- In the "grundbesitz global" fund, attractive real estate, mainly with long-term rental contracts, provides stable income.
- The fund's global remit offers better risk diversification and increases the chance of finding attractive investments.
- Many real estate markets are relatively expensive, but promising investment opportunities can still be found off the beaten track.
Christian, real estate fund returns are generally in low single digits. Why are these funds still of interest to investors?
Real estate fund investors are not usually on the hunt for the highest returns. Historically, real estate funds have generally been characterised by low volatility. This means that, while you can’t rule out share-price fluctuations, they are relatively low compared to other investments. Real estate funds can, for example, provide a certain stability in an investor's portfolio when there is turbulence on the capital markets. Most real estate funds currently generate returns of two to three percent. By contrast, equity funds can expect higher long-term returns, but investors must be able to sit out poor market phases.
How do the fund’s key figures compare?
We recently paid out about EUR 71 million in total to our investors for the financial year just gone. The distribution yield came to 2.2 percent in the retail share class and 2.6 percent in the institutional share class. It’s worth remembering that 80 percent of the distributions are free of income tax for retail investors. I think that’s quite satisfactory.
What lay behind this success?
Increased rental income was a particularly strong contributor to last year’s good performance. We were also able to sell two properties in the USA and France, generating a significant surplus over and above the stated market value, especially in one case. Combined with an increase in the letting rate, this also contributed to improving our scope rating, which is now a-AIF. Another factor was our high geographic diversification. At present, our properties are spread across four continents and 16 countries.
What are the advantages of a global real estate fund?
The greatest advantage lies in better risk diversification. The more different markets we operate in, the greater chance there is that a strong market can offset any weakness in another market.
Are there other advantages?
There are simply more opportunities to invest, which is almost more important, in my view. The more restrictive your definition of an investment universed, the harder it is to find attractive properties worth investing in. As a global organisation, we at DWS are naturally at an advantage in this respect, as we have our own experts on the ground in almost all the regions where we want to invest.
So, why is it that in recent years many global real estate funds have often not performed any better than funds focused on specific local markets or have even underperformed them?
That has indeed often been the case, especially in recent years. The problem is different currencies. The regulator requires real estate funds to hedge at least 70 percent of the currency risk. We actually hedge 95 to 100 percent so that there is no risk of any losses. The cost of that naturally weighs on returns. Real estate funds that operate exclusively in the eurozone don't have this challenge.
How does currency hedging actually work?
The cost of currency hedging essentially correspond to the interest rate differences between currency regions. The problem here is that eurozone interest rates have been extremely low for a long time now and considerably lower than those in other major currency regions such as the USA or Asia. This means the interest rate gap is quite wide, and the hedging costs are correspondingly high. It’s certainly advantageous that the USA is now also beginning to cut its interest rates again.
How does "grundbesitz global" compare with regionally focused real estate funds?
We recently achieved an annual return of 3.3 percent, beating many of our competitors. This shows that the right properties in the right locations can help to compensate for the currency disadvantage. If you’re looking for good prospects globally, you simply have more opportunities to invest. It's very helpful for us that we also have experts on the ground who analyse closely the target investment properties.
What is your investment philosophy? How do you find suitable investment properties?
A trend in which I firmly believe is urbanisation. We therefore focus on metropolitan regions. Major cities continue to grow at above-average rates. And where there's growth, there's corresponding demand for real estate – whether it's for residential use, office space or shopping centres.
Aren't you worried about price bubbles?
For us as fiduciary investors of client funds, caution and prudence are always a priority. We therefore observe the markets and how they might develop very closely, taking account of our expertise on the ground as well as our research department’s assessment. Of course, you're right that prices are currently at historic highs in many places. However, if you consider general interest-rate and return levels, that helps to put these prices into perspective. We also try to respond to current price levels from the investment side, for example by behaving in a somewhat anticyclical way and sometimes also swimming against the tide. We also search specifically for locations that still have development potential. A good example is Helsinki, where we have acquired part of Nokia’s former headquarters. The location was previously used exclusively for offices but has since developed into an urban district with residential units and good infrastructure.
Which sectors currently look the most promising – residential property, office space, logistics or shopping centres?
There are huge regional differences, and so it's impossible to make a blanket statement. But here too we are trying to avoid chasing the herd and are instead looking for anticyclical opportunities. That’s why we currently find shopping centres interesting, for example, although many people are saying: "For goodness sake, they're losing virtually all their customers to the Internet!" We take a more differentiated view. Large, dominant shopping centres still work very well. Major brands still have to find somewhere to showcase themselves.
Logistics real estate in Asia is also worth considering. Although the market is already saturated in the USA and Europe, the situation is different in, for example, Japan and South Korea. There, you can still achieve much higher returns from logistics real estate than from office space. And we have invested in promising office space in Sydney, Australia. Each case is individual. And it naturally helps a lot if you are not confined to one region but can look for good investment opportunities globally.
Which regions do you currently prefer?
We are heavily invested in Europe. That’s partly because we don't have any currency risks in the eurozone, which would otherwise be expensive to hedge. For that reason, we also expanded our European portfolio further in recent months. We purchased a retail property in Barberino, Italy and the logistics property Vantaa/Aviopolis in Helsinki, Finland.
Do you invest in Germany?
No, we are holding back in Germany. Not because there’s nothing of interest here, but simply because we want to differentiate ourselves from our other products.
How do you assess the real estate market in North America?
The USA is a really important market for us, not least because of its size. The economy there has tremendous momentum and that naturally affects property and real estate too. Canada is also interesting.
What about Asia?
There, we are particularly looking at Japan. People often perceive the country as ageing and undynamic, but that is of course only true in part. Go to the metropolitan hubs of Tokyo or Osaka, and you’ll find a relatively young population and respectable growth. We are likewise invested in South Korea. We do, however, have our problems with many other countries. This is simply because you need absolute clarity on the legal and tax situation when it comes to real estate investments. You can't simply sell a large shopping centre from one day to the next if political circumstances deteriorate like you can an equity. An important question to ask when investing in real estate is always: how will I get back out again?
At present, there are growing signs that economic momentum may reverse. How do you see the real estate markets developing against this background?
It's difficult to say. It is still completely unclear if global growth really will collapse or if the situation will calm down again. If things do cut up rough, real estate markets certainly won’t escape the consequences. On the other hand, real estate markets tend to be slow to react to economic changes – not least because rental contracts are often concluded on a long-term basis. Real estate can therefore bring stability to a portfolio. In terms of the long-term outlook, we continue to focus on investments in metropolitan regions where we basically expect sustainable growth.