Mastering the toughest discipline right from the start
For more than 50 years, Union Investment has been managing opportunities and risks along the entire property value chain, from new builds to modification and extension of existing properties. In addition to completed stock, Union Investment also invests in development Projects.
“Development projects offer the crucial advantage that we can exercise considerable influence over how buildings are designed,” says Bent Mühlena, head of real estate project management at Union Investment Real Estate GmbH. Today, development projects are a Union Investment trademark, but the very first fund managers also knew how to successfully realise such projects. In the CO-OP Immobilienfonds fund (now UniImmo: Deutschland), which was launched on 1 June 1966, construction projects formed part of the investment strategy from the start. In its very first year of business, fund management acquired five sites for properties in the planning stage, as well as eight completed properties.
The fund’s second largest property at the time, comprising 3,400 sq m of space, was a new build project in Heidenheim. The prospect of reliable income potential and positive capital appreciation was the main reason for engaging in new build investments. Construction activity was correspondingly brisk in the fund’s early years. The portfolio consisted of 35 properties by the end of 1968, including many recently completed new builds and 11 other properties under construction.
Crossing a key threshold
Following extensive investment in construction projects, the then CO-OP Immobilien-Fonds Verwaltungs AG took a significant step in 1969/1970 by committing to a more substantial new build project. This first milestone in its project business involved development of a hypermarket in Lübeck comprising approximately 15,000 sq m of space, which became the largest property in the fund. The portfolio comprised a total of 20 buildings under construction and undeveloped sites, as well as 30 completed properties, clearly demonstrating the importance of new build projects. Bent Mühlena explains the reasons: “Every property starts life as a development project. This initial stage has an enormous impact on the economic success of a building.” Real estate project management during planning and construction is a highly demanding and complex role which requires in-depth technical and commercial expertise. Not without reason, it is often described as the toughest discipline in the real estate sector.
“Compared to new build construction, developing existing properties brings with it another set of challenges,” adds Bent Mühlena. In the case of the hypermarket in Lübeck, this was successfully illustrated in 1980 after a holding period of approximately ten years. Significant investment saw the existing retail property extended to 21,000 sq m and strategically upgraded to include a new non-food area with a DIY store and a two-storey office development on top. Once again, the project managers achieved a new milestone: the largest development project in the portfolio at the time was also the largest Plaza hypermarket in Germany following completion. The extended building became the fund's largest individual property.
Complex challenges all part of the mix
Early-stage project acquisition is still very much part of Union Investment's daily business, being financed either via forward funding or forward purchase. Bent Mühlena highlights the additional benefits: “We share in the rewards of successful marketing and can negotiate the price with the developer in an exclusive process. Conversely, we also need to be able to assess and manage the particular risks associated with development projects. Our long experience is a huge advantage here.”
The high level of project management activity led to restructuring of the in-house construction team in the mid-1990s to create a new real estate development department. High-profile projects such as the Neues Kranzler Eck complex and DomAquareé ensemble in Berlin, the Frankfurter Welle in Frankfurt am Main – the largest single investment to date in financial terms – and the Riem Arcades in Munich were all successfully realised and marketed with the involvement and management of the then DIFA Deutsche Immobilien Fond AG. These were joined by the first development projects outside Germany, such as Thames Court in London. Over five decades, Union Investment has successfully positioned itself as an expert and internationally sought-after investor in new build Projects.
An integral part of the investment strategy
Bent Mühlena confirms that project deals are now an important part of the company’s investment strategy worldwide: “With a 40-strong team of architects, civil engineers and project managers, we support construction projects across all sectors from office buildings and hotels to logistics and retail, carrying out quality assurance to ensure that our assets deliver sustainable and reliable returns.” Around a quarter of Union Investment's acquisitions (by value) between 2014 and 2016 involved real estate that was still in the planning or construction phase. Acquiring projects reduces the average age of the property portfolio and ensures that holdings remain competitive, while at the same time representing an effective response to the shortage of completed core properties. When Union Investment entered the Australian office property market in 2014, it was also via a project acquisition. The Southpoint office and commercial building in South Bank, Brisbane, with 27,900 sq m of space will be completed in the first quarter of 2017 and handed over to tenants. Another spectacular project for one of Union Investment's open-ended real estate funds is currently being realised at Saint-Lazare station in Paris’s 8th arrondissement, where the Grand Central business centre is under construction, totalling 23,600 sq m of rental space.The project has been under development by The Carlyle Group since 2013. In addition to 20,100 sq m of office and retail space, the complex will include three entrance lobbies, two restaurants, a bar and an auditorium, which will be accessible to the public. Special features of the project designed by Jacques Ferrier Architecture include a public promenade, several terraces comprising a total of 2,000 sq m, as well as a green roof that can be used for agricultural purposes.