Surviving industry crises – and translating them into new milestones 2004-2007
The history of open-ended real estate funds is a 50-year success story for Union Investment. But even Union Investment has experienced some setbacks and reversals along the way. Professional crisis management has allowed the company to overcome external shocks and market upheaval while remaining on track thanks to a continuous improvement process.
Serious economic crises naturally have an impact on the real estate markets and in turn on our business, as does more localised disruption. Any crisis is a challenge for the management team and the company, but successfully overcoming a crisis can turn it into a new milestone. During the 1973/74 oil crisis, for example, fund inflows turned negative, but fund closures were avoided. Union Investment also successfully negotiated the upheaval triggered by the financial crisis that started in 2007 and by the nuclear disaster in Fukushima, Japan in 2011. The various industry-specific crises since 2004 likewise illustrate the effectiveness of crisis management in Union Investment’s Real Estate Segment.
Allegations of corruption against two other real estate fund providers led to a crisis of confidence among investors in the summer of 2004, for example. This was accompanied by an unprecedented downturn in the commercial property markets that hit Germany particularly hard. These two factors led to huge cash outflows across almost all products investing primarily in Germany, including DIFA-Fonds Nr. 1. In January 2005, the DIFA expert committee concluded that the expectations for economic growth in Germany on which valuations were based had once again not been met. Accordingly, a special revaluation was carried out in the same month, resulting in a significant downward adjustment with regard to a number of DIFA-Fonds Nr. 1 and DIFA-GRUND properties. This had a corresponding impact on fund performance, but closure of the funds was averted.
Clear commitment to ensure liquidity plus active portfolio and crisis management at Union Investment
"There were a number of reasons why we not only survived the crisis, but also managed to turn around the ‘classic’ DIFA funds in 2007 through successful portfolio sales. The key factors include a clear commitment by the Union Investment Group to the real estate business, active management of the crisis and necessary reforms," explains Dr. Reinhard Kutscher, Chairman of the Management Board of Union Investment Real Estate GmbH since 2009. The Union Investment Group pledged to ensure there was enough liquidity in DIFA-Fonds Nr. 1 to service redemption requests, thereby helping to reassure investors and the markets. Active portfolio management was also made a priority in order to stabilise the liquidity situation and boost the performance of DIFA-Fonds Nr. 1. Portfolio sales, such as that of Pegasus were made, with the proceeds exceeding the expert valuation on average. Excluding major investors from real estate funds designed for retail investors also helped to prevent the kind of unmanageable redemptions that can trigger fund closures due to a lack of liquidity. A transparency initiative co-launched by DIFA included publishing the market value of individual properties for the first time, which also contributed to rebuilding investor confidence in the product.
A combination of factors thus enabled Union Investment to successfully overcome the varied and formidable challenges experienced since 2004 without outside help. The most notable are the company’s clear commitment to open-ended real estate funds, strict separation of retail and institutional investors, marketing of the product as a long-term investment and – last not least – a forward-looking investment policy on the part of management with a focus on sustainable returns. This stability is also a promise for the future.