German Fund Manager
Looks Beyond Home

Hamburg-based real-estate fund manager Union Investment Real Estate AG, formerly DIFA Deutsche Immobilien Fonds AG, is cutting its exposure to its home market in favor of new pastures in Asia and Latin America.

The shift is part of a broader drive on the part of the German fund manager to both diversify risk and increase its exposure to real-estate assets in regions benefiting from strong economic growth.

As a result, it is in the process of acquiring five apartment blocks under construction in central Tokyo from local developer FLEG Future Life Entry Group International. Union Investment already acquired one existing apartment block from FLEG last month. When completed, the six apartment blocks will contain around 140 apartments. Union Investment has invested €50.7 million ($69.2 million) in the deal, which is expected to close by the end of October.

"We are interested in residential properties in Tokyo because the fundamentals are good and there is strong demand for homes," says Reinhard Kutscher, chairman of the management board at Union Investment. "Initial returns on residential assets in Tokyo are typically around 4% to 5%, but interest rates are very low, so debt is very cheap. We would also expect some rental growth going forward."

The foray into Japan is a far cry from 2000, when more than 80% of Union Investment's real-estate assets were in its home market, with the remaining 20% elsewhere in Europe. As of July 31, assets in Germany accounted for 51.26% of its portfolio, with 37.66% elsewhere in Europe, 10.38% in North America, Mexico and Chile and just less than 1% in Asia.

The fund manager now intends to rapidly accelerate its allocation to Asia over the next five years, with the aim of investing as much as 35% of its UniImmo Global fund and as much as 15% of the UniImmo Europe fund in Asia within this period, Mr. Kutscher says.

Union Investment Real Estate manages five real-estate funds which, combined, had around €14 billion of assets under management as of June 30.

In addition to Singapore, Japan and South Korea, where it has already done deals, Union Investment is also interested in entering China, India, Malaysia and Thailand.

Fears of German open-ended funds being overvalued in 2005, which triggered the temporary closure of some funds, coupled with Germany's recent recession, have also contributed to players such as Union Investment setting their sights on emerging markets, says real-estate analyst Kai Klose at Sal. Oppenheim in Frankfurt. The reason: Yields can be as much as 500 basis points higher in Asia than in Germany. Other German open-ended funds are also starting to eye emerging markets. DB Real Estate has ventured into South Korea, and last month Commerz Grundbesitz Group acquired its second shopping center in Japan.

Union Investment denies that its push into emerging markets was precipitated by the recent valuation concerns and fund closures -- none of Union Investment's funds were closed. Instead, the fund manager says a change in German legislation in 2004, which allowed Germany's open-ended funds to invest abroad more freely, paved the way for international investment.

Neither is Union Investment limiting its expansion to Asia. It is also deepening its footprint in Turkey and Latin America, namely in Mexico and Chile. Last week, it acquired a shopping center under development from Multi Turkmall in Istanbul for €257 million. It is also investing €19 million in the development of the first Media Markt electronics store -- a unit of Germany's Metro Group -- in Istanbul, which is due to open next year.

"In Turkey, we are focusing on the retail sector because both consumer spending and the population are growing fast, which makes it an attractive market," Mr. Kutscher says. "The same is true of Mexico and Chile, although we are also interested in offices in these countries. The yields in more emerging markets, such as Chile, Turkey and Mexico are also high, at around 8-10%."

However, the higher yields reflect both country and currency risk. Nevertheless, Mexico and Chile, in particular, offer good opportunities because the competition for properties is not as high as in core markets, such as France, Mr. Kutscher says.

Interestingly, the downturn in the U.S. housing market might encourage Union Investment to reconsider investing there, Mr. Kutscher says. High prices in the U.S. have been a barrier to recent investment, he says. If the slowdown in the housing market ricochets out to the commercial-real-estate market, Union Investment might take advantage of lower prices to invest in offices and logistics properties, he adds.

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