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There was much talk among the German participants at this year's MIPIM in Cannes about the likely intentions of the bigger players in Germany’s frothy residential property market. Certainly a number of indicators are flagging that the recent excellent run for the big investor groups may be prompting the smart money to take a fair bit off the table - while the going is still good.
Among the big private equity players, Blackstone and Goldman Sachs are readying themselves to lighten up their holdings again, after several strategic exits last year. But they are not alone, and discussions with several players at MIPIM highlight just how many players are gearing up for what they hope will be a timely exit. Prices in the residential housing market have risen steadily across the country since 2009, during which time investing by Germans themselves in their own dwellings has risen strongly, so returns will have been good.
Just for starters, at least three companies - the New York-based Blackstone, Lincoln Equities from New Jersey, and a Deutsche Bank division are planning to sell at least 23,000 apartments in Germany this year. Blackstone alone is preparing the sale of 8,000 residential units in Berlin, valued at about €400 million.
The UK private equity group Terra Firma is also preparing to float between 30% and 40% this summer of its German subsidiary Deutscher Annington, the largest private landlord in Germany. In a recent interview, Terra Tirma founder Guy Hands suggested that his private equity group aimed to have sold off all its shares in Annington within two years – in a staggered exit similar to Cerberus and Goldman Sachs’ exit from Berlin residential property manager GSW Immobilien last year.
In January of this year, Goldman Sachs’ Whitehall Funds raised €1.3 billion on the stock market by floating Düsseldorf-based housing company LEG Immobilien, in what is likely to have made them hundreds of millions of dollars since buying the company from the North Rhine-Westphalian government in 2007.
We’ve highlighted a number of studies in these pages recently suggesting that the rate of price increases across the residential sector is slowing down. Several large equity funds are in any event approaching the end of their scheduled duration, while others funds probably figure there are better return opportunities in buying sub-performing or non-performing loan portfolios from banks.
Germany’s listed property companies such as Deutsche Wohnen AG, TAG Immobilien and Berlin’s GSW Immobilien have also been freely availing of the generous climate to raise fresh capital, and have been knocking on open doors recently with investors keen to gain further exposure to the sector – but the sheer volume of such share placements maybe sating investors appetites for more.
For example, underwriting banks found that they had to support the LEG Immobilien share price for an initial period of several weeks to avoid the shares slumping – while at the current share price of €42.90, there are still trading below the issue price of €44.00. Come the summer, investors may be less willing to pile in to the latest offerings at any price, as a certain amount of new-issue fatigue takes its toll.
When the big private equity players charged into the market, they were primarily interested in promoting the notion of privatisation and increased home ownership among their tenants, raising rent levels and exiting with a big capital gain through a trade sale or a stock market flotation. In contrast, the new consortiums that have emerged as potential buyers of big portfolio holdings are more focused on stability and solid annual returns from rental income, as an alternative to the low interest rates available on the alternative European fixed-income assets, such as yields on 10-year Bunds of about 1.4%. The perhaps 5% yields available on residential housing are attractive enough, but don’t compare with the 20% or so that the big private equity groups are traditionally foraging for.
Meanwhile, last month’s report by the Bundesbank addressed the issue of foreigners investing in German residential real estate, as part of what the Bundesbank describes as its “watching brief” on the German housing situation. While conceding that their figures are ‘incomplete’, last month’s report showed foreign investors being actual net sellers of German residential housing in 2012, a point we covered in an article in REFIRE last month.
“All in all, the volume of cross-border real estate transactions covered in the balance of payments compared with the total value of the German housing stock or the level of annual transactions in the sector is very low” concluded the Bundesbank in its report.
With a total value of about €9.8 trillion and an annual turnover of about €148bn, it put the level of purchases by non-Germans at less than half a percent. (The Bundesbank does warn about the accuracy of its data capturing, however, recognising that acquisitions made by German companies owned by foreigners are not treated as cross-border deals, for example).
Still strong on the buyer side are investors from Luxembourg and the Netherlands, partly due to their traditional fund structures, with buyers from Russia and China showing moderate increases. Investors from the US, the UK and Denmark have been slipping back over the past four years, say the Bundesbank researchers.