Asian investors turn to Germany with renewed vigour

Asian investors are looking at Germany with renewed vigour, as uncertainty surrounding Brexit and China-US trade wars pushes them to take a chance on Europe’s biggest economy.

‘There has been an increase in interest in recent months in Asian investors looking at Germany,’ Alexander Kropf, head of capital markets Germany at C&W, told REFIRE. ‘It’s a hard market for them to enter, though, and German real estate can seem expensive, particularly if they’re looking for a 6% return. However, I think there will be some deals this year that appeal to them,’ he added.

The uptick in interest on the part of Asian investors in Germany is due to their wish to diversify and to channel more money into Germany because the UK market is uncertain, according to Kropf: ‘They have invested mainly in London a lot over the years and now want to diversify into mainland Europe where Germany is clearly the most secure destination,’ he said.

Last year (November), C&W helped Hana Financial Investment, a South Korean consortium, to buy the Trianon tower in Frankfurt for €670m from NorthStar Realty Europe, marking the biggest deal of the year on behalf of an Asian investor in Germany. The 45-storey skyscraper has a distinctive delta shape, topped by a polygonal diamond which, on special occasions, is transformed into a coloured illumination. Located at Mainzer Landstrasse, in the centre of Frankfurt’s banking district, it is the sixth-highest tower in Frankfurt at 186m and comprises 61,304 sqm of office space, as well as 4,345 sqm of ancillary space and 2,788 sqm of residential space.

Christian Kadel, head of capital markets Germany at Colliers, agrees that Brexit is encouraging some Asian investors to re-think their European investment strategy:‘At MIPIM this year, Asian investors I talked to, particularly institutional investors, were cautious about the UK in light of Brexit and are looking more at Germany,’ he said. ‘There are some good examples of Asian investors buying and selling assets in Germany very successfully, such as NPS with the Sony Center, and they are looking for more opportunities. We see that institutional Chinese money is not really looking at prime real estate, such as shiny office towers – they prefer to invest in infrastructure.’

Japanese investment wave to come

Japanese investment is the big wave to come, according to Kadel: ‘Japanese pension funds have around $1 trn to invest; if just 10% is invested in alternatives such as real estate, that’s a lot of money. Japan is too small for that level of investment, so they have to go abroad. Singaporean investors want to grow their presence in Germany as well. Korean investors, who have been around a bit longer, usually started with Frankfurt, Berlin or Munich and are now also looking at cities such as Cologne and Stuttgart, although they are still quite focused on the Big 7. The only limiting factor is the lack of product. That’s why I think there will be less than €60b of real estate deals in Germany this year – there is just not enough product coming to market.’

CapitaLand leads the pack

Singaporean real estate group CapitaLand – which Kadel bills as the ‘most active’ Asian investor in Germany today, along with Korean investors - has already bought a couple of office towers in Frankfurt: Galileo for around €356m in May 2018 and Main Airport center (MAC) in December 2017 for €245m, which marked the group’s first investment in Germany.

‘Typically, Asian investors are looking for either single let offices or offices with just two tenants,’ Kropf said. ‘They like Frankfurt but not Berlin because the market moves too quickly for them to execute some deals and they don’t really understand it. They will also look outside the Big 7 to cities such as Cologne if they can get an office with a 10 to 15 year lease and if the net yield isn’t below 4%. They are conservative, so normally only leverage up to 50%.’

One asset likely to appeal to Asian investors is office and retail complex, The Squaire, near Frankfurt airport, according to those who track the market. Part of the Officefirst portfolio, Blackstone’s asset management platform for German offices, it is believed to have just come on the market. ‘It’s 140,000 sqm and KPMG has a long lease there, as do two Hilton hotels,’ said one analyst, who asked not to be identified. ‘Asian capital might be quite interested; it could sell for around €1b in two-to-three months.’ Blackstone could not be reached for comment.

For Marcus Lütgering, head of office investment Germany at JLL, ‘Asian interest in Germany will continue to be relatively high this year, with Korea and Singapore clearly ahead’: ‘This reflects the high number of bids and LOIs received from the region,’ he said.

Asian investors committed €4.27b to German real estate last year and an additional €5.91b in 2018, according to JLL.

Typically, Asian investors target London and Paris first before setting their sights on Germany. Subsequently, conditions in the UK post-Brexit could have an impact on their allocation strategy in Europe. ‘Everybody is speculating about Brexit and when it will actually happen,’ Lütgering said. ‘The real question is what investors do after Brexit. The UK won’t be in the EU anymore, so they will be asking what this means for portfolio allocation, balance etc.’

Korea’s National Pension Service (NPS) is also active in Germany and used to own the Sony Center in Berlin before it sold it to Canadian pension fund Oxford Properties and New York-based Madison International Realty for €1.1b in October 2017. ‘The government fund is now looking at the German market again, as is one of South Korea’s biggest multinational conglomerates,’ said Lütgering, declining to give further details. ‘They tend to be more opportunity-driven, so there’s been a shift to granular product outside the Big 7. Japanese investors are now starting to look at Germany as well. They are not allowed to buy more than a 50% stake in something, so they always need an investment partner. I think they will invest more indirectly, via funds, as that would be easier for them.’

Another investor committing serious capital to Germany is China’s sovereign wealth fund, China Investment Corporation (CIC). Blackstone sold its pan-European logistics platform Logicor -which invested heavily in markets such as Germany and the Netherlands - to CIC for €12.25b in June 2017, in the biggest deal of the year. (In December 2017, Blackstone bought back a 10% stake in Logicor from CIC for an undisclosed sum.)

‘Asian investors like logistics, as Blackstone’s sale of Logicor to CIC in 2017 shows,’ said Kropf. ‘It appeals because logistics tends to be a single tenant. They will also invest in hotels if there is a 20-year lease in place to an established operator, such Kempinksi. They don’t like retail at all because it is multi-tenanted and management-intensive.’ (ssk)