Union Investment broadens investor base among European institutionals

Union Investment, the giant fund manager that operates as the investment arm of the co-operative DZ Bank, has released figures for its buying and selling activity throughout 2022. It's clear the group has been holding back on acquisitions and its usual development programme to keep its powder dry in anticipation of falling prices.

As the largest provider of open-ended real estate funds in Germany, the group grew its actively and passively managed assets in its funds by 9% last year, bringing them to €56.2bn, a new record high. Net capital inflows into its retail and special funds (Spezialfonds) was €3.3bn, along with a further €1.1bn raised by its Service KVG business. It bought a total of 28 properties and projects worth €2.4bn for its funds, together with 41 acquisitions worth €1.4bn for its Service KVG mandates for third parties. Eight sales were made, for about €300m.

AUM for its institutional funds and Service KVG mandates total €19.8bn, with fresh capital commitments last year of €1.1bn. The company now has 35 separate products for institutional investors, including 22 Service KVG mandates. Among the biggest transactions last year was the second construction phase of the Siemens Campus in Erlangen, which Union Investment acquired for major customers via a club deal.

According to Michael Bütter, CEO and chairman of the managing board, presenting the results recently, the company deliberately put on the brakes in the second half. “The new interest rate environment and the energy crisis have drastically increased risk in the real estate markets. In order to offer our existing investors stability and steady appreciation even in this period of uncertainty, we deliberately opted for a cautious investment strategy instead of pursuing additional growth. In the case of some opportunities, we intend to wait for the inevitable price corrections in the wake of interest rate rises."

“By the third quarter of 2023 at the latest, by which time interest rates should have stabilised, we will see a significant drop in prices in most asset classes, which will unlock transaction activity. There are three requirements for seizing the opportunities that arise in the new interest rate environment: capital, decisiveness, and the ability to identify the right time to re-enter the market. We are very well positioned in all three respects.”

Looking ahead, Büttner said: “In a changed interest rate environment, there are attractive opportunities to generate returns for all our funds, including through index-based rent adjustment.” He said the company was aiming to leverage the performance potential of its real estate portfolios, currently standing at around 500 properties. The value-add strategy has been extended to the company’s own holdings, among other measures, and there is now greater emphasis on the company launching its own development projects, including the selective conversion of real estate into mixed-use properties. Its investments are spread across 11 national markets, including the USA.

Two years ago the company announced a new strategy of greater diversification across asset classes. Within Europe, Germany made up the bulk of investments last year at €600m, followed by the Netherlands at €400m. As part of the strategy, residential is to gain greater exposure, given its relatively low correlation with commercial markets, and it invested more than €300m in existing markets such as Amsterdam, Helsinki and Dublin as well as in the Nordics and southern Europe for the first time. The plan is to invest more than €2bn in the sector.

In logistics, the group invested €550m, with a new move into the light industrial sector through the purchase of Hexagon Kassel.

Union Investment is also becoming a significant player in the embattled hotel sector, particularly targeting resort hotels. Along with the DACH region, this will include Spain, Portugal and northern Italy. Recent acquisitions include the Autograph Collection by Marriott on Lake Tegernsee, and the 25hours Paper Island hotel in Copenhagen.

The institutional German hotel market was worth €55.7 billion at the end of 2021, a rise of 6.9% year-on-year, according to a study by Union Investment itself and research group bulwiengesa. "The growth rate has returned to the pre-pandemic average," said Andreas Löcher, head of investment management hospitality at Union Investment. "There are encouraging signs of recovery in the German hotel market, with above-average growth in segments that are traditionally considered more crisis-resilient, in the budget/economy segment, in branded hotels and also among operator models such as serviced apartments."

Both in retail and in offices, Union made investments in Lisbon and Barcelona to spearhead its drive to greater exposure to southern Europe.

While traditionally known as a heavyweight in the mutual funds sector, with its colossal distribution clout throughout Germany's co-operative banking sector, the company is clearly focused on driving growth in the institutional part of its business, with further growth expected even in this difficult year.

Management board member Maximilian Brauers, with responsibility for the institutional side, said: “The changed interest rate environment is already creating selective investment opportunities. We see opportunities in particular where properties are looking for capital and we can offer customers the chance to participate in an exclusive investment case via a joint venture or club deal. Over the coming years, we intend to further diversify our institutional customer base through real estate solutions that meet higher ROI requirements against the backdrop of a stricter regulatory regime. This will enable us to tap into additional sources of capital for medium to high value transactions in the real estate markets. That also includes institutional capital from outside Germany.”