as a starting point, Sorgente has developed a project to create a property fund based on this asset class. It will be called the Historic Building Fund though it hasn’t yet been decided whether to establish it under Italian or Luxembourg law but it has already been decided that a minority share will be available for major private investors (with a minimum investment of 20 thousand euros). The fund will invest in Trophy buildings in the most promising property markets. “It will be an instrument investing in office and tertiary space,” explains CEO Valter Mainetti, “because these are the only buildings whose rents can guarantee a half year income that is attractive for investors. Residential accommodation, instead, provides too low a monthly income so their appeal for investors is mainly due to the final capital gain”.