REFIRE
Charles Kingston - REFIRE
Charles Kingston
This was the week that a shaken Angela Merkel told her fellow citizens in a Munich beer hall that the EU must now be prepared to look after itself, and cast aside any expectations of solidarity with erstwhile partners the UK and the US.
After she'd had several days of enduring Donald Trump's presence at close quarters, we were struck by the decisive tone in Merkel's manner. The last vestiges of hope in salvaging something of the old order were – reluctantly – being wiped away. A line was being drawn.
Merkel and her ally Horst Seehofer, the Bavarian prime minister, raised their beer glasses in a toast, and buried any past hatchets between them. Their CDU/CSU alliance sent out a strong message of intent as to what we can expect in the run-up to September's national elections. Barring a disaster, Merkel is on course to win again.
Whether the British like it or not, behind the scenes the collective German government apparatus has been jolted into a new readiness to embrace the bond with Emmanuel Macron's France. And, from last week, any Franco-German tendency to give the British the benefit of any doubt – if there had ever been such an inclination – will have receded yet further.
Timing a peak or a trough in markets is a notoriously difficult task, with those lucky enough to nail the turn counting their stars as they bask in their later reputation as "the man who called the crash", or at least sold at the top.
So we note with interest Austrian investor and developer CA Immo's move to put the Tower 185 building in Frankfurt on the market for upwards of €800m, in what is expected to be one of the biggest single office sales in German history. Built by CA Immo in 2012, the company sold a 66% stake in the property to two German pension funds in 2013 at a price which valued the building at €500m.
CA Immo says it has "decided to evaluate the sale of the Tower 185 office building in Frankurt within what is presently an ideal market environment…" To our ears, this sounds like code, meaning "We'd like to test whether we've just reached peak German real estate."
After all, a 60% price hike in four years is not bad by any man's standards. At that price, a buyer would likely be Asian, probably Korean. With a strong currency, Korean groups have been scooping up core European assets let to blue-chip tenants on long leases. Tower 185 would certainly fit that bill. All eyes will be on this sale, as a measure of where we stand.
According to the JLL VICTOR index, which purports to TELL us where we stand by tracking rental and valuation returns on prime office space in Germany's top 5 cities, returns over the last quarters have been spectacular. 3.2% this last quarter, 6.6% the previous quarter, and a total return for the last 12 months – at least for Frankfurt and Berlin – of 21%.
Sensational. And fund manager WealthCap is soon to offer a three-property portfolio including two Berlin shopping centres and a Frankfurt office building for €1bn, expecting to trouser a healthy profit on the €678m it spent on the trio of assets.
So, where is the fly in the ointment? The latest annual survey on investor intentions by Frankfurt-based fund manager Universal-Investment showed German investors readying to commit only 45% of their capital to Germany this year, as against 67.5% last year. The number favouring investment in North America has leapt from 5.7% to 19%. This suggests that – not for the first time – German investors now take a more pessimistic view of investment in their own market than foreign investors do.
As we see it, if Chancellor Merkel's sense of the future is correct, then Germany will be adopting a more deterministic tone in the years to come, acknowledging that some form of multi-speed Europe – spearheaded by Germany, and hopefully France – is inevitable, but which accomodates the co-existence in a lower gear of the weaker eurozone members. This is progress.
Plus, this dynamic seems sure to keep plenty of capital flowing into the German market for the foreseeable future. We don't see an uncoupling of residential prices from rising incomes, for example, that might present a threat to the housing market. With office space scarce in Germany's big cities, the prospect of rent rises is realistic for the best properties – hence the daring new prices being demanded.
As we report in this issue, a cloud hangs over rents in prime shopping centres as big foreign retailers cool on the sector, and it's doubtful whether yields will go much lower. But logistics and hotel investments in Germany are chasing one record after the next as investors scramble to get a foothold in the market in advance of the next phase. Demand is outstripping supply in all real estate sectors.
Shrewd and experienced investors are lightening up while the going is so good, and while the pressure on investors to invest is so intense. Project developers are finding backers for countless new developments, and building at decent margins for a market whose hunger is a long way from sated. There is much mileage in the market yet.
And yes, German real estate WILL profit from Brexit. Not all in a rush, not all to Frankfurt. But the look on Angela Merkel's face as she bade adieu to the comforting patterns of the past, that sad but steely look foretold something of her formidable sense of purpose in steering a new course for Germany. Something important changed last week.
