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German residential
"It's not cheap to buy German residential," Bruhn said. "It would have been better buying these assets 10 years ago... but it is what it is.”
In its biggest transaction ever, and in its first direct transaction in Germany, the Danish pension fund PFA invested more than €1bn in buying the Century residential portfolio from Industria Wohnen, consisting of 3,700 homes across Germany.
PFA is the largest commercial fund in Denmark and the fifth largest in Europe, with €80bn of assets under management, including about €8bn in real estate. The move comes after a recent internal decision to “significantly increase” the fund’s exposure to real estate through 2022, a period which the fund says is likely to see interest rates remain at about the same low level as they are now.
Denmark’s central bank has been operating with negative interest rates since 2012, longer than any country, having been initially introduced to fight back against speculators hoarding Danish kroner during Europe’s debt crisis.
PFA has hired Domicil Real Estate Group to exclusively manage the 247,278 sqm portfolio, which consists of one commercial building and 33 residential buildings across 15 locations in Germany. The average rent is €7.85 per sqm/month. Two-thirds of the 3,700 residential units are in major metropolitan centres, including Berlin, Munich, Hamburg, the Rhineland and the Rhine-Neckar region.
More than half of the rental income is generated in Berlin and Munich. The Bavarian capital, in particular, is thought to offer much upside potential with average rents in the city now nearly €10.00 per sqm, well above the Century portfolio’s current average.
In a competitive bidding process, PFA won out by offering the highest bid, against several competitors. The Danish pension fund started showing interest in the portfolio in April and the deal was finalised in early August.
‘The properties are primarily located in attractive and very attractive locations in sought-after residential neighbourhoods. Century also offers substantial potential for rental growth,’ commented Khaled Kaissar, founder and managing partner of the Domicil Real Estate Group.
For Industria Wohnen, part of the Frankfurt-based Degussa Bank, the deal represents an earlier-than-planned exit. The portfolio was part of Industria Wohnen’s first real estate special fund dubbed ‘Wohnen Deutschland’, which launched for institutional investors in 2010 with a target term of 10 years.
Klaus Niewöhner-Pape, Industria Wohnen’s managing director, said: ‘Since the fund was launched, we have consistently geared the portfolio towards economically thriving conurbations with strong growth potential. On behalf of our investors, we are now taking advantage of the extraordinarily positive market developments of recent years and have decided to embrace this early exit opportunity.”
In a recent interview with Bloomberg, Michael Bruhn, head of real estate at PFA in Copenhagen, offered insights into PFA’s strategy: "One-third of the PFA balance sheet doesn't produce any interest or any returns," he said. That includes Danish and German bonds. "They're just sitting there. So we're constantly seeking new ways to find income and, of course, balance it with the risk as well."
PFA is now focused on expanding its investments outside Denmark in an effort to generate higher returns. Property was the asset class that performed best in PFA's first quarter, with a return of 1.5%, its latest figures show. Its portfolio of listed shares fell 2.9% in the period and its bond holdings delivered a 0.4% loss.
The decision by PFA to invest in German commercial and residential property comes even after the strong upsurge in prices in recent years. According to Bruhn, it made sense to invest in bonds before the financial crisis, but no longer. He points to the “historically big” spread between returns from what he called "core German residential" investments and 10-year government securities as being as high as 250 basis points. He added that even if interest rates do go up, real estate offers a hedge because rents tend to rise in monetary tightening cycles.
"It's not cheap to buy German residential," Bruhn said. "It would have been better buying these assets 10 years ago... but it is what it is.”
