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A Deep Dive into CommerzReal’s Investment Strategy

The subsidiary of Commerzbank remains bullish on office space despite uncertainty on the long-term questions about work-from-home trends.

Domestic investors may be wary about the outlook for office properties in major gateway markets such as Manhattan and San Francisco, but Germany-based Commerz Real is hoping to find some buying opportunities in those markets in the coming year.

Commerz Real is a subsidiary of Commerzbank. The investment firm currently has €34 billion ($40.6 billion) in AUM and is an active investor in the U.S. real estate market with assets such as 222 E 41st Street in New York, Dexter Station in Seattle and the Alohilani Resort in Waikiki Beach, Hawaii. CommerzReal invests in the U.S. through its global fund, hausInvest, which is one of Germany’s largest and oldest open-ended real estate funds. The fund invests across Western Europe, Asia and Australia with about 10 percent of its assets in the U.S.

Last year was a challenging one for foreign investors to close deals in the U.S. Mirroring the broader decline in sales activity, cross border investment in U.S. real estate dropped by 31 percent last year to $44.3 billion, according to Real Capital Analytics. Commerz Real also hit pause on its U.S. acquisitions over the past year due to the impact from COVID-19. Its last U.S. acquisition was 1330 West Fulton in Chicago for $167.5 million.

Travel restrictions between Europe and the U.S. continue to present delays in resuming buying activity in America. However, the company is preparing to jump back into the market. WMRE recently spoke with Henning Koch, a member of the management board and global head of transactions at Commerz Real to hear more about the firm’s investment strategy in the U.S.

The following interview has been edited for style, length and clarity.

WMRE: Tell me about your investor base. Do you work primarily with institutions, HNWIs or both?

henning-koch.jpgHenning Koch: We work with both. We have an open-end retail fund called hausInvest. This is our big flagship fund that is roughly €16.5 billion ($19.8 billion) AUM. This is our fund that invests in the U.S. with roughly $2 billion in asset exposure. With the proper saving plan, individuals can invest as little as €10 per month into the fund. We also run a couple of institutional funds, which are not invested in the U.S.

WMRE: Can you briefly describe your current strategy as it relates to U.S. real estate assets? What property types and regions of the country do you like right now and why?

Henning Koch: A major component in our fund is office. We also have a little shopping center exposure, some hotels and some residential. In the U.S. we are mainly interested right now in super core inner city offices. So, we are focusing on the gateway cities of the East Coast and West Coast, including New York City, D.C. and Boston on the East Coast, and on the West Coast, San Francisco and Seattle. L.A. is not an easy market for us. We also have two properties in Chicago. We have started to look a little bit at the more upcoming modern cities, such as Austin. We’re trying to understand where the mega-trends are in the tech industry and where there is more growth potential, but in the end, we always return to the gateway cities.

WMRE: Domestically, there is some concern about how office space may be impacted in large urban centers. What’s your view on that?

Henning Koch: We are pretty relaxed on the office discussion. Of course, we are monitoring it closely, and looking at which way office demand will move in the future. On the other side, we have so many practical examples where we have seen a really stable performance by the office assets in our portfolio. We invest in super core inner city locations. So, absolutely prime locations. What we have seen during the pandemic was that we have still leased up the space under better conditions than the original business plan. So, we are more positive on the renter side than prior to the pandemic, which shows us that in these super prime locations we have seen quite a stable and safe haven situation. On the fringe locations, it is a little bit different, but we have very little fringe in our portfolio. Eighty percent is in super core locations.

WMRE: So, do you think you could see some buying opportunities for core office assets in gateway markets because of the pandemic?

Henning Koch: Absolutely. That’s what we are hoping to find. The only issue right now is that we are not allowed to enter the country. So, we don’t have access, which is difficult for us because we definitely see some good opportunities in the U.S. right now, especially as compared to Europe. There is less competition right now, and we would like to take advantage of that situation. We are hoping to get back to the U.S. as soon as possible.

WMRE: Do you have any team members or boots on the ground in the U.S. right now?

Henning Koch: This is exactly the challenge we are facing in the U.S. We still do not have people on the ground, and we need to travel from Germany to the U.S. We are currently working on opening an office in New York City so that we can be more active, visiting properties and running due diligence. It also would be good on the asset management side to have two or three people on the ground who can take care of properties and tenants.

WMRE: What kinds of returns does the hausInvest fund generate?

Henning Koch: It is a total return of roughly 2 percent on a net, net basis – after fees and taxes and everything. That means that we would need to buy at cap rates of 5 percent or perhaps 4.75 percent to overcome hedging costs.

WMRE: That sounds like a bond-like return. Is that what your investors are looking for?

Henning Koch: Exactly. It is a very safe haven. In Germany, we have a zero interest rate environment. So, we have a spread of more than 200 basis points to the typical bond asset class. The fund has existed for nearly 50 years, and we have always had a positive return. We have never been negative. This is quite unique in the industry. We prefer having lower returns, but very steady returns.

WMRE: In the U.S., we are seeing more retail investors increasing allocations to real estate. Is there a similar trend in Germany?

Henning Koch: We definitely see more interest and more demand for real estate. It is the only asset class right now that provides stable returns and also protects you against inflation, which many people expect in the mid- to long-term view. Therefore, we see a very strong run on real estate vehicles.

WMRE: Given all of the challenges and uncertainty related to the pandemic, have you had to increase your communications to investors?

Henning Koch: Yes, definitely. That is something that we are trying to do much more often now in both directions. On one side, we are trying to have regular reporting and communications to investors on how stable is the fund, and how stable is the portfolio. Also, we need to have very strong communications with the tenants these days. They want to see a landlord who takes responsibility, who is taking care of them and understands their needs and problems right now. For example, a restaurant operator in Germany has a very tough life, because everything is closed. A lot of retailers also have very strong problems. So, you need to have close lines of communication with these clients.

WMRE: Raising capital can be highly competitive these days, what strategies are you using to raise capital from new investors?

Henning Koch: On the institutional side, it is a very, very competitive environment. Capital raising campaigns are coming to Europe from America and Asia and everywhere. On the retail side, it is a little bit different. We have mainly four big institutions that run retail funds. Therefore, this is a very strong argument to play in the retail funds world, and we are trying to strengthen our position in the retail funds business. We have launched a new retail fund that is investing in renewables and infrastructure projects. On the institutional side, we try to be very specific on the funds that we are launching so that we can differentiate from our competitors.

TAGS: Office News
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