Mr Schellein, last year the ECB decided to maintain its low-interest policy. What does this mean for the European real estate investment markets?
The ECB’s decision was not unexpected, and nothing fundamental will change in 2020 compared with previous years, either. The slogan “lower for longer” still applies, perhaps even to the next few decades. The Bank of Japan has been following a comparable monetary policy for some 20 years and there’s no end in sight
Does this mean that no relief is expected in Europe for the moment?
No, on the contrary. Real estate prices continue to trend upward, while at the same time there is limited interest in raising rents in many places. We are at the end of a long economic cycle. As economic growth slows, rents aren’t developing as dynamically as they once did and total returns on real estate investments are declining.
How is Union Investment responding to this?
Our investment policy is still focused on sustainable growth, which means that for each investment we look closely at the long-term profitability of the properties to be acquired. In addition, many of our portfolio properties in cities that have experienced dynamic growth in office rents in recent years – such as Stockholm, Amsterdam, Berlin and Munich – are being let below the current market level. When leases for properties of this kind expire, that offers a good opportunity to increase returns over the long term and enhance potential values
What criteria do you use to select new properties for purchase?
Location is an important factor in determining the future profitability of real estate. For example, we prefer to invest in countries with stable political and economic background conditions, in other words the economically strong regions of western and northern Europe, with an emphasis on what are known as their gateway cities. We also do our best to identify markets and locations where further growth in rents appears likely. We are also investing more frequently – and during an earlier phase – in project developments and in portfolio properties that we can reposition by refurbishing and/or upgrading them. For example, we are pursuing active value creation from value-add to core with the aim of keeping stabilised properties in our portfolio over the long term
Last year you sold two properties in the Paris region …
… and acquired one in the CBD. The properties that were sold were located in the Bois-Colombes submarket on the periphery of Île-de-France, where markets are much more volatile than they are in the CBD, which offers sustained rent growth and continuously rising capital values. We prefer to focus on top locations in Paris, where we have had very good experiences with our investments
Do high land values in top locations make it expensive to buy?
They are, but on the other hand they also keep demand high over the long term, thereby ensuring stable cash flows and capital values. The payback period for additional capital investments in properties of this kind is also much shorter, and even the complete repositioning of an older portfolio property – up to and including complete demolition and rebuilding – can be lucrative. Any money spent is recovered much faster thanks to high rents.
How does Union Investment protect its access to high-quality properties?
Competition is increasing everywhere, but we have a major edge: we have been active in many European markets for decades now – sometimes with local real estate teams and also across two or three real estate cycles – and we are very familiar with the conditions there. We are also known and accepted as a reliable partner in Europe. The market knows that we are willing to get involved in project developments early in the game and that we are also able to carry on when building takes a long time and returns are low.
Are you concerned about political developments in France?
My colleagues in Paris have been walking to work for weeks due to the public transport strikes. It has been an interesting experience to see that both users and investors are for the most part ignoring turbulence of this kind, and that certainly isn’t limited to France. Europe is generally known to be a “safe haven”, so there is relatively high tolerance to political unrest. This was also the case in Barcelona, and the independence movement barely had an effect on the real estate market in the city, which is the capital of Catalonia, or on foreign investment in general.
How do you assess the effect of Brexit?
Even Brexit had only a temporary impact on the investment market in the UK, where activity practically ceased before the elections in December. The leasing markets hardly noticed a thing, and the demand for office space remains high.
So do you still have the UK on your radar?
Yes, London is the only truly global city in Europe. Even if the financial institutions don’t play the same vital role they used to, other users – such as tech companies like Google, Amazon, Facebook and Apple – have come along to take their place, keeping demand for offices up. Once the political uncertainties have been resolved and new trade agreements have been signed with the EU and other countries, the outlook for further growth will be good. For that reason, we are actively preparing to get involved in the UK again.
Tell us where you see the greatest risks?
In the increasing pressure on capital, which makes investors more willing to ignore or temporarily suppress risks on the market, particularly since the last crisis is now in the relatively distant past. That can lead to carelessness. People no longer feel that meticulous analyses are important, particularly in the case of large investment volumes and transactions with complex structures. That also increases the risk of disruptions on the market.
How do you handle that situation?
Our guidelines in the current market environment are and will continue to be reliable forecasts of returns. Our investment policy, which is based on sustainable growth, is a particularly vivid expression of this. Our purchase volume of some €2.8 billion last year came primarily from individual deals. However, that doesn’t mean we aren’t also intensively working on portfolio purchases. We also keep a close eye on the profitability of individual assets in the context of portfolio transactions. We simply don’t want any surprises later on.
By Birgitt Wüst