Dec. 11 (Bloomberg) -- Citigroup Inc.'s property unit raised $2.1 billion for its first high-return real estate funds, one for Europe and the other for North America, as the bank seeks fee income from managing investment alternatives to stocks and bonds.

Citigroup Property Investors gathered 1.162 billion euros ($1.5 billion) for CPI Capital Partners Europe LP and $603 million for CPI Capital Partners North America LP, the New York-based bank said in a statement. Citigroup and its investment managers committed 200 million euros of the total to the Europe fund and $200 million to the North American fund.

``Improving real estate fundamentals, shifting demographics and liquid capital markets are creating opportunities for our value-add approach to investing,'' said Joseph Azrack, 59, chief executive officer of Citigroup Property Investors, in a statement. ``Investors recognize this, and demand for this fund was strong across a broad range of domestic and international clients.''

Azrack, who came in 2004 to Citigroup Property Investors, a unit of the world's biggest bank by market value, is expanding real estate offerings as Wall Street banks raise record funds for global property investment. Morgan Stanley is raising $8 billion for what would be the largest real estate fund of its kind and Goldman Sachs Group Inc. also is approaching institutions for a new real estate fund. A former chairman and CEO of Boston-based real estate investment firm AEW Capital Management LP, Azrack oversees about 100 people in a unit that had about $8.5 billion under management before the two new funds announced today.

Record Growth

Demand from institutional investors such as pension funds is driving a record expansion of high-yield real estate funds seeking net returns of at least 10 percent. About $140 billion is currently being invested or will be raised this year and next, according to Real Estate Alert, a weekly financial newsletter.

Citigroup's new European fund will be managed by a London- based investment team of more than 20 people led by CPI Europe head Roger Orf, 54, and Chief Investment Officer Neil Hasson. The fund plans to invest mainly in Germany and other Western European countries and to a lesser extent in central and southern Europe.

About 20 percent of the Europe fund already has been invested, Citigroup said. The European fund aims to invest its capital over four years.

The North American fund will invest mainly in the U.S. and Mexico. It will be led by managing director Larry Ellman and a staff in New York and Los Angeles. About 40 percent of the fund already has been put into 17 investments.

Malls, Offices, Resorts

The North American fund plans to invest in assets including shopping centers, offices and hotels and resort communities, said James Green, a managing director who worked with Azrack at AEW before joining Citigroup. They include Laredo Bay, a resort community of vacation second homes on the Baja Peninsula, and a hotel resort in Cancun, Mexico. The fund has a three-year investment period.

``We're buying properties in need of repositioning, recapitalization and potentially some redevelopment,'' Green said in a telephone interview. ``Many of them are well-located, well- leased institutional quality real estate assets selling for very low cap rates.''

Citigroup Property Investors is part of Citigroup Alternative Investments, one of the bank's four main business divisions. The property unit has offices in New York, London, Los Angeles, Shanghai and Hong Kong and a presence in Mumbai.

To contact the reporter for this story: Hui-yong Yu in Seattle at hyu@bloomberg.net

Last Updated: December 11, 2006 14:38 EST