German funds become the UK's new big spenders
2 June 2003
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12 December 2005
Too much money and not enough to spend it on. It's a situation that few of us have the good fortune to enjoy. But such is the plight of the German open-ended real estate investment funds - or 'offene fonds', as they're known. With the German stockmarket in the doldrums, wealthy individuals and professionals have been pouring their money into the funds at a rate of knots.
Because of the sad state of the German real estate market, the fund managers are looking outside their homeland to buy up property wherever they can. The UK is no exception. In the past two months the funds have been responsible for buying up quite a number of prime City spaces. CGI made two purchases from Hammerson for £192m and immediately followed it up with a £172m purchase at 88 Wood Street.
Further purchases by CGI are being negotiated. DIFA made a £39.2m acquisition at Friars Bridge Court. DEGI brought the Goldman Sachs building, and is in the midst of another deal. Similarly, DB Real Estate Investment has a couple of transactions on the go. And so the list goes on.
While a rundown of fund purchases makes for rather a dull read, it's certainly kept the cash rolling in for the lawyers. Nice work if you can get it.
According to German mutual fund association BVI Bundesverband Investment und Asset Management, a whopping E8.8bn (£6.3bn) has been invested in the funds in the first four months of this year alone. That takes the total of money under management to E80.4bn (£57.64bn). Those that have come out best on the influx of new money in the past few months are Deka Immo, DIFA and DB Real Estate - also the three largest funds.
While the influx of money is obviously welcome, the key difficulty for the funds is investing it in a relatively short timeframe, as the funds have a maximum and minimum level of funds that are not invested. While the minimum level allows investors to draw on
their investment at any time, the funds must make sure they are under the maximum cash levels to comply with the financial regulator. As 50 per cent of the funds' investment must be in the property market, there is a constant need to keep finding new investments, and a need for an adviser on the other end of the phone.
Four UK firms have no doubt been rubbing their hands in glee for the past decade. Simmons & Simmons, Nabarro Nathanson, Linklaters and Norton Rose have pretty much got this market sewn up - for the meantime anyway. Clifford Chance, in particular partner Sally Lovitt, has benefited from the second wave of funds that hit the market, acting as UK adviser to smaller fund KanAm Grund.
Luckily for the firms, the funds have been very loyal to their UK advisers and tend to have only one firm to do the work. Nabarros, for example, is the sole adviser to DEGI, which it has acted for since it first entered the UK in 1991, WestInvest and SEB. It also shares DB Real Estate, one of the particularly active clients at present, with Linklaters. Simmons & Simmons has acted for Deka, the largest fund, since its entry into the UK market, and Linklaters has advised DIFA since its arrival.
There's perhaps only been one exception to the loyalty rule - Norton Rose has managed to lure the very active CGI. Although Norton Rose first advised
the fund around eight years ago, it was traditionally a Linklaters client. However, one of the first purchases the fund made in England was the Linklaters HQ. Norton Rose was brought in to advise CGI on the matter. After a row erupted at a later stage between landlord and tenant, CGI decided to send its business Norton Rose's way for good. Robin Mitchell, the Norton Rose partner that now services the client, must be quite thankful for that.
While Linklaters seems to have a firm hold on the other two funds it acts for - DIFA and iii - the London office of Paul Hastings Janofsky & Walker must be hoping to draw on the experience of Linklaters defector Jeffrey Bailey, who joined the US firm last month.
Bailey was one of the leading lights in the early days of open ended funds and has acted for both DIFA and iii in the past, but younger partner James Knox has largely been handling the work since the mid-1990s.
Paul Hastings would be well advised to edge its way in. It looks like the same funds that kickstarted the gloomy UK property market in the early 1990s are likely to keep putting cash into England for at least the next 12 months. Let's face it, they've got to spend the money somehow.
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