HGA Capital

The closed-end fund specialist has looked beyond its domestic German market to make central European investments, and is about to launch a US residential fund

HGA Capital Grundbesitz und Anlage, an HSH Nordbank subsidiary specialising in closed-ended funds, is in the process of launching its first US fund, which will invest exclusively in residential property, marking the start of a new product line for the fund manager.

HGA managing director Dr Joachim Seeler says the attraction of the sector lies in its demographic trends as well as the strength of the economy. “The US is the only industrialised country with a rapidly growing population, hence housing offers interesting opportunities,” he says.

German sponsors of previous US funds have invested mainly in commercial property, so HGA/USA V’s focus on housing offers investors a chance to diversify. The fund aims to buy low-rise housing estates on the east coast with 350 to 400 flats. It is buying 900 flats in West Palm Beach, Florida, and in Germantown, Washington DC and has joined forces with Alliance Inc, which owns more than 60,000 flats, to manage the properties.

HGA, founded in 1972, has launched closed-ended property funds with an investment value of €1.8bn in the past decade. Last year the merger of Landesbank Schleswig-Holstein and Hamburgische Landesbank into HSH Nordbank put a brake on HGA’s activities, after total equity placed with investors fell to €74m from €109m in 2002.

HGA’s funds are typically low-risk, core-type vehicles. Until four years ago the fund manager’s activities were almost entirely geared towards the German market, but more recently it has invested abroad and is looking for investments in the US, Austria, Hungary, the Czech Republic and Poland.

“Central European office markets have yet to reach maturity,” says Seeler. “Rents are falling and in some markets, such as Warsaw, the prime office locations have yet to be determined. The retail sector holds the greatest potential. Purchasing power in the central European countries is lower than in western Europe, but footfall is higher and shops are open seven days a week. Hence the gap between western and central European turnover is narrowing.”

For its thrust into central Europe, HGA has teamed up with Hamburg-based shopping centre developer ECE. Its first fund, HGA/ Mitteleuropa I, offers investors a stake in a 28,000m2 ECE shopping centre in Pécs, southern Hungary, which opened in March and is fully let. The fund has a projected dividend of 8% a year. HGA’s funds are euro denominated to avoid currency risk.

The fund manager’s second central European fund will offer investors a share in the 33,000m2 Galerie Vankovka in Brno, the Czech Republic’s second largest city. The centre is due for completion in autumn 2005 and is 75% prelet. HGA expects a return of 8.6% a year for the fund. The company is in talks to buy other projects in the Czech Republic and Poland, and Seeler aims to make it central Europe’s market leader for closed-ended funds this year.

The German market remains a core one for HGA, despite economic problems at home. “We expect the market to undergo some changes,” says Seeler. “Property management will become more important, tenants will demand higher specifications and lease terms will become shorter.”

HGA also expects corporate property sales to produce investment opportunities. Last year it launched a fund based on a Frankfurt office building bought from Deutsche Telekom in a sale-and-leaseback deal.

Selected investments
The fund has focused on central European retail for its foreign investments, while corporate sale and leasebacks have provided domestic investment opportunities
Fund	Value €m	Location	Type of investment	Occupier	Projected dividend yield p.a.
HGA/Campus Kronberg	101.3	Rhine-Main area, Germany	29,100m2 office building	Accenture	6% rising to 8.75% by 2007
HGA/Frankfurt Fonds	65.1	Frankfurt, Germany	31,200m2office/warehouse scheme	Deutsche Telekom subsidiary	8.0% rising to 9% or investors can opt for a lower dividend yield and take advantage of tax breaks
HGA/Mitteleuropa II	31.0	Brno, Czech Republic	33,000m2 shopping centre	Multi-tenanted	7.5% rising to 12% by 2020
HGA/Mitteleuropa I	25.1	Pécs, southern Hungary	28,000m2 shopping centre	Multi-tenanted	n/a
HGA/”sterreich I	17.4	Vienna, Austria	7,650m2 offices, 1,300m2 retail	Anchor tenant: Austrian ministry for science and research	6.5% rising to 8.5% by 2018
Source: HGACapital