Mr Thiel, how are rising interest rates affecting open-ended real estate funds?
For fund managers, rising interest rates are a normal cyclical effect, but one that we haven’t experienced for a long time. Interest rate rises have triggered a re-rating. Due to increased financing costs, demand for properties has softened significantly and equity-rich investors are seeking a higher initial return, which leads to falling purchase prices. The transaction markets will only recover when interest rates have stabilised.
Are you seeing changes in inflows to your open-ended funds?
There is certainly less investment in retail funds than before interest rates started to rise, but net sales remain positive. We are preparing for more competition from interest-bearing products over the next 12 months. They are currently performing better and have a similar short-term risk profile. One advantage in the current market phase is that savings plans account for a relatively high proportion of investment in our retail funds. We have also switched from limiting the availability of units to a traffic light system, which means that all our products are open to investors simultaneously.
And how is net cash inflow looking with regard to institutional capital?
On the institutional side, it’s proving very challenging to attract new capital for the open-ended real estate funds at the moment. We’re seeing substantial interest from investors in club deals that invest in new projects, while the existing funds are finding it a bit more difficult in the current conditions.
Are investors seeking to reallocate capital and what is your assessment of redemptions?
As regards the institutional funds, there are customers who intend to withdraw their money after a 12-month notice period. We can manage that very effectively because our institutional funds have a broad customer base, with investors including many cooperative banks, for example. Our investors are aware that an open-ended real estate fund is a medium to long-term investment, is managed with a relatively small cash ratio and therefore has limited fungibility.
Have the minimum holding period and the notice period had the desired effect?
In introducing the Capital Investment Code (KAGB) ten years ago, the regulator provided exactly the right instruments. The Code makes it possible to solve the liquidity mismatch conundrum and plan properly for redemptions. The proportion of legacy investors who invested with us before the Code came into force in 2013 is 20 to 25 percent. That means 75 to 80 percent of investments fall under the new rules, which gives the funds a high level of stability. It was also a wise decision on our part to ensure separation between private and institutional capital in our open-ended real estate funds early on by launching UniInstitutional European Real Estate in 2004.
When market participants start to see eye-to-eye on pricing again, interesting acquisition opportunities are sure to arise.
Are you now expecting a revaluation of your fund properties?
We don’t see any reason for major valuation adjustments. The multiperiod capitalised earnings method we use responds relatively slowly to changes in the market. There are two sides here: the gross income, i.e. the revenue side, and the property yield, which is set by expert assessors. On the revenue side, we have a stable environment because we have very little vacant space, we have rent assurance clauses that protect our existing portfolio and there is no pressure on rents. This means we are largely able to compensate for higher capitalisation rates.
What challenges are there in the office sector, particularly in the US?
We are continuing to see strong demand for our office space. The fact that our properties are in good or very good locations works to our advantage here. We ensure our existing properties remain attractive to users by offering them new space options and sustainable layouts. With regard to the portfolio in the US, it’s true that demand has weakened. Our professional asset management team is actively tackling this challenge. We have also diversified in the US by investing in the multifamily, grocery-anchored retail and hotel segments.
Across all markets, active asset management, a focus on existing holdings and transformation of properties are all gaining in importance, as is entering new asset classes, such as logistics, resort hotels and European residential property. This carefully calibrated investment strategy further boosts the stability of our funds.
Do you expect to see opportunities for acquisitions soon?
When market participants start to see eye-to-eye on pricing again, interesting acquisition opportunities are sure to arise. We continue to monitor transactions and assess whether the new price level has been reached yet. If we‘re unsure, we’d rather forgo a deal. We expect a return to functioning markets by about mid-2024.
Do your funds still represent a good investment opportunity?
Due to the partial tax exemption, returns on open-ended real estate funds are within striking distance of the interest-bearing products that are currently performing so well. Furthermore, open-ended real estate funds have fared very well in every crisis. They are a pillar of strength because they have a low correlation with the capital market and low volatility. They defy inflation and market fluctuations, offer steady distributions and have been a stable investment in private and institutional portfolios for decades thanks to the tangible nature of property.
Interview by Christian Hunziker, photos by Patrick Ohligschläger