Likeable real estate executive, Michael Bütter, jokes about age in an interview about the huge transformation project underway at Hamburg-based global firm, Union Investment Real Estate.
He doesn’t look so aged himself and his energy bounces through the Teams call, but the experienced CEO of Union Investment’s €53 bn property business is self-deprecatingly aware of the future. He and his senior colleagues want this company to be attractive to younger talented individuals that must steer this ship in the present and future.
There is no better example of this desire than the Next Generation Board of Union Investment Real Estate (pictured). During the same week as this interview took place in March, the Next Generation team (three men and three women) joined Union Investment’s full real estate board for the first time since the idea was conceived. He explains the plan is for the Next Gen board to participate at the beginning and end of each quarter.
‘This Next Gen board makes us a bit more diverse, younger, and fresher, and more attractive,’ he beams. ‘It might be something surprising for a lot of real estate boards out there as you would not expect young generational people all aged between 29 and 32 to take part in a whole board session, but they are. They have a voice. They will suggest topics and debate with us.’
‘When I joined two years ago, I said, “I think we are extremely white, male and - let’s put it this way – ‘experienced’, including myself! How can we do things differently?” I thought we could do this with people from the outside or we could do this by building people up from the inside. We decided both were possible, but it is in our hands to do it from the inside.’
‘We at Union Investment want to be attractive for young people. We are growing and want top-class young employees to bridge this company into the next generation. We have a great education and training programme. We have promoted more women than men during my tenure and we will continue to do so because this real estate industry is dominated by people like me, but we want to stay attractive for future generations.’
Immomentum 5-year strategy
It turns out, the Next Generation Board idea is just a part of a major new strategy under the umbrella term ‘Immomentum’ - an amalgamation of the German for real estate (Immobilien) and Momentum.
Says Bütter: ‘If I say there is a cultural change it is not because we were not good enough, because we are good. But we can do things ever better and there are competencies and values in place such as digitisation and sustainability that also come with a challenge to do them better. Only great companies can achieve the next level in a short period of time, and our staff has proven this already. Our staff was able to double the growth speed within seven months, which I think is amazing. That is due to quality and skill set.’
In practical terms, there are important facets of project Immomentum which readers might have already observed or certainly will do so going forward. Firstly, the company wants to continue its new momentum by investing a maximum of €8-€9 bn each year - around 15% AUM growth if the markets allow.
It has embarked on a skilling-up programme to transform into a more youthful and diverse organisation, it is pushing for more ‘local offices or ‘hubs’ (the company just opened in London this year to add to Hamburg, Vienna, Paris, Madrid, New York and Singapore). On the investing side, it wants to stick to its five major asset classes of offices, hotel, retail, residential and logistics, but diversify within them, and also to target more institutional investor capital on top of the mega-strong private investor base that has formed the bedrock of Union’s property funds for decades. There is of course ESG at the heart of the things it does already.
Bütter spoke with PropertyEU during an interesting week. There was the Next Gen Board. But there was also an important Union Investment Group ExCom meeting where the leaders of all relevant business units (real estate, infrastructure, equities, and so on) convened, which led to the postponement of his trip to London in what would have been his first since the Covid-19 crisis of 2020. The London trip has been rearranged for late April.
When quizzed about the nature of the group board meeting, naturally Bütter remains tight lipped. But he is very forthcoming on the mission for the real estate platform, and what has been keeping its 564 employees busy.
In his own assessment, when he joined Union Investment in October 2020, he took over a well-run and managed platform with what he calls ‘first-class’ people, some of whom have been with the company for two decades or more. He observed a high degree of loyalty working both ways between company and employee.
Bigger and more efficient platform
Nevertheless, it was time for a new plan, which is clearly ambitious and so far, apparently successful. Last year, for example, the company achieved its best-ever result by transacting a record €8 bn of real estate including €6 bn of acquisitions (in 2020 it was €4.1 bn). It now has €43 bn RE AUM and a total of €53 bn AUM counting liquidity and committed capital, making it already one of the largest managers in Europe. But the plan is to reach around €80-85 bn within several years and drive the effectiveness and efficiency of the platform at the same time.
Union Investment’s real estate investment activities fall into the categories of offices, hotels, retail, and more recently, residential and logistics.
Bütter classifies housing as a new asset class for Union Investment into which it has invested more than €1 bn outside of Germany for the two years he has been at the helm, including entering the US multifamily market (as well as the grocery-anchored retail sector) for the first time during 2021 via two transactions in the sunshine state of Florida.
The company has been tipping residential developments into two of Union’s huge, private open-ended Unilmmo Deutschland and Europa funds, each exceeding €15 bn of AUM. Into these, Union has also been adding logistics real estate for the first time as well in South Korea.
Adding new asset classes has been a significant development because Union Investment was formerly known as a commercial real estate player only, focused on core and core-plus office buildings in the major European cities. Last year the firm invested €4 bn into offices, which was a record. But there is something new.
It is now open to making value-add development investments in the face of factors including lack of good and sustainable office product and the high prices attached to what is available that means margins are getting squeezed. By getting into the development stage early, Union Investment can exert more control over producing high ESG-level office products, points out Bütter, who sees ESG as an opportunity not only for the company but for the entire real estate industry to improve things.
Last year, the firm invested €1.1 bn in four office development projects in Munich, Stuttgart and Paris as part of this new office direction. To assist with the effort, Union employs nearly 50 engineers, architects, and other experts at the coal face of projects.
Another new departure at Union is its involvement in forward funding deals, again designed to gain early access to products.
However, both options are currently at risk due to recent political events with the Russian war on Ukraine as this will likely result in a strong increase in construction and energy costs which make project developments less attractive. Yields as of today do not reflect the risk of higher and unpredictable construction costs, says Bütter.
Additionally, the war will also negatively impact the ability of the industry to convert existing ‘brown’ assets into ESG-acceptable products on time.
Union Investment is a big believer in having investment and asset management experts on the ground in its markets. The first priority for a new hub has been London where the company has made senior investment and asset management hires to get closer.
On the Continent, it seems a hub in the Nordics beckons as well as in the Netherlands. These will add to Paris, a hub deemed to be a success for building up a fully integrated investment and asset management team allowing Union Investment to get involved in several Parisian projects.
So what else is happening as part of the transformative process? Union Investment is very well ingrained into Germany’s cooperative banking system called Genossenschaftlicher Finanzverbund, giving it a constant stream of retail investor capital.
However, there is a new effort to attract more institutional partner clients. A clear advert for this was last year’s acquisition of a €600 mln German office project in Munich with Germany’s largest pension fund, BVK.
Such prominent separate account and club deals have apparently led to investors outside Germany wondering if Union could also help them access deals.
This interest is not by accident, but by design because Union Investment is looking to grow its institutional investor business. It was one of the key employee suggestions Bütter received when he joined: skilling up to assist institutional investor clients.
One clear area for improvement was in financial reporting. Institutional investors often require much more information and bespoke formats compared to the periodic statements provided for open-ended retail funds.
Union Investment believes it has done very well in skilling up staff, but the work is ongoing. ‘This is a journey as every cultural improvement process is, and we are in the middle of it with the aim to become even better and more flexible so that someone could work for both a retail fund and an institutional investor,’ explains Bütter. ‘This is where we see possible efficiencies and making life better for our clients.’
Asking to compete more for institutional money has created more work and requires a different mindset. Hungry, deal-driven employees eager to win business are required in such a competitive market. This is very different to the traditional source of retail capital that continues to come in easily ‘from a socket’ from Union’s Finanzverbund network.
The early signs look promising. Just lately, it has found at least 50% of its growth came from institutional investors. The company says it wants to build further on the €17 bn of assets held on behalf of such clients on top of the 19% growth it made last year.
A further sign of how serious Union Investment is about this arrived in January when the company made an external hire - Catharina Becker as head of institutional property solutions.
Union Investment’s new transformation is what it calls a 360 degree one. But the ideas behind it came initially bottom-up from the employees rather than the usual CEO arriving with a new strategic proposal written at the top of a mountain.
‘It was important to find out what the core values were and what makes the employees proud. This means corporate responsibility for tenants and investors of course, but also that we feel responsible for the environment and how we do our business. This is the glue that keeps us together and makes us different.’
The bottom-up approach has contributed to the company’s ‘KPIs’ being beaten significantly.
Of course, there is a reason why not every company hires a new CEO who then asks the employees for their best suggestions: time. Bütter reckons it has taken 18 months to get to the starting line. Covid-19 has not helped either, and the planning and the execution phase thus far have almost entirely been led digitally from outside the office. But the time investment seems to have been worth it. ‘When you have a high degree of employee buy-in it is very helpful. Everybody is committed to this project.’
Before they even got going, Covid-19 forced the management to wonder if they should delay the transformation project. After all, the pandemic meant people could not physically meet in offices to make any progress. Nevertheless, the project got the green light.
Says Bütter: ‘This huge transformative process has achieved buy-in 100% digitally via Teams meetings. The communication process led by (communications chief) Fabian Hellbusch and his team has been very successful. This has really become a case study because we are not a digital company, we are about bricks, so we had to overcome this. It has become a fantastic outcome.’
Playing safe with a low cost of capital
Union Investment has decided to stick to its five core asset classes. There is a reluctance to enter into certain niche products such as nursing homes, for example, where specialists already exist.
‘We would rather keep doing what we do well and adjust the risk, maybe for example getting into a deal earlier such as by forward funding,’ notes Bütter. ‘This is a safer approach than starting a new fund for nursing homes or data centres or wherever we do not have core expertise. We have a view on many niche asset classes, but we strive for excellency. It is sometimes better to know what you are really good at. We like to create value within our five core asset classes of offices, hotels, retail, housing, and logistics.’
However, within these core products, Union Investment does see potential for diversification.
‘There is a lot of dynamic and potential within our core areas of expertise so there is no need or pressure to enter into some other potentially riskier new market segments,’ says Bütter.
One example would be in the hospitality segment, something the company has been investing in for 30 years. Now it is considering the next step such as resort hotels.
Classic event hotels with an inability to diversify their offering are no longer of interest to Union, having seen the way so many conferences turned digital during Covid. But resort hotels will recover more quickly given the huge demand for a resumption of travel. This might even be a unique approach among hotel-shy Germany-based real estate firms, remarks Bütter.
COVID-19 GIVING CONFIDENCE
Two years into a five-year plan, how is Union approaching things given there remains instability in the world, not least a war in Europe?
Apart from the Ukraine conflict (and exacerbated by it), construction costs have been going through the roof, energy and transport costs are soaring, and hedging costs are higher while interest rates head north. Any market upheaval will slow down or pause the growth path. The availability of quality assets in the market, construction costs and the investor demand for low-yielding transactions ultimately decide on the exact growth trajectory pursued.
These are issues that threaten Union Investment’s business plan, and frankly those of the whole real estate investing industry.
But Bütter insists that the company can cope and this remains a company with a strong growth project, using its flexibility to adjust the initial plan according to the market circumstances.
He takes comfort from Union’s resilience displayed during Covid-19. Occupancy stayed around 95% throughout the pandemic, which he attributes to the good quality core and core-plus assets. He goes as far as to say the company managed its hotel and retail assets ‘brilliantly’, calling 95% occupancy during a pandemic a ‘spectacular result’.
The company also managed to make a string of new investments during the pandemic by relying also on digital site visits. With hindsight, this has bolstered its pre-existing confidence to further push new local hubs having seen how important it was to have teams on the ground, such as its investment professionals in New York who were able to conduct new transactions in the US market. In just three months since US travel restrictions were lifted in the US, Union’s team acquired four properties including its entry into both grocery-anchored retail and multifamily.
Luckily, Union Investment has no exposure to Russia or Ukraine assets or tenants. The closest country to the war zone is Poland where it manages around €2 bn of mainly shopping centre properties which are apparently performing well. In the whole of eastern Europe it has only a few assets. The vast majority of its 468-strong global portfolio is in the western hemisphere.
On the one hand, the 2022 Ukraine crisis is helping Union’s business – and arguably those of other asset managers – because of how real estate as an asset class is behaving with stability. ‘We have stable returns of 2% for our private retail funds and more for our institutional investors. That is not to be seen from stock market products where returns have been negative. We see a lot of demand for real estate. We would like to make use of this and collect this capital. Demand from private investors into open-ended real estate funds has been higher than pre-corona. This is a safe haven.’
But ‘side effects’ from the Ukraine war do impact Union such as additional inflationary pressures, and possible interest rate rises. Rising construction costs in particular mean Union has to scrutinize each existing development project. It must also factor in increased costs when looking at future projects. Potentially, Union would have to slow down project developments if costs rose too much. Bütter points out that prices of relevant building materials are likely to double or even triple.
Meanwhile, Ukrainian drivers that ordinarily would be delivering goods from east to west are staying put to fight. Steel prices are rising as a result. Energy prices continue to spiral. However, on this latter point, it provides an extra reason for Union to transform its existing stock to ensure its assets are low on energy consumption and therefore more ESG-attractive.
Bütter also talks of seeing the first signs of interest rate rises. So far, the attractive spread in real estate remains. But he thinks the gap is likely to narrow significantly. His personal opinion is that the gap will narrow within the next six to 18 months. After that, the gap will begin to widen again.
When that spread does narrow, prices of real estate will not necessarily drop, meaning there could be a slowdown in the market. But eventually pressure on sellers will work its downward magic, as it normally does, and trades will ramp up again.
Of course, this is educated guess work by Bütter, born of years of experience of economic cycles. No-one knows when, or to what extent, any of this will happen. As so often it comes down to timing: ‘I am just concerned that we get the timing right between not investing during that first phase and then opening up again,’ he says.
Right now, what he knows for sure is it is getting harder and harder to get good assets due to competition. ‘The issue today is to source the best assets because it is very competitive. This is true for a lot of our competitors. I believe, if we put construction costs aside, the battle for assets would continue despite the increase in interest rates.’
‘The companies that have the lowest cost of capital will be the winners, and we are one of them.’
This article appears in the April 2022 edition of PropertyEU. A pdf version will be available soon.