New Union Investment retail fund eyes German asset

Last week, German fund manager Union Investment launched its first dedicated shopping centre fund for institutional investors - UII Shopping Nr. 1 - with a target volume of EUR 750 mln. Two thirds of the equity has already been raised and the remainder is expected to flow in during the second half of 2011 and 2012. Christoph Schumacher, deputy managing director of Union Investment Institutional Property, tells PropertyEU why shopping centres are too good to pass up.

?PropertyEU: Why did you decide to launch a shopping centre fund at this time?
Schumacher: In the last three years, we’ve invested around EUR 2.4 bn in shopping centres in continental Europe, including Germany, Italy, France and Turkey. In total, we have around EUR 4 bn retail exposure via our funds for private investors. We also have three diversified institutional funds and there was investor interest for a focused fund like this. We looked at where the interesting markets were - including Germany, France and Italy - and which ones generated good cash-flow and took it from there. More than EUR 300 mln has already been pledged by investors. ?Also, during the financial crisis and now, shopping centres have had a very low vacancy rate and good cash-flow possibilities. In our portfolio, for example, the vacancy rate of the shopping centres is only 2%. In continental Europe, we are also starting to see a recovery in the economy, which has an impact on consumer spending.

Over the last 10 years, shopping centres have delivered average total returns of just under 10% a year. Retail performance has also been less volatile than other sectors. In addition, rents are expected to increase in almost every European market, which makes this an ideal time to increase our exposure to this sector.

PropertyEU: Where have you seen investor interest from?
Schumacher: We have seen a wide range of investor interest. In total, we have seven investors in the fund, including German insurance companies, some church money, pension funds and a public body. The fund is currently dedicated to German investors. However, at a later stage, we may open it up to international investors.

?PropertyEU: When do you expect the fund to make its first investment?
Schumacher: Actually, we expect to close the first deal in July. It’s a German asset but I can’t say more at this stage! We have also seen interesting assets in France and the Netherlands.

?PropertyEU: Will the fund also consider investing in deals significantly larger than its target size of around EUR 90 mln?
Schumacher: We’d like a certain level of diversification in the fund but we don’t want to hold more than 15 properties or so, which means we’d rather not acquire assets that are too small. That said, we wouldn’t exclude properties that cost more than EUR 90 mln or smaller ones - in the right circumstances. We’ll focus largely on shopping centres but we’ll also look at prime high street properties, such as trophy assets. Although this is a core fund, we can also invest up to 20% in development projects, which we would consider, if there is a value-enhancement opportunity or a refurbishment possibility.

?PropertyEU: The fund will invest in Germany, France, Belgium, Italy, the Netherlands and Austria, as well as Poland and the Czech Republic. Do you have a set allocation per country or will you be more opportunistic?
Schumacher: The fund has a remit to invest 75% in core markets, including Germany, Austria, France, the Netherlands and Italy. Within that 75%, we would like to have a diversified, good mix of those core countries. The fund can also invest up to 25% in Poland and the Czech Republic combined.
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PropertyEU: The fund will not invest in other big European markets such as the UK and Spain - what are the main reasons for this? Also, are there any plans to include other geographical markets at a later date?
?Schumacher: There are several reasons for this. In the case of the UK, we are trying to avoid currency risk - our investors prefer to stay within the eurozone. In addition, the UK is also an expensive market. We don’t have much exposure to Spain and took the decision to focus on markets that we know well, such as the ones above. However, if our investors decide at some point that they would like to invest in other countries, we will certainly look at it.

?PropertyEU: What sort of annual return do you expect this fund to generate?
Schumacher: It depends on valuations and cash-flows. We do have certain expectations regarding the annual return but we have only shared them with our investors at the moment.

?PropertyEU: The target size of the fund is EUR 750 mln, including up to EUR 300 mln in debt - do you have plans to grow the fund once this target size is reached?
Schumacher: I think it’s most likely that we would cap this fund at EUR 750 mln. If there is investor appetite for more shopping centres, we are more likely to launch a second shopping centre fund than to grow the first one.