REFIRE/HanseMerkur/Envato
HanseMerkur Grundvermögen on the benefits of co-investing, foreign bargain-hunters, and the German housing shortage
REFIRE met recently with Malte Andes, the deputy chairman of HanseMerkur Grundvermögen (HMG), the asset and investment manager responsible for all the real estate interests of the Hamburg-headquartered HanseMerkur Insurance Group. HMG has more than €6.3bn of assets under management, and employs more than 110 real estate specialists. The company has been actively investing through the current downturn, and we were curious to know if they have a ‘secret sauce’ which gives them an ‘edge’, where others fear to tread. Some excerpts from our discussion:
REFIRE: What were the origins of HanseMerkur Grundvermögen?
Malte Andes: At HanseMerkur Grundvermögen our original goal was to increase the insurance company’s property ratio. When we started, Hanse Merkur had less than half a billion euros in property assets, which was insignificant for an insurer of that size. We’ve since acquired about €5bn more in assets, and also built up the financing business. Our second objective was to move away from our participating indirectly in external fund vehicles, and to position ourselves as our own asset manager in such a way that third parties can participate in our funds, with HanseMerkur also providing asset management for third parties.
But first we had to prove ourselves. We did this by actively buying, and then showing that we could achieve results. We now have over 70 co-investors – among them insurance companies and pension funds – entrusting us with their money. This has led to our major growth in the last few years – buying property and lending property finance. By focusing on the area of property finance and subordinated loans, we avoided competing with the banks, focusing on areas they did not or could not compete in, for various regulatory or risk reasons.
Has this strategy proven to be sustainable?
One of the reasons we are active at the moment is that, if something DOES go wrong with the financing on a project, we can always step in and handle it ourselves. We can remain committed to a project and know that we can see it through.
Good examples of this are our Laurenz Carré project opposite Cologne’s famous Cathedral, and in the Markgrafenstrasse in Berlin near the former Checkpoint Charlie. We believe that anyone who builds a modern, sustainable new building in prime locations like these will be able to rent it out wonderfully in three or four years’ time, because there will be only a few competing products. We are continuing to build while others are pulling back. Our strategy is to work with external partners, such as Bauwens in Cologne and Quantum in Berlin, who co-operate with our own in-house teams of project developers, architects and engineers.
So you see yourselves as a fund initiator, but with more in-house expertise than traditional fund managers?
Yes, we do a lot with our own people. But we also bring in technical due diligence experts like Drees & Sommer, and bring in external lawyers although we have our own excellent in-house legal and technical competencies. Our insurer parent expects us to operate as a standalone business, which we do. HanseMerkur is always invested with our own money and remains so over the whole lifetime of the property. We initially buy most properties with 100% of our own money, buying only those assets that suit our strategy. When we can bundle a few properties together, we look for third-party investors, where we can show them specific purchase agreements or even finished properties. We are committed to going ahead anyway, but it might suit third parties as well to be on board. In any event, HanseMerkur is keeping a 20-30% stake, so they know we’ll be remaining involved.
In these tight times, being independent of banks and alternative financiers must give you a decided advantage when assessing projects?
With money so inexpensive in the recent past, we have occasionally raised outside capital. But we can indeed put in 100% of our own money when we see an asset worth buying, and then subsequently consider what might possibly be the best possible financing structure for it. That might even include the banks.
For example, in partnership with ABG Real Estate, we are developing the old BHF Tower – now known as CENTRAL PARX – in a €370m conversion project in the heart of Frankfurt’s business district, due to start this autumn. A DZ HYP-led consortium of diverse Volksbanken is providing financing to the tune of €200m, in one of the biggest financing deals this year in Germany. It just shows that top projects like this will always get financing, no matter in what market phase we find ourselves in.
With all this competence and expertise that you have at your disposal, does it all pay off? Do you really earn a higher return on your investments than other comparable investors?
While it is, of course, difficult to benchmark, I would say it does pay off as evidenced by the stability of our investments. There is the classical dilemma – do I go for the highest possible return, or concentrate on delivering what we have promised. For us, the latter is our first priority. We’re not about short holding periods, but rather investing the money stably and generating the promised cash flow over the long term. This has worked for us very well.
But it’s undeniable that previous years had been easy in terms of acquisition and financing, while the last two years have been extremely difficult. Still, I believe the devaluations in our portfolio will prove to be significantly lower for us than for many others. We think the price falls will be manageable, because we’ve stayed so close to our properties. What we’ve bought is very well-let and well-financed over the long term. Our rent increases have often more than compensated for the rise in interest rates.
Do you see a certain bottoming-out in the office sector, or is there still a lot of trouble ahead of us?
We see both. There is a certain bottoming-out in modern properties in good locations, that can be properly let out. The expected wave of bargain prices has so far failed to materialise. But the bottom has not been reached for properties that either no longer fit in with the times from an ESG perspective, or whose worse locations are such that they are susceptible to suffering more from working-from-home tendencies. There’s still downward movement there.
You are also very active in the residential sector. Where are you predominantly investing, and what differentiates your strategy from other companies?
We are deepening our focus on solid, preferably new products in top locations, something we weren’t so focused on in the past. Our first choice is the Top 7 cities, but we’ve identified about 50 other locations, typically university cities in southern Germany, which will be the winners of demographic change. For us, investing in weaker regions and older properties is out, despite the much lower multiples they’re selling at.
We are also looking very closely at subsidised housing, which in our view is something that simply fits in well with the times. There is plenty of ‘social dynamite’ out there in the big cities – such as Berlin, Hamburg, Frankfurt, Munich. From a yield perspective, investing in social housing makes sense. But also from a social perspective.
How will this work, in practice? Can such approaches be as profitable as traditional investment in privately financed accommodation?
Remember, people often equate social housing with socially deprived areas and a tenant clientele they no longer want. That image is completely outdated. There are housing subsidies for plenty of people who are at the centre of society, who have decent jobs, but still can’t afford an apartment. Investing in subsidized housing can be comparably profitable to privately financed accommodation – where it very much depends on the rent increase expectations. There are different models, such as high building subsidies, which can be attractive. There are subsidies that simply ensure that you really let at market level. And there are still some very favourable loan opportunities out there.
From our point of view, if I have the opportunity to leverage to the same extent as was possible in previous years, then I have a very attractive product. If what you want is a stable cash flow in the long term, I’m not worried at all about letting such houses. If you have decent tenants, you can quickly find a replacement when they move out. The cash flows remain stable and predictable. Our current investors know that you need staying power and a long-term investment horizon to benefit from this.
Your investors are predominantly German institutions. Can foreign investors access your projects, and if so, how.
Many of our properties are in German AIFs (Spezialfonds), not typically advantageous to foreign investors. But our big new projects in Cologne and Berlin are being managed by Luxembourg vehicles, because we believe there is a market for these premium locations for investors outside Germany. We are also setting up our loan funds in Luxembourg to simplify the regulatory aspects.
Many of our existing investor groups are treading very cautiously at the moment, and so we’re also looking to tap into new investor groups. Many foreign investors would be keen to gain exposure to our council flat projects, for example. Our new fund structures can help them gain access to these opportunities.
Are you sensing increased interest from abroad, or are investors waiting on the sidelines in anticipation of further price falls?
Many investors are still waiting, betting on prices to fall further. It’s not uncommon for foreign investors to be more driven than we Germans, but still, many are predominantly bargain hunters looking for a favourable entry point and looking to exit after three or four years. This probably wouldn’t work for us, as we’re looking for investors who have a similar profile to ours, and would want to stay involved for the long term.
Is Germany as attractive an investment location as it was, say, five years ago?
It’s true that general business conditions have certainly been better in the past. Inflation, the war in Ukraine, energy prices. But at some point things will start moving in the right direction again, and Germany will regain its overall appeal.
What has traditionally characterized Germany has been low volatility, stable markets, especially in the land sector, and predictable cash flows, including tenants. With the ongoing trend to one- and two-person households in the big cities, now put at about 80%, you don’t even need any particular population growth to ensure further stable, high demand for residential property.
The housing shortage IS real, especially in the big cities. What solutions do you see for the market over the medium term?
Of course, there is too little building land. Approval processes take too long. There are too many regulations. You’re not allowed to build as cheaply as would be possible and sensible. There are plenty of obstacles in the way of more building. But we see some projects that are being completed, built by solid companies that have started and are now delivering their projects. With new land costs, construction costs and slightly higher rents, there will be new products delivered that can be reasonably priced. But, agreed, we need more than this to really tackle the housing shortage.
