Approaching the German office property market
Michael Montebaur (Principal, Hanseatic Funds)
Stefan Boehme (Principal, s.boehme & co.)
James Knox (Partner, Real Estate, Berwin Leighton Paisner)
Douglas Edwards (Director, Corpus Sireo)
Torsten Hollstein (Managing Director, CR Investment Management)
Investors considering approaching the German office property market must consider it a long-term proposition, the Refire 2013 conference in London was told.
Michael Monetbaur, principal of Hanseatic Funds, said that the biggest sector of Germany’s real estate market benefited from low interest rates and moderate rental levels but yields had been compressed and overseas investors faced strong domestic competition.
‘Germany has always been a low yield market,’ he said. ‘That’s part of being a stable market.’ But there was little product and so the risk of overpricing. There were investment opportunities ‘but bear in mind that Germany has always been a long-term decision’.
His views were echoed by Stefan Boehme, principal of wealth manager s. boehme & co. His family concentrated on the top five or seven cities but had been finding over the past two or three years it was ‘difficult to put money down’.
They had switched their definition of prime as only the location but, borrowing the phrase managing to core coined by Rüdiger von Stengel of Art Invest, he said they were sweating to make returns needed.
Torsten Hollstein, partner in CR Investment Management of Berlin, said liquidity was a problem outside the leading cities where the international investment community already had networks in place.
‘If you look at what you can buy for a given amount in London and you want to spend the same amount of money in Germany you get considerably more stones.’
But buying more property meant investors must look at the market liquidity on exit as well as to acquire. It was difficult for international investors to buy in smaller markets where there was no established network of advisers. Very often domestic investors were quicker and more convincing to local banks providing financing and the local authorities.
Douglas Edwards, managing director of Corpus Sireo, said he would expect ‘only modest growth in the core seven markets’ where 70% of new space was pre-let. ‘From my perspective rental growth in the core cities will be moderate to limited.’
But he took a ‘contrasting view’ of regional markets, predicting rental growth of 2 to 3% and picking out such locations as Hanover and Erfurt.
James Knox, a partner in lawyers Berwin Leighton Paisner, noted that international investment in the market had begun in 2003 with the crises in open funds which sold off big portfolios, and then grew with debt-fuelled deals in 2006/2007 when some funds were being closed down.
‘In any jurisdiction where you can get an influx of different nationalities and different skill sets it can only be a good thing,’ he said of this diversified market.
Boehme, asked if ‘green is the new core’ noted that clients once took an ‘emotional’ view of architecture but this was now a necessity. Retailers in particular had changed what they wanted from their spaces. Today, being green was part of the toolbox for mitigating rising costs. But he would rather see a continuous green attitude than a certificate that fixed the building to particular date.
Knox spoke of ‘raised eyebrows’ from international investors at some aspects of the German legal framework, for example fixed 10-year leases with a nine-month break clause. His advice: ask a tax lawyer.
So who was investing in German office real estate? Edwards said sovereign wealth funds and national funds from the Middle and Far East were investing in core cities while hedge and other leveraged funds sought opportunistic deals. This was a dumbbell-shaped market with core plus investors steering away.
Hollstein said that while Berlin, for example, was catching up on the expectations of 10 years ago, rents would not rise excessively. This was because ‘in the inner city part of Berlin we can build the entire office stock of Frankfurt’. Whenever rents began getting to attractive levels, he said, ‘someone will build’.