Union Investment invests €2.3bn on behalf of its real estate funds

German fund manager Union Investment invested €2.3bn on behalf of its real estate funds last year, taking its real estate fund assets under management to more than €40bn for the first time, Dr. Reinhard Kutscher, chairman of the management board of Union Investment Real Estate, told REFIRE this month.

‘Of the €2.3bn we invested last year, around half was in Germany,’ he said (An additional 36% was invested elsewhere in Europe, with a further 14% channelled into the US). ‘How much we invest this year depends on the opportunities but we’d like to invest around €2bn. We look at all asset classes in Germany and beyond. Logistics is very interesting to us, so we’d like to do a bit more in that segment, both in Germany and elsewhere. Last year, we started looking at micro living as well and would like to do more, including forward investments into micro living projects developed by partners. We’re also starting to look at long stay apartment-hotels and did three deals last year. We’re also interested in more mixed use-use, which can mean retail/offices or retail/housing. There’s a need for more resi stock in downtown locations.’

In October last year, Union Investment acquired four hotel development projects comprising 675 rooms for its Immofonds 1 and its hotel fund UII Hotel Nr. 1 for an undisclosed sum from benchmark REAL Estate Development via a forward purchase agreement. As part of the deal, three hotels will be built in Dresden, Oberhausen, and Eschborn. The fund manager also acquired an additional planned hotel property in Freiburg im Breisgau for its UII Hotel Nr. 1. Fund. The portfolio contained two future Super 8-branded hotels and two planned long-stay formats by Hyatt House and Adagio Access.

In addition, Union Investment sold 18 properties last year for around €770m, bringing the total transaction volume to around €3bn, broadly the same as in 2017.

Interestingly, around 60% of Union Investment’s acquisitions in 2018 were via development and forward funded deals, according to Kutscher: ‘The advantage is that you get a slightly better price because you take some letting risk,’ he said. ‘In addition, you can influence the quality of what is built, which is very important to us. Potentially, we could spend a similar amount on forward funded deals this year. Last year, we intensified our acquisition of smaller deals – below €50m – which is in line with most of our institutional funds. Some of these were forward funded deals as well. However, to tap into deals like this you need good relationships with local developers.’

And as Brexit chaos rumbles miserably on, the jury is still out in terms of what it will mean for the real estate sector in the UK, both in the short and long-term. ‘At the moment, we are waiting to see what will happen in the UK,’ Kutscher said. ‘We bought a hotel in Edinburgh last year. We’d only look at long-term leases and high-quality tenants but we may still invest there in the long-term. The US has always been a big part of our portfolio but it has become so expensive to hedge currency that I don’t really see us investing there this year, which is a shame.’ (Union Investment has €5.2bn of AUM in the US.)

At the end of 2018, Union Investment’s large real estate funds for retail investors reported occupancy levels of between 95.3% and 98.9%, with its office portfolio achieving a record occupancy level of 98%. The associated sustained rental income was a key contributor to the solid performance of the funds. As at the year-end, the funds for retail investors reported returns of between 2% and 3%.

‘In addition to solid growth in our traditional core business, our investments in various niche markets also made a very positive contribution to the overall result for our real estate business,’ Kutscher said. ‘Early engagement with digitisation and sustainability and the resulting strong positioning in these key areas mean that we are very well placed to continue benefiting from the outstanding importance of real estate as an investment product in turbulent time.’ (ssk)