City&Country: German investment firm looking for more

With the completion of CapSquare Tower in Kuala Lumpur, Union Investment Real Estate GmbH is looking to follow up on its maiden foray in property investment in Malaysia.

The German-based fund’s investment was the catalyst for the development of the freehold Capital Square (CapSquare), a 15.2-acre mixed development on Jalan Munshi Abdullah in downtown Kuala Lumpur, when it acquired one of its office towers, Cap Square Tower, in January 2008. The construction of the tower had been delayed since 1997 due to the Asian financial crisis.

Since then, developer Bandar Raya Developments Bhd (BRDB) has gone on to develop CapSquare, which comprises offices, condominiums, a shopping centre and a retail boulevard. The project is 70% completed and will have a gross development value of about RM1 billion upon completion. Its latest launch, 6 CapSquare, a 176-unit condominium complex, has seen a take-up of 65%.

Union Investment  (which changed its name from Union Investment Real Estate AG in September last year) paid RM439 million to BRDB for the 41-storey Grade A office block. The first tenants are expected to move into the 600,000 sq ft (gross floor area) building by Dec 5.

Union Investment managing director Dr Karl-Joseph Hermanns-Engel tells City & Country the company is now in talks with a financial institution to take up space there and hopes to seal the deal soon.

It is also looking to obtain Green Building Index certification for Cap Square Tower. “We are working on the green building concept, but we have to be realistic. It has to match the local market conditions. We do have some green buildings in our portfolio,” says Hermanns-Engel.

Union Investment is an international investment management company specialising in open-ended real estate funds for private and institutional investors. It has six open-ended real estate funds in Germany, with assets under management amounting to €19.1 billion (RM81.8 billion).

“We have six retail-oriented open-ended real estate funds. Three are investing for institutional investors like pension funds and family businesses. Another three are for private clients and banks.
“Our three big retail funds have their own focus with regards to investment destination, style and strategy. We deal with each portfolio in diversified ways. We are looking for shopping centres, offices and hotels, logistics products. Sometimes we also do residential but this is more of an exception. Our daily bread is the office sector but we have in the past few years expanded the retail sector up to 24%. We are also one of the biggest hotel owners in Germany and Europe,” Hermanns-Engel says.

Diversification
The fund manager decided to diversify geographically in 2002, in line with globalisation, and did so aggressively. It has expanded its presence from four countries to 26 in eight years, in Asia and other emerging markets.

It has more than 300 properties in its portfolio in Germany, Hungary, the US, Canada, Mexico, Chile, Japan, Singapore and South Korea, among them.

“Going into new markets is very challenging. First of all, you have to know what you are doing, what kind of fund you are working on and which profile is suitable. We decided to go into Asia and make it as quick as possible. We formed a local team for Asia-Pacific at end-2006 and chose Singapore as our regional office. We started off with a one-man show and now we have six people there.

“We are looking at a longer investment line with stabilised inflow in different markets. Normally, when you enter Asia as a core investor, you think of Japan because it is a stable market. That’s what we thought during 2007/08, and it was during the peak of the market there … Malaysia is actually more stable than Japan,” Hermanns-Engel says.

Some 45% of its portfolio is in Germany, while Asia constitutes only about 4.5%, which means there is much room for expansion in Asia. The fund manager will be doing so via acquisitions of more products in Asia, depending on the market condition and pricing.

The fund focuses primarily on office developments, followed by shopping centres and other retail developments.

“We came to Malaysia as part of our portfolio diversification strategy. We have been less confident in the market in Europe and we have to go elsewhere to find a fair price element that we consider the right target. That’s why we bought Cap Square Tower. This is an emerging market where the economy is pushed to perform,” Hermanns-Engel says.

He is positive about the outlook for the Malaysian market as the government is stimulating the real estate industry. “However, we are still looking for other properties in Malaysia, especially office and retail developments. We are concerned about the huge amount of office space that is coming onto the market in the next two to three years, which is expected to bring pressure to the rental market, ” he says.

Nevertheless, he adds, the government must remain open to institutional players and investors.

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 833, Nov 22-28, 2010