Five things you didn’t know about Germany’s listed property sector

When even the revered Economist magazine devotes one of its main editorials to the question of Germany‘s listed housing companies, as it did recently, then the sector can (almost) be said to have arrived.

And in truth it has, with somewhat of a flourish. The merger of Deutsche Wohnen AG and GSW Immobilien to create a giant new European property company has been greeted on all sides as A Good Thing. GSW‘s shareholders, with minimum dissent, have shown themselves more than happy to become shareholders in the new enlarged entity. The firms are similarly structured, more than two-thirds of their common residential holdings are located in Berlin, and the chances of genuinely achieving some form of synergy, while enjoying the negotiating clout that comes with size, are in fact surprisingly good.

This latest development, along with the well-publicised German property IPOs of Deutsche Annington and LEG Immobilien earlier this year, mask the stark reality of Germany‘s relationship to its listed real estate sector. Although €7.7bn of new equity capital has been raised on the market since the end of 2008, the growth of the German listed real estate sector should now actually be seen as the story of growth in the residential property sector. Fully 100% of the new equity placed on the market this year has come from the housing sector. For all practical purposes, and with a handful of exceptions, the European quoted housing sector IS the German housing sector. How about that?

But wait. Just how did it come to this? Barely six years ago, the nascent German REIT nearly arrived stillborn, with critics attacking the ‘flawed legislation‘ which explicitly prevented the inclusion of residential property. As Philip Charls, the head of the European Public Real Estate Association EPRA has often noted, his biggest challenge in raising the profile and weighting of the German listed sector among its European peers is a cultural mindset that views the stock market with distrust, and is uneasy about the notion of treating residential housing as a speculative investment.

Housing, we were told, particularly in a nation of renters such as Germany, is a valuable social good and not a commodity to be traded at the press of a button like contracts for wheat bushels or pork bellies. The rough-and-tumble stock market, with its inherent volatility and visceral appeal to speculators, is no place for the tender entities that are housing companies, obsessing - as they do daily - about improving the physical comfort and well-being of their tenants.

The recent very useful study presented by German real estate lobbying group ZIA and Barkow Consulting at a conference on the real estate listed sector in Frankfurt lifted the lid on a number of surprises, all worthy of further exploration.

We learned that German listed property companies own German assets valued at €59.1 billion, while foreign listed companies own a further €8.5bn, making €67.6bn. Of this total, €45.8bn is residential. Now, the much-vaunted open-ended funds, closed-ended funds and Spezialfonds sector taken together have property assets valued at perhaps €84bn, but only a fraction of those are held in Germany. The study thus illuminates how significant the listed sector has almost surreptitiously become – but also how underrated too, as the preferred indirect vehicle for investing in German bricks and mortar.

Part of the problem is the skewed nature of the investor community. Fully 95% of the shares in free float for German listed companies are owned by foreign investors. The free float itself of the fifteen largest listed German property companies amounts to a mere €10.8bn – amounting to about 60% of Europe‘s single largest listed property firm Unibail- Rodamco, and only about 25% of the size of the UK listed sector.

Of course, the weighting now enjoyed by German residential means, theoretically, that there is big upside potential for the sector to embrace more office, retail and logistics investment. Germany‘s open-ended funds, struggling to re-establish themselves after a period in the dunce‘s corner and the imposition of new legislation designed to make them safer and more attractive for private investors, own at least 2.5 times the amount of office properties as the listed companies.

But it‘s hard to see how this will change in the short term. The mood in Berlin, where Angela Merkel is hammering out a coalition agreement with her likely partners the SDP, is not conducive to enacting new legislation to favour the real estate sector. In the interests of harmony, Frau Merkel is likely to compromise on the “rent brake“ issue, allowiing the capping of rents on residential housing to assuage voter unease with rising rent levels.

Any tinkering with the existing G-REIT legislation to make the vehicle more attractive for institutional investors is likely to be pushed further on to the back burner in this legislation period, if not left entirely in the back room to gather dust. With barely €1bn in market cap, and having recently lost two of its five early pioneers, the German REIT sector can bid adieu to aspirations above its station for the time being – and probably a lot longer.

We‘ll be looking closely at where fresh financing for the German real estate sector is coming from at our inaugural REFIRE London Conference next Tuesday, November 12th. There are still a handful of tickets available, and we look forward to meeting you there.