Foreign-currency investment: the UniImmo: Global portfolio includes London’s One Coleman Street office building.
Union Investment

A close eye on the cycle

An asset manager’s core task is to make the most of the varying global market phases – which presents particular challenges in active fund management.

UniImmo: Global is a worldwide open-ended retail real estate fund for private investors. Its portfolio currently comprises 28 properties in nine countries around the globe. To visit them all, one would have to travel from the UK to Mexico, via the USA to Japan and Singapore, and finally back to the European Union as far as Constance on the lake of the same name. In all, Union Investment’s real estate funds are invested in 26 countries. Managing such global investments requires a thorough knowledge of the different legal systems in the various national markets. The British, for example, are unfamiliar with the land registry that is customary in Germany, while in China, property can be bought only in conjunction with a long-term lease. The cultural characteristics of international business partners, which sometimes vary considerably, are likewise an issue in cross-border contract negotiations. For this reason, real estate fund managers need to bring well-grounded, international, expert knowledge to bear in order to be able to manage a real estate fund successfully when investing abroad, and especially on different continents.


Whereas, as recently as about ten years ago, the commonly used term was simply fund administration, this has long since been replaced by highly complex, active fund management. Reinhard Kutscher, Chairman of the Management Board and the person responsible for global fund management at Union Investment Real Estate GmbH, also recalls that, “in the past, a fund tended to be administered rather than actively managed.” Kutscher sums the change up in this way: “Today, active fund management means boosting investment opportunities and reducing the risks – and, as far as possible, in a forward-looking, proactive manner.” A fund manager has to keep a close eye on the future, and to identify at an early stage which countries are worth investing in, when it makes sense to invest in a property or when selling up is a better alternative. Global trends, for example, are a decisive consideration in the active management of funds that invest internationally. If researchers project or ascertain that Spain’s economy is gathering speed again, the upturn in the USA is taking a break or Japan’s Abenomics, as they are known, are having an impact, this affects the respective property markets and has a direct influence on a fund manager’s opportunity/risk assessment. Despite all this, the international property business remains a local one. “It is useless to be able to identify trends if you cannot put that knowledge into effect on location”, says Kutscher.


A building in Singapore cannot be bought from a desk in Hamburg – unlike a share, which can be ordered at the click of a mouse on any stock exchange anywhere in the world. For this reason, local presence is decisive, especially in less transparent markets. For instance, if there are plans to build new offices in the vicinity of an existing property, this could put pressure on rents or cause tenants to move to a more modern building. It is necessary to possess the relevant information at the right time in order to be able to intervene at an early stage anywhere in the world. “It may then make sense to sell up quickly, even though the property is still yielding good returns”, Kutscher explains. Professional, active fund management depends on staff or partner companies with local expertise. The legal and tax systems that have to be taken into consideration in the acquisition and management of a property also differ hugely in national markets. Even within Europe, there are substantial variations from the standard that applies in the home market (see the article “Plans with impact” from page 22 and the infographic on pages 24/25). “You cannot simply move a property out of the country if something happens”, says Kutscher. Therefore, it is important that the state in question should protect property rights, he notes. “This is far from clear-cut in every country”, Kutscher adds. Above all, it is questionable whether it will be possible to assert claims before independent courts in the event of a dispute. Union Investment rules out a number of countries as investment targets on these grounds. The 183 states that are potentially suitable for investment are examined twice a year. Countries with dictatorial regimes or constant unrest are automatically ruled out.


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countries are covered by the property portfolio of all funds managed by Union Investment. Twice a year, 183 states are checked for their suitability as investment targets for the German asset manager.

So one major element in active fund management is risk management. For this purpose, Union Investment has developed its own procedures for carrying out regular stress tests. It can simulate, for instance, how a fund might be affected by a hypothetical scenario in which interest rates suddenly shoot up by 200 basis points (see the article “Blessing or curse?” that starts on page 30). Or else, modelling is used to analyse how a fund portfolio’s risk profile would change if a large property were purchased or sold, or a country were to be deemed no longer suitable for investment. The results of these stress tests are constantly fed into the active fund management process, so that opportunities and risks can be managed in the best possible way all the time. Active fund management and risk management also extend to liquid assets, debt financing and foreign currencies. For instance, statutory rules governing open-ended real estate funds provide that a fund should hold a minimum level of liquid assets in order to be able to repay investors’ money at any time. For most funds, however, this is not currently a problem. They are reporting high inflows looking for real estate in which to be invested. To enable this to happen in a rational manner, Union Investment has introduced a traffic-light system for liquidity management. If a fund receives more money than the fund managers are able to invest short term in line with their investment strategy, the traffic light shows red. Then the sales partners – cooperative banks such as Germany’s Volksbanken und Raiffeisenbanken – refrain temporarily from offering that fund to investors. “It is working perfectly”, Kutscher says. With funds for institutional investors, the necessary liquid assets are collected directly from the investors – for example, through a subscription phase. The liquid assets that are kept – and are required to be kept – in Union Investment’s funds are invested conservatively so that they can be accessed at short notice. The present extremely low level of interest rates makes this aspect of liquidity management a challenge. It is currently difficult to find a good balance between safety, short-term accessibility and adequate returns, Kutscher notes.


Balancing out currency risks

Foreign currencies likewise carry risks for a fund, so the active fund management process carefully monitors this area so as to safeguard opportunities and minimise risks. Real estate may be purchased in pesos, yen or US dollars, but German investors still expect their income to be distributed in euros. Therefore, loans for the partial financing of purchases are often taken out in the respective national currency and managed by using what is known as the credit ratio for each country and for the fund as a whole. In this way, foreign-currency loans can be repaid using rental income in the respective national currency. This avoids the more risky and expensive exercise of constantly exchanging currencies. Forward exchange dealing is used to safeguard other foreign-currency amounts. “We do not want to have any major exchange-rate fluctuations that might have a negative impact on the fund’s performance”, Kutscher explains. The safety comes at a price, but the costs are balanced out by higher yields in foreign markets. Therefore, funds that invest worldwide make sense, because they reflect the different cycles in global property markets. Consequently, the cost of a fund management process that is organised globally pays for itself, because the wider distribution of an investment also reduces its risks.


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