Union Investment to invest €1b in development this year

German fund manager Union Investment is on the development trail. Fresh from investing almost €1 bn in development projects last year, it expects to spend a similar amount on development in 2014.

Union Investment hopes to invest €2 bn in real estate globally this year, of which around half is expected to be in development projects. Here, Frank Billand, CIO and member of the management board at Union Investment Real Estate in Hamburg, tells PropertyEU why Union Investment is hoping to up its exposure to development projects this year and why it prefers to acquire projects in the early stages of development.

PropertyEU: You invested €960 mln in development projects last year and are hoping to invest a similar amount this year. What is the attraction of such projects?

Billand: We are targeting development projects because we think acquiring projects during the early stages of development gives us a strategic advantage in this very competitive market. We invested €2.1 bn across 31 transactions last year, including 11 development deals. In this overheated market, we prefer to buy at the development stage rather than at auctions at the end where pricing can become irrational and where there is a very long queue of interested investors!

We typically do a 50/50 mix of forward funding, which carries some development risk, and forward purchasing, whereby we pay on completion of the building. We prefer to engage in forward funding with developers with whom we have a good track record. One large recent development that we acquired was the ‘Am Hirschgarten’ project in Munich, which we bought from German developer Hochtief Projektentwicklung for an undisclosed sum in December. The 37,500 m2 space comprises offices, retail and storage space and is already 60% let. It is due to be completed by the end of the year. We have also invested €155 mln in an office/retail development on the high street in Hannover, which is due to be finished next month (March).

PropertyEU: How much do you intend to invest this year?

Billand: We would like to invest around €2 bn across all our funds, of which half could be invested in development. We have also earmarked €300 mln to be invested in the US and at least €100 mln for the Asia-Pacific region, mainly in Tokyo and Australia. We already have €300 mln in our development pipeline for this year, of which about half is being invested in Germany.

PropertyEU: Which markets are you targeting?

Billand: We’re interested in markets where there is strong rental growth, few speculative developments and sustainable demand from tenants. This includes cities such as Frankfurt and Munich, as well as markets such as the UK and France. We’re also interested in secondary cities in the US, such as Austin, Texas and Seattle.

In addition, we are interested in development projects because they afford us the opportunity to invest in green certified buildings, which is very important for our funds. In France, for example, we have invested €135 mln in a 24,000 m2 hotel in La Défense, Paris, which will be operated by Spain’s Meliá Hotels. It will have 220 rooms and is due to open in November this year. We’re very keen to do deals with strong operators like Meliá who are also prepared to sign leases of around 20 years.

PropertyEU: How do you finance your development projects?

Billand: Financing is not really an issue as we are a strong equity player. Last year, our privately-owned funds had net inflows of €2.8 bn. Within the eurozone, we prefer to invest 100% of equity. For some development projects, we might take out a loan of up to five years, with a typical LTV of 40%.

PropertyEU: Do you plan to enter any new markets this year?

Billand: No, not for the time being as we already invest across 24 countries worldwide, so we’re not currently looking at entering any new ones. We already have a €20 bn real estate portfolio and want to grow that further in upcoming years.