Union Investment has been one of the biggest buyers of new real estate developments in Europe and the UK in recent years, but is wary of buying new projects in London, the company’s management board member Frank Billand told PropertyEU in an interview.
Union Investment has been one of the biggest buyers of new real estate developments in Europe and the UK in recent years, but is wary of buying new projects in London, the company’s management board member Frank Billand told PropertyEU in an interview.
‘We still need to be convinced it makes sense to take the risk. There are many high-rise developments in London.’
Over the past decade, the Hamburg-based investment manager has acquired roughly 30-35 developments across a range of countries in Europe including its home market Germany, France, the UK and the Netherlands as well as further afield in the US and Australia. The fund manager is still looking at developments in various markets, including the UK capital, but is exercising caution, Billand said.
‘We feel the cycle of developments is very mature and coming to its peak and that the current cycle will finish by 2018/19. We expect the market will change shortly after 2018/19…Interest rates may go up and that will affect the market dynamics. We wouldn’t want to have exposure then to a high number of new developments still waiting for tenants.’
Intense competition
One of the main reasons Union Investment is interested in buying project developments is the intense competition for fully-leased buildings. ‘We don’t want to stand in a queue and pull a number along with 15 other potential buyers. We have deliberately looked for ways to get involved in a project in an earlier phase. We have been able to land deals by taking on more risk. But it’s always a risk that we understand and can oversee.’
Indeed, Union Investment’s presence in the budget hotel market and the creation of its dedicated fund in this sector was only possible because it was able to buy the developments, Billand said. ‘This was a completely new product line.’
Until recently, Union Investment was also interested in acquiring shopping centre developments to get an edge over other buyers in this segment but that period is now over, he said. In fact, the company is now cautious about investing in new shopping centres before or during construction and wants to see a track record first, he added. ‘We prefer to wait and see how a shopping centre is performing two or three years after opening.’
The financial benefits of buying a new development are minimal, he noted. ‘On average the performance is slightly higher but it’s pretty limited. You can normally add on 25 bps for taking on the risk but not much more.’
Skills and expertise
Billand is convinced that one of the key success factors for a buyer of development schemes is an experienced team of project managers and architects. ‘We have 33 people in our technical department and we strongly feel that they are experienced and very helpful. They check and control all our developments and acquisitions and also oversee our existing stock. Every two weeks there is an exchange of experiences within the team which is really quite thrilling. Thanks to this exchange, we learn about the best specifications, building technology and construction methods and how to sort out problems with developers. We also learn how to deal with surprises.’
Another success factor is caution is selecting markets, Billand said. ‘We would be cautious about office investments that are not fully-let on long-term leases in Warsaw. The city is close to being overbuilt, there’s too much oversupply.’
Dublin on the other hand is a city that Billand is prepared to bet on. Earlier this year, Union Investment announced it is to forward fund the development of Burlington House, Dublin’s largest new speculative office building. The site was acquired in June last year by UK listed developer Development Securities for €40 mln after its previous owner, Glasbay, went into receivership. The five-storey building, formerly occupied by Allianz, has since been demolished and will be replaced by a new 16,000 m2 building. ‘Dublin is recovering from the crisis,’ Billand explained. ‘And there are only two or three office buildings under construction in the city.’