German Property Funds Shop in U.K., Paris as Money Flows Back

By Simon Packard

Oct. 29 (Bloomberg) -- Matthias Danne, head of Germany’s largest real estate mutual-fund company, is ready to return to the commercial property market and make purchases in France, Germany and the U.K. after prices dropped as much as 45 percent.

“For the first time in five or six years, we can buy Class A properties in prime locations,” the DekaBank Deutsche Girozentrale management board member said in an interview at the Expo Real trade fair in Munich, which takes place in October each year following the Oktoberfest beer festival. “Two years ago, it was too expensive.”

Deka, Commerz Real AG and Union Investment Real Estate GmbH are leading a revival in acquisitions in Europe by German property funds as the 87.3 billion-euro ($131 billion) industry recovers from its second crisis in five years. Investors fled these funds after Lehman Brothers Holdings Inc.’s bankruptcy in September 2008, which forced 12 to close and most to shelve purchase plans.

German money managers now have as much as 7.5 billion euros to spend, according to estimates from CB Richard Ellis Group Inc., the largest commercial broker.

German funds made 1.05 billion euros of purchases in Europe in the third quarter, 22 percent more than in the first half, Los Angeles-based CB Richard Ellis estimates. They accounted for about 6 percent of all commercial property deals in Europe, up from 3.5 percent in the first half and an average of 4.6 percent a year from 2004 to 2008.

“The German open-ended funds are going strong and, if anything, their activity is increasing,” said Iryna Pylypchuk, a London-based researcher at CB Richard Ellis.

2008 Exodus

The exodus in 2008 was intensified by a government pledge to guarantee savings-account deposits, a state bailout of Munich-based Hypo Real Estate AG and withdrawals by other money managers facing their own redemptions.

Last year was only the second time in half a century that German funds were shut for redemptions. Three closed in December 2005 and January 2006 after probes by Germany’s financial regulator and a Frankfurt prosecutor raised concern that property valuations had been inflated and led to the eventual withdrawal of 11.6 billion euros from all of the funds.

Funds were just starting to attract money again and to resume acquisitions in 2008, notably in London, when they became engulfed by the global financial turmoil. Four have yet to open for redemptions again while they sell assets, increase debt or seek fresh investment.

Getting Some Back

In the first eight months of 2009, German funds got back about half the money investors withdrew in the seven weeks following Lehman’s collapse, or a net 3.04 billion euros, figures compiled by Frankfurt-based BVI Bundesverband Investment & Asset Management show. Last year, they made 8.5 billion euros of property purchases, though most stopped investing in the final months of 2008.

Savers are coming back to real estate mutual funds as they outperform other investments, asset managers say. They returned 3 percent in the year through August, BVI data show. Bank savings accounts currently yield an average of about 1 percent.

The German funds mostly target buildings occupied by tenants on long, inflation-indexed leases. They delivered an average annual return of 5.2 percent for investors during the past 20 years, BVI says.

“We call real estate concrete gold,” said Michael Birnbaum, head of communications at property fund manager KanAm Grund KAG. It reopened one of its two funds in July. They had redemptions totaling 471 million euros by the end of August. Earlier this month, Grundinvest Fonds registered daily inflows of at least 2 million euros.

Big Three

The three largest operators are drawing most of the inflows and account for about 90 percent of the property acquisitions by German funds. Deka, Commerz Real and Union Investment funds, which didn’t close, attracted a net 4.66 billion euros in January through August, according to BVI, while the remaining 35 had net outflows of 1.62 billion euros.

The sales clout of their parent companies helped the Big Three, asset managers say. Deka is owned by regional savings banks and Union Investment by cooperative banks. Commerz Real is part of Frankfurt-based Commerzbank AG, which has 800 branches.

“We have sorted out most of the problems; we’re almost back to where we were” before the crisis, said Barbara Knoflach, chief executive officer of Frankfurt-based SEB Asset Management AG. She spoke over coffee and cake at SEB’s booth at the real estate trade fair, where attendance dropped about 15 percent this year to 21,000 people.

Notice Periods

SEB’s ImmoInvest fund opened for redemptions again in May. Knoflach, who is also a member of BVI’s board, said the lobby is pressing for law changes next year that would end daily fund redemption rights for institutional investors and impose notice periods of about 12 months.

The two crises have left some investors wary of property mutual funds, said Tilman Hickl, managing director of Munich- based UBS Real Estate KAG, a unit of UBS AG. It has yet to reopen one of its two funds for withdrawals.

“The perception that the funds are a 100 percent safe haven has been partly demolished,” Hickl said. “If two or three funds have to close again, that might cause a panic.”

Hans-Joachim Kuehl, Commerz Real’s head of acquisitions, was forced to halt 800 million euros of property deals he was negotiating to weather the liquidity crisis. His 2009 budget for making investments was cut in half to 1 billion euros.

“In February, we decided ‘Let’s get back into the investment market,’” Kuehl said. “Fresh money was coming in and the forecast was quite positive” for certain markets.

Paris Slump

Since August, he’s agreed to buy or acquired three office buildings in Paris for 222 million euros. Hamburg-based Union Investment also agreed to buy a building in Paris last month for 177 million euros. Values in the city have dropped as much as 40 percent since the peak 21 months ago.

The funds are also looking outside Europe, which accounts for about 85 percent of their investments. Deka bought 1999 K Street in Washington last month for $208 million and spent 150 million euros in June on two Australian properties.

Total European commercial real estate investment totaled 42 billion euros in the first nine months, or 57 percent less than a year earlier, CB Richard Ellis estimates, reflecting the difficulties most buyers have in obtaining debt finance.

“There aren’t that many investors willing or able to spend money on big investments of over 100 million euros,” said Reinhard Kutscher, chairman of the management board of Union Investment Real Estate. He expects Union to sign as much as 700 million euros of deals by year-end on top of the 1 billion euros of purchases already made.

Dusting Off

Even those that lost the most from their funds in absolute terms are dusting off acquisition plans.

Credit Suisse Group AG’s three funds registered combined outflows of 680.5 million euros in the first eight months. From Sept. 1 to Oct. 15, its CS Euroreal fund for individual investors had more than 100 million euros of net inflows, said Dirk Meiwirth, head of real estate product management at Credit Suisse Asset Management Immobilien KAG in Frankfurt.

“We are looking strategically at different deals for the funds,” he said.

If the current pattern continues, German funds may have as much as 12 billion euros to invest through 2011, CB Richard Ellis estimates.

In London, the best deals may already be in the past, Danne said. So far this year, Deka funds have bought only a supermarket logistics warehouse in north London for about 73 million euros after getting outbid on other sales in the British capital.

“We are close to the bottom in a couple of markets,” Danne said. “Maybe it’s a bit late to be in the U.K. -- this year we failed in a couple of deals in London, due to returning demand.”

To contact the reporter on this story: Simon Packard in London at packard@bloomberg.net