Extending a hearty welcome to our new Australian investors
It's now more than ten years since the German real estate industry was in a collective tizzy about the new forthcoming REITS legislation. Fearful of change, the bleeding hearts in Germany leapt to the barricades, determined at all costs to keep residential housing in any form from inclusion in the new tax-efficient REIT vehicle that was going to drag the German listed property sector - kicking and screaming - into the modern era.
The German REIT came, stillborn, just as the financial crisis arrived to bury all memories of the hype and hoopla surrounding the miracle construction – not to mention the myriad column inches devoted in the press to speculation as to how many billions would be raised by REIT candidates.
Ah, such memories. In the years that followed, EPRA was left weeping and gnashing its teeth at the woeful underperformance of the listed sector in Europe's largest economy, whose total listed real estate market cap still paled in comparison to even neighbours France and the Netherlands.
All that pandering to German legislators, for whom the housing market was the untouchable sacred cow, led to an extraordinary unforeseen side effect. For it transpired that the German housing sector was the secret weapon after all. Because since those righteous days, the listed sector in Germany has surged ahead – almost exclusively through the dynamism, growth and consolidation of the residential housing segment.
The market cap of the Vonovias, Deutsche Wohnens, LEGs and others have surpassed all the expectations of that curmudgeonly era, a mere ten years ago. Ten years in which German residential has gone only upwards, creating huge shareholder wealth along the way. This week EPRA figures show that Germany overtook the UK as Europe's largest listed real estate market by value, as measured in dollars, during the first quarter, due to a marked outperfomance of German real estate stocks.
This is a stunning performance, by any measure. At the end of March, the total listed real estate sector in developed Europe was valued at $490bn, representing 6.35% of the region's commercial real estate value of $7.7 trillion. Germany led with $107.28bn, ahead of the UK at $100.09bn and France at $93.7bn. A year ago Germany lagged both of these two by a margin, at only $69.06bn.
It's even more stunning when you consider how German investors, with their traditional aversion to volatility, have continued to shun the stock market, preferring instead to pour their money into the tried and trusted mutual fund sector, with its smoothed annual returns. At the last count, nearly 95% of investors in the German listed real estate sector were foreigners, who have so far been handsomely rewarded for their faith in German residential.
Among those expecting even more performance is the world's largest investor Blackrock. The US company holds stakes of up to 10% in many German listed property companies, and has been topping up its holdings in Deutsche Wohnen, LEG, Vonovia and TAG Immobilien, as well as being a major shareholder in banking behemoth Deutsche Bank. Additionally, it is an active direct investor in German commercial real estate.
The big American players were the original Prince Charmings, who kissed the German property market awake between 2000 and 2005, before the world discovered the attractions of Germany. Although they weren't always viewed with such affection, there's no doubt they dragged the German real estate industry up by the bootstraps, to become the powerhouse it is today. Now, after years of the good times, they're getting a bit fidgety as returns in the market continue to shrink.
It's no great surprise then, that the Americans are about to be replaced by Asian investors as the second largest buyer group in Germany after the Europeans. Asian buyers made up 10% of German transaction volume in 2017, the big brokers agree, while the American share fell from 20% to 11%. Overall, foreign investors accounted for 48% of the market.
Much more Asian money is expected to flow into the market, as the big Asian players from China and South Korea in particular expand their allocations to the sector, and are more than happy with the relatively low returns on offer compared to the perceived security. Less so the Americans, with their higher return requirements. Giants like Blackrock will still feature on company share rosters, but in direct hands-on engagements, the smart US money is already moving on.
Time to welcome the Australians back into the market, then. The news that IFM Investors and Industry Super Property Trust, both owned by 27 Australian superannuation funds, are to launch a collective platform, IPFM, later this year will come as welcome news. IPFM will kick off by focusing on core, income-producing assets in European gateway cities such as London, Paris, Frankfurt and Berlin.
Germany will play a prominent role in IPFM's strategy, it looks like, much as ten years ago when companies such as Babcock and Brown initially ventured overseas – albeit not very successfully then for their hapless investors. After withdrawing to their now increasingly expensive –and limited – domestic property market, Australian sap is rising again, along with allocations to real estate.
They'll receive a warm welcoming mat here in Germany, for sure. Plus they'll have the added advantage that not many people here understand the nuances of cricket, and hence are unlikely to make unappreciated jokes about ball-tampering. Herzlich Willkommen!