November 23, 2015
Interviewed by: David Snow
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Gauging Risk in Global Opportunities

Working for a large insurance company like Allianz Real Estate has its advantages when looking at RE investment opportunities worldwide, says the firm’s chief risk officer Hauke Brede—namely that it can write larger checks that some of the competition.

Working for a large insurance company like Allianz Real Estate has its advantages when looking at RE investment opportunities worldwide, says the firm’s chief risk officer Hauke Brede—namely that it can write larger checks that some of the competition.

Gauging Risk in Global Opportunities
With Hauke Brede of Allianz Real Estate

David Snow, PrivcapRE: Today, we’re joined by Dr. Hauke Brede, Chief Risk Officer of Allianz Real Estate. Hauke, welcome to Privcap. Thank you for being here.

Hauke Brede, Allianz Real Estate: My pleasure, David.

Snow: Allianz is a global real estate investor, so I’d love to hear your view on the risk-return profile of various opportunities around the world. It’s a big topic, obviously, but why don’t we start with a quick overview of Allianz Real Estate? What are your objectives? How are you set up?

Brede: Allianz Real Estate is a capital-asset investment manager for Allianz, the insurance company based in Germany. What we do, basically, is invest out of our overall assets under management of roughly €650 billion. We invest probably 5% of that amount in real estate. It could be direct equity. It could be also through funds, real estate funds or also on the lending side.

The current portfolio size, in terms of real estate assets under management, is roughly €30 billion.

Snow: You are the Chief Risk Officer. What does that mean? What do you spend most of your day doing?

Brede: Chief Risk Officer really means—I mean to look at all the risk dimensions of our investments, [such as] on the new-business side when we underwrite new deals across all these three products that I just mentioned. Also, on the ongoing portfolio monitoring my team will look at what are the key risk dimensions.

When we underwrite new investments, my team provides the independent risk assessment on any of these investments.

You look at these investments and you say, “What is the typical risk associated with the investment per se on a structural level? That could be market risk or it could be leverage risk through financing, but it goes all the way down to asset-specific risk, tenant risk. It also includes non-quantitative risk factors, let’s say, reputational risk. It basically puts the risk into perspective of the target return to say if there is really a balanced view on this investment.

Snow: How much time and energy can you put into geopolitical risk, where you’re trying to determine the economic stability or even the political stability of a country? Would you negate an investment opportunity if you were not able to get your arms around the next 10 years of a country?

Brede: Basically, this is already happening on a strategic level. For example, some countries we exclude from our investment horizon because we don’t really get information on the country’s current performance or actually on the outlook.

Snow: What’s an example of a country that has been excluded?

Brede: We looked at a couple of emerging markets. As an investor, we are faced with the same problem as anybody else with this low interestrate environment. One country we looked at a couple of years ago already was, for example, Turkey. In Turkey, we had a couple of issues where we said…from a financial standpoint, it’s sometimes not attractive to find assets for our risk-return profile. Then, you had a long range of issues around, for example, political risk but also ethics risk. I mean, the foreign exchange rate—and we just saw this within a year ago—the Turkish lira became very weak.

We looked at other markets—let’s say, Brazil—and we found out that just to get the euro-denominated return we need for our investments, we would actually incur a hedging cost of 900 basis points. So, that really doesn’t make sense for us.

Snow: Let’s take a bit of a tour around the world. Obviously, it’s a big place, and prices have come back in a varied way. How do you determine whether a market is simply too frothy for your target risk and return goals?

Brede: Right now, overall, you see in many places prices are very high. So how can you then still say, “This is a good investment for us”? Our investment horizon is very typical, maybe, for insurance companies and pension funds. We look at a 10-year horizon. Of course, we don’t have a crystal ball but at least we have a view on what could actually happen over the next couple of years and whether we believe where we are today could be something that, at the exit, is still attractive.

There are some markets where we see a major recovery and we’re back to 2007 figures.

Snow: Places like London and presumably Munich.

Brede: Yeah, London and Munich, exactly. In, Munich, we see now price increases where you say it’s beyond actually what we’ve seen before. But, for example, London would be then a market. We don’t have a lot of liabilities in the British pound. So, for us, that market is not very attractive.

Then, of course, you look at the broader UK market, for example, and you say, “Maybe there’s something else on the retail side, but maybe it’s not prime London.” Basically, you look at the different markets and assets and you try to look forward. And I’ve seen other investments as well going to this managed to core strategy where you maybe work with business partners. And you look at a core building that has one or two defects and work on this asset to create then a core investment again.

Snow: What is your take on the China market? How active has Allianz been in China and where do you see the opportunity to invest?

Brede: Right now, China, in terms of exposure, is below 10%. So, it’s not the major part of our portfolio. But we looked at many different opportunities to invest in China. The issue that we found out very often is that it’s a different legal environment, for sure. You have a couple of things to keep in mind when you invest in this country. Last, but not least, whether you can actually [repatriate?] your money at the end of the investment period.

For example, you have to be careful about the existing stock. I mean, you don’t want to buy an existing shopping center in China because just the functional layout—the setting is not what you could consider a top-notch, dominant shopping center. But, we would certainly go into such a market only with a local champion, with the 800-pound gorilla who actually knows the market locally.

Snow: You mentioned being open to being part of developments in places like China. How do you assess risk where, instead of buying an existing property, you are developing a new one?

Brede: This is a very good question. The problem is, if you invest in real estate and as a core investor, we normally shy away from real estate development projects. We’d rather like to actually buy the asset once it’s stabilized and fully developed.

The same was true at one point in Russia, for example. We’re not invested in Russia, but if the existing stock doesn’t really work for you as an institutional investor, you don’t want to buy these assets. Then, developments might be then the better option.

The same is also true for Spain, for example. If you look at Spain and at offices there, it’s not considered to be ClassA office space. The existing stock is so old and, in terms of a functional layout, not as efficient as what you would normally expect in other markets.

Snow: Although you do have certain return expectation and goals, these may be different from more opportunistic real estate investors. Does that give you an advantage in certain markets where perhaps your cost of capital is lower than a private equity-style fund?

Brede: Our cost of capital is much lower compared to other investors who also maybe need to get external funding for it. Although, right now, interest rates are very low. In terms of advantage, I think as we are more into these investments for the long haul, it makes it a bit more difficult for us because you have to see—especially today—where price is already quite elevated. Where’s the next opportunity to sell? So, when we underwrite a new investment, we also look at exit risk.

So, you really have to make sure you find sustainable investments from an economic standpoint. I don’t think there is a big advantage. I think we have one advantage as an insurance company—we can underwrite big tickets. I mean, we start at €50 million, but I’ve never really seen investments below €100 million. And normally the…average ticket size is much, much larger.

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