Morgan Stanley, IVG buy portfolios for EUR 2.5 bn

Morgan Stanley Real Estate and IVG Immobilien have agreed to buy 53 properties and the Frankfurter Welle office development for a total of EUR 2.5 bn from Hamburg-based fund manager Union Investment Real Estate.

In a statement, Union Investment (formerly DIFA) said the prices achieved for the various buildings in the Rhine-Main and Berlin regions significantly exceeded expert valuations. Following the transaction, Union Investment has completed the process of realigning the portfolios of its two classic funds - UniImmo: Deutschland (formerly DIFA-Fonds Nr. 1) and UniImmo: Europa (formerly DIFA-GRUND) - by reducing its holdings in Germany.

Morgan Stanley is to pay just over EUR 1.3 bn for a subportfolio of 28 UniImmo: Deutschland properties for a total price of 1.36 billion euros. The properties include the Neues Kranzler Eck development in Berlin. Morgan Stanley is also acquiring the Frankfurter Welle office scheme, owned by both Unilmmo funds, for just over EUR 700 mln. Bonn-based IVG, Germany's largest listed property company, is buying a second subportfolio that comprises 25 properties, primarily held by the UniImmo: Europa fund, for a total of EUR 495 mln. 'We are confident of being able to increase the occupancy level considerably,'' IVG ceo Wolfhard Leichnitz, said in a statement. 'In combination with a higher rental level we see considerable potential for appreciation.''

Bloomberg reported that Morgan Stanley and IVG are buying the assets at a time when real estate prices and rents are starting to rise in Europe's largest economy as employment rises and economic growth picks up. German commercial property was the worst or second-worst performer among 12 western European countries measured by research organisation Investment Property Databank in five of the six years between 2001 and 2006. The total return last year on German commercial real estate was 1.3%, compared with at least 15 percent in countries such as the UK, France, Spain, Sweden and Ireland. Morgan Stanley has spent EUR 4 bn last year buying German commercial property.

IVG's acquisition is the second substantial purchase of German commercial property by a domestic real estate company in a week. On 10 May, DIC Asset announced it had bought 54 properties from Hansainvest for EUR 465 mln. IVG will have 61 percent of its assets in Germany following the acquisition, which will increase the size of the German office real estate investment trust that IVG plans to create later this year, said Leichnitz.

Union Investment said the sale to Morgan Stanley and IVG reduces the proportion of German properties in the UniImmo: Deutschland fund from 70.6 to 57.5% and to 35.0% for UniImmo: Europa (previously 40.3%). 'In a single move, this sale creates a balanced, well diversified portfolio structure within the funds, comprising an appropriate mix of solid high-yield German and Western European properties, says Dr. Frank Billand, member of the Management Board of Union Investment Real Estate AG. According to Dr. Billand, the office-focused Pegasus portfolio largely consists of buildings that no longer fit the funds’ portfolio strategy and for which this was the optimum time to sell.