One of Germany’s largest investors smells opportunity in NYC retail

Allianz’s US real estate head talked to TRD about his plans

TRD New York /
Dec.December 08, 2017 08:00 AM

From left: 1515 Broadway, Christoph Donner and 10 Hudson Yards

Allianz, a Munich-based insurance giant, quietly emerged as one of New York’s most active real estate investors over the past two years.

Always a big commercial lender, Allianz started its buying spree in October 2015 with the $210 million acquisition of a 95 percent stake in 114 Fifth Avenue. In mid-2016, it bought stakes in Rudin Management’s One Battery Park Plaza and Related Companies and Oxford Properties Group’s 10 Hudson Yards. And last month, it bought a 43 percent stake in 1515 Broadway from SL Green Realty, valuing the Times Square office tower at $1.95 billion.

At one point, China Investment Corporation was reportedly close to a deal for the building but it fell through, allowing Allianz to swoop in.

Christoph Donner, who joined Allianz Real Estate America as CEO in 2014 after years at Aareal Bank and Hypo Real Estate, spoke to The Real Deal about the insurer’s recent investments, the impact of political uncertainty and his plans for the next two years.

This interview was translated from German and edited for length and clarity.

Were you surprised to land 1515 Broadway after all?
I wouldn’t say we were surprised. In the end, the colleagues at SL Green knew that we had invested a fair amount of work, that we had analyzed the deal and were far along in our internal decision-making process. So we could restart this fairly quickly. It was important to us and SL Green to get the deal over with in 2017. SL Green being a publicly traded company makes certainty of execution even more important. And I think we could convince the colleagues that we can make it.

Why has Allianz become so much more active in the New York market lately?
There was an equity (investment) push because properties aren’t just attractive in general to Allianz as a long-term investor, but because the U.S. market looks very positive — in terms of liquidity, economic growth and new technologies. We also significantly expanded our team here. We’re almost 30 people now. When I started (in 2014), we were 17. Now we have the infrastructure to do these deals, and the contacts. It takes a while until the market realizes that we can do these big deals and act as a reliable partner. Once that happens, you quickly start getting more deals.

So it’s like a snowball effect: once you do a big deal, the brokers start calling you.
The brokers start calling, but more so sellers and potential partners. If you look at our structures, we typically buy minority stakes, albeit large very ones. For our partners it’s important to know that we can quickly close on a big deal and that our investment horizon is identical with theirs. We have no interest in making a short-term profit. And last but not last we have a strong real estate team here in the U.S., which makes us a partner you can talk to if something goes differently. We all know that in real estate things rarely go as planned. And there’s a difference between talking to a proper real estate investor and a classic investor who just gives you the money but has to go to a consultant before important decisions can be made.

Do low interest rates in the Eurozone make returns in the U.S. real estate market look more attractive in comparison?
Compared to prices and yields we see in Europe, the U.S., and even New York, is more attractive, although Allianz has to price in currency hedging costs, which erases part of the advantage. New York is certainly the most liquid real estate market in the world.

What are your plans for the next two years?
Allianz holds close to 52 billion Euros in real estate globally, including debt and equity. This number will continue to grow because Allianz as a group will invest increasingly in alternative assets due to low yields in the fixed-income sector. If you say the 52 billion should grow to 75 billion in the long term — purely through reallocation — that’s a 20 billion difference, which will be invested globally in debt and equity. In the medium run you could envision that 15 to 20 percent of that sum will be invested in the U.S.

Are you primarily looking at New York City at the moment?
When it comes to debt, we are active across the U.S., and in terms of equity, we see New York as a strong market. I could see us buying one to two properties per year in New York in the coming years — provided the market holds and the properties are attractive. But we have diversified beyond New York as well.

Does political uncertainty in the U.S. play a role for you as an investor?
I think we have relatively high uncertainty globally, whether that’s in Asia with its changing growth rate and demographic shifts or Europe. Brexit is still a topic. With that in mind we look at the general economic situation in the U.S., which is still positive. Tax reform won’t fundamentally change that. Allianz is a long-term investor. We look at a 10-year-plus horizon. Political volatilities certainly play a role in our thoughts, but the view is always long-term.

Retail space makes up a big chunk of 1515 Broadway’s value. Much has been written about the retail market’s crisis. Are you worried about the health of your retail tenants?
We’re not worried because that location at the Bow-Tie gets a high frequency of foot traffic. Even if something were to happen to one or two tenants, we would be in a good position to refill that space. In general, we’re certainly more skeptical when it comes to retail — like everyone else probably.

Where do you still see opportunities for yield in the New York market?
Yield is difficult. All properties are expensive. It’s more important for us to buy a property that delivers a long-term, sustainable yield. It’s not about where we can make a quick buck. Hotel is a no-go for us right now. Office properties are attractive. We look for buildings that differentiate themselves from rival properties, that aren’t replaceable commodities. In high-street retail, there will be a price correction. That can create opportunities for long-term investors. That’s an area where I can see us getting active next year.

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