Trends in the real estate market
Monitoring market cycles – in tune with change
What is the right balance between opportunity and risk in the global markets? That is the central question that real estate investment managers must continually answer in order to achieve their investors’ yield targets. Analysis of current market trends and the resulting forecasts of future developments form the basis for investment decisions and active portfolio Management.
In the current market phase, the investment cycle in many European markets – particularly in Germany – is at a very advanced stage. As a result, investment managers are increasingly looking to overseas markets for acquisition opportunities, as the risk-return profiles there tend to be more attractive. In addition, large real estate funds are becoming notably more diversified with regard to property types. This is most apparent in the increased number of hotel acquisitions.
The way commercial properties are used is also changing. Shopping centres provide the most striking example of this trend. They are responding in various ways to the growing online shopping market in order to deliver an exciting shopping experience.
Global diversification of real estate investment
In the current market phase, it is becoming increasingly difficult to acquire commercial properties in Europe with an attractive risk-return profile. German open-ended real estate funds are therefore increasingly investing in overseas markets, chiefly in the US, but also in Australia, Asia and Mexico. According to Scope, the ex-Europe proportion of investments climbed from 15 per cent in 2014 to approximately 40 per cent in 2016. This growth trend is still ongoing.
Union Investment has played a significant role in shaping this trend and will continue to diversify its portfolio over the coming years through investments overseas.
The US is the largest real estate market in the world and offers attractive growth opportunities for European investment managers. In 2016 alone, Union Investment acquired office, hotel and retail real estate in the US worth over EUR 1.3 billion, making the company “the most active buyer of US property by a large margin” according to analysis by ratings agency Scope.
Office properties: gateway and secondary cities
Alongside the well-known gateway cities on the east and west coasts, such as Boston, New York, San Francisco and Los Angeles, investment managers increasingly have their sights on properties in a range of high-growth secondary cities. These include locations such as Atlanta, Denver, Phoenix and Minneapolis. Experts distinguish between nine gateway cities and 20 secondary cities in the US.
Retail properties: a broader range than in Europe
In Europe, investment managers distinguish between three categories of retail property: individual retail/commercial properties in or close to city centres, retail parks, which are often close to popular transport routes, and shopping centres. In the US, the range is wider due to the more diverse retail universe.
For example, as well as having the urban retail and grocery-anchored retail categories in its sights, which correspond approximately to Europe’s retail/commercial properties and retail parks, Union Investment also focuses on lifestyle centres. These are upscale shopping centres with additional leisure amenities.
Hotel properties: new builds and existing properties
The investment focus for hotel properties in the current market phase is more narrowly defined than for office space. The key factor is identifying an established or high-growth hotel location in the US that is equally attractive to business travellers and tourists. This applies to popular destinations such as New York and Los Angeles, as well as to cities like Seattle and Chicago.
Interview: Martin J. Brühl on investments in Australia
A range of successful office locations
Sydney is the leading office and business location in Australia and undoubtedly the continent’s most popular real estate market. In addition, there are a number of other established office locations of interest to European investors. These include the cities of Brisbane and Melbourne, as well as Adelaide and Perth.
Development projects along Anglo-Saxon lines
Using its own real estate project management team, Union Investment supported the Southpoint office and commercial development scheme in Brisbane through to completion. European investment managers benefit from the fact that Australian property law is based on English common law, large parts of which still apply unchanged today. This makes managing development projects and the acquisition and sale of properties easier.
New business ideas for retail
There are now many different routes by which retailers can reach their customers. Companies increasingly favour omni-channel concepts as a way of integrating different shopping methods. In addition, online retail influences traditional chain store concepts. Branches in shopping centres and retail/commercial buildings, for example, are adapting in order to provide customers with an even more attractive shopping experience.
Conversely, online retailers are looking for a way to access popular retail space in order to gain exposure for their offering outside the online world.
Union Investment and Sonae Sierra collaborated on the First Store competition to support innovative store-ready concepts by providing winners with premium shop space in Berlin's ALEXA shopping centre to try out exciting new ideas.
Vibrant, colourful, distinctive: that is the formula for the ideal retail platform. Established brands are re-inventing themselves; innovative concepts are generating variety. As digitisation continues, city centres are evolving into analogue hubs.
Union Investment has been investing in retail property for more than 40 years. Over 30 per cent of our real estate assets are now retail properties, and we invest across the entire range of retail property types.
Real estate funds boost hotel weighting
Based on calculations by ratings agency Scope, open-ended real estate funds in Germany have increased their hotel weighting from 3 per cent in 2014 to 15 per cent in 2016, representing a huge fivefold increase. Long-term leases, internationally comparable concepts and good prospects for the hotel market all combine to make hotel properties extremely attractive.
The hotel market is chiefly growing in the budget and midscale segments, which are associated with well-known brands such as Holiday Inn and Motel One. Institutional investors also benefit from this growth, thanks in part to opportunities provided by innovative product solutions. In addition, lifestyle concepts are enriching the hotel market and spurring competition across the entire hospitality sector.
In general, people are travelling more. While staying overnight in a hotel used to be something special, it has now become routine. Several industry players even take the view that “hotels are the new apartments”.
International investors are therefore increasingly focusing on hotel properties, which until fairly recently used to be a marginal product. There are many reasons for this, not least the worldwide increase in tourist numbers and people's growing mobility.
UII Hotel Nr. 1 is an innovative fund solution from Union Investment for institutional investors. This special fund focuses on the high-growth budget and midscale segments.
Union Investment is a leading European investment manager in the hotel real estate market. We hold over 60 hotels in our actively managed portfolio and are also pursuing a clear growth strategy outside Europe.
Campus properties enable new work environments
Campus properties bring together different types of use at a single location. Typically, office space is complemented by many other amenities, such as retail outlets, eateries and services. This creates a modern working atmosphere that has the feel of a “village in the city” with its broad mix of functions.
These properties attract established companies as well as newly formed and growing startups, who particularly appreciate the character of campus complexes. Union Investment teamed with strategic partner Investa to launch Urban Campus Nr. 1, a special fund focusing on the broad spectrum of campus properties.
In the initial acquisition phase, Urban Campus Nr. 1 has primarily targeted “transformation properties”, i.e. buildings with historical significance that have undergone a change in use to become modern campus complexes. Thanks to their history, these properties are highly recognisable local landmarks and are well integrated into the urban infrastructure. For Union Investment and Investa, they also offer scope for densification and an associated increase in revenue.
Three properties have been acquired for Urban Campus Nr. 1 to date. Uferstadt Fürth is an ensemble of seven separate buildings on the site of Grundig’s former production plant. Loftwerk in Nuremberg consists of four units and is occupied by over 30 tenants. This heritage-protected complex was built in 1920 as a factory for shoe manufacturer Vereinigte Fränkische Schuhfabrik. Campus Konstanz technology and pharmaceutical park extends the fund’s holdings to include other use types.