German open-ended funds increasingly eye Asia and Latin America

As the credit crunch continues to tighten its hold on European real estate markets, some European investors - including Germany's open-ended funds - are increasing their bets on Asia and Latin America. Germany's open-ended real estate funds have put the valuations scandals of 2005 behind them to re-emerge as major players in global markets - with very deep pockets to boot. Many such funds are targeting Asia, in particular, due to strong demand for office space on the part of international companies, which is fuelling institutional interest.

'German open-ended funds have a lot of capital to invest. Markets such as Asia are attractive because they offer higher yields than at home. Yields can be as high as 11% in Asia, compared with around 5% in Germany. Typically, around 10% of total investment on the part of Germany's open-ended funds is outside Europe,' said Matthias Becker, a real estate analyst at the UniCredit Group in Munich.

One investor with Asia on its radar is RREEF. Around 16% of its grundbesitz global fund - or EUR 500 mln - is invested in Asia, although the firm would like to double this allocation over the next couple of years. Currently, the fund has around EUR 3.5 bn of assets under management.

'We're mainly targeting offices in China, Japan, Korea and Singapore, although we are also looking at well-located shopping centres in major cities in these markets,' said Holger Naumann, head of RREEF in Germany. The region's strong rental growth is fuelling the company's interest, Naumann said.

'In China, we are not looking as much at cities like Beijing and Shanghai because you have to invest substantially to get any real exposure to them. Instead, we are targeting other large cities such as Tianjin and Wuhan. We have a target annual return of 5% to 7% for this fund,' he added.

And investors are not afraid to commit big bucks. Following the acquisition last month (August) of the da vinci Kamiyacho office building in Tokyo, Commerz Real's hausInvest global open-ended real estate has now invested more than EUR1 bn in the Asia-Pacific region since it entered the market in 2006. 'The developed national economies [in the Asia-Pacific region] are marked by a fast growth dynamic and sound investment parameters,' said Hans-Joachim Kühl, a member of the management board of Commerz Real, which is the real estate arm of Commerzbank.

However, not all investors remained convinced that Asia offers boundless opportunities. While Degi, which is wholly-owned by Aberdeen Asset Management, has invested almost EUR 100 mln in Asia this year via its Degi International fund, it remains a risky market, largely because of the lack of stable property market structures, according to Thomas Beyerle, head of research at Degi. One problem, he says, is that it is currently not possible to set up a legal secured structure to export any rental income coming out of China.

However, Degi is also evaluating investment opportunities in Latin America - most notably in Brazil and Chile - said Beyerle, where the office markets are performing well. Degi currently has EUR 6.9 bn of property assets under management. Its International fund has an annual target return of 5.1%.

It is not the only investor getting in on the act: last month Union Investment Real Estate, formerly known as Difa, acquired a fully-let Class A office building in Santa Fe, a large business district in Mexico City, for $97.3 mln for its open-ended real estate fund UniImmo:Europa. To date, the fund has invested almost EUR 500 mln in Mexico and Chile. Up to 25% of the fund can be invested elsewhere in the world.