Illustration: Adrian Bauer

The effort is worth it

For years, institutional real estate purchasers have stuck to the motto: the bigger, the better. Now they are rediscovering the charms of smaller investments.

The German office investment market was working hard in 2018. Not only did domestic and foreign buyers invest nearly €30 billion in the segment, they were especially interested in acquiring large buildings. Analysts with BNP Paribas Real Estate, a real estate consulting and services firm, counted 65 acquisitions of individual buildings in the three-digit millions of euros range.


But that reflects only one side of the current market activities. Notices of property purchases by institutional investors are piling up on a scale that was previously seen usually with private buyers or family offices. For example, in January Deka Investment acquired Forum Krefeld, which was completed at the end of November 2018, for an institutional fund portfolio – a mixed-use property with a manageable 8,000 square metres of space. The price, which was negotiated in secret, is likely in the low two-digit millions of euros range.


Solid factor on the purchase spectrum

For a long time now, Union Investment has been happy to acquire smaller properties as well. For example, the Hamburg-based investment manager acquired an office property in Bad Homburg at the end of 2018 that is fully let to IT service provider Dimension Data. The building was purchased for an institutional fund in this case as well – and with 6,750 square metres of floor space that was also acquired in the low double-digit millions of euros price range. The Step 8.3 office building in Stuttgart is a similar size. The six-storey-high, fully let building completed in 2018 has just about 8,000 square metres of space. The property was acquired by Union Investment for its Austrian retail real estate fund, immofonds 1. 


These two examples are by no means exceptions, emphasises Martin J. Brühl, Chief Investment Officer and Member of the Management Board at Union Investment Real Estate GmbH: “We have significantly expanded our acquisition spectrum in the last three years. In our building inventory in particular, the small-volume market segment is now a solid factor and will continue to gain in importance – both for our institutional solutions as well as for our products for private customers.” After all, 25 of the 36 acquisitions with a total volume of €2.3 billion that Union Investment concluded last year fell below the €50 million mark. The strategy makes sense – and for many reasons. A good half of the major deals closed in Germany last year were made with money from foreign deposit-taking institutions. “Foreign investors were more often able to prevail in these major deals than the competition from Germany,” as Matthias Leube, CEO of real estate company Colliers International Deutschland, describes the situation. 


That means: international investors were prepared to pay higher prices than domestic competitors, which sent the peak acquisition yields for office buildings in major German cities – which were already at a record low – even further downhill. In an annual comparison, they declined by 0.1 percentage points to only 3.2 percent, according to CBRE real estate services.


Domestic investors have been viewing the rising purchase prices in their own country with scepticism for some time – and are searching for strategic alternatives or complementary opportunities for their portfolios. Matthias Pink, Research Director at international property consultant Savills in Germany, expressly supports the approach of investors taking a closer look at smaller properties again. They had slipped into the background in the past, he says. For example, the percentage of commercial real estate transactions below €50 million per purchase in Germany had been steadily declining over the past six years, according to an analysis by JLL real estate consultants. These purchases contributed only around €5 billion to the total transaction volume of €29.5 billion in Germany in 2018. The average property volume is currently well above €50 million, mentions Savills researcher Pink, adding: “Investor competition should be the most intense around this value.” For anyone who wants to avoid that, it might make sense to focus on lower property volumes. 


Project acquisition is not an obstacle

However, Pink also mentions the downside of investments with smaller components: “Building a diversified portfolio takes more effort,” he says. “The acquisition of higher-volume properties is generally more efficient for fund management,” confirms Sonja Knorr, real estate fund analyst at Scope Analysis. Ultimately, the scope of due diligence and the entire acquisition process for high-volume properties requires scarcely more effort than for smaller acquisitions. “However, concentration risks increase for the funds with larger properties,” warns Knorr. Thus, the strategic return to smaller properties has also come to large retail funds – and is by no means limited to office buildings. Union Investment recently acquired a hotel property in the historic city centre of Edinburgh for its UniImmo: Global fund, which is worth €3.5 billion in total. At around €43 million, the purchase price is comparatively modest in this example as well. And low volumes are no longer an obstacle for project acquisitions, either: the Hamburg-based company purchased a logistics centre that was still under construction in Monsheim near Worms in mid-2018 – also for the UniImmo: Global fund. With 63,000 square metres of floor space, the price in this case is likely below the €50 million-mark once again. So there is plenty of room for the small ones, even in the portfolios of major funds. And Savills Manager Pink is certain: “The higher cost and effort is likely to be worthwhile for cashflow investors with a long-term focus.”


By Anne Wiktorin


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