Investors suffering from summer wobblies and residential indigestion
The summer heat-wave that’s been keeping the mercury up in the high thirties may be mainly responsible for the lethargy that seems to be afflicting Germany’s business community these past weeks. The old maxim of “Sell in May and go away” has never had quite the same number of adherents in Germany as it has in London, and given the different sporting traditions, not too many in Frankfurt might know to only “come back on St. Leger’s day”.
Nonetheless, several recent events suggest a shift in the tide of untrammelled enthusiasm for all things German resi dential. Deutsche Annington finally got a version of its IPO over the line, although raising far less than originally anticipated. Two big banks, Deutsche Bank and Goldman Sachs, misjudged their distribution’s appetite for another big chunk of German residential in the form of Gagfah stock, and like many before them in German real estate, have seen their speculation turn into an investment.
There’s no real harm done. Although unwelcome, the Masters of the Universe can dribble their holdings back onto the market without unduly destabilising the Gagfah share price. It might take several months, but at some point they’ll have wriggled out of the noose and their holdings will be somebody else’s. By then, with any luck, investors will be licking their chops again to get their hands on exposure to the listed German residential sector. That’s the plan.
By then, of course, the German election will have run its course, and we’ll have a better idea how the parties propose to implement their election promises. Given the highly political nature of residential property in Germany – in contrast to all forms of commercial property investment – the parties are almost unanimous in their avowed intentions to
impose rental caps on private tenancy agreements. Not just within existing contracts, but – much more significantly – by imposing limitations on any rental increase in subsequent lease agreements.
Given the amount of business plans whose projections are premised on future rent increases upon a change in tenant, the extent to which the parties are determined to follow through on their populist promises will have serious implications for investors. Uncertainty surrounding this threat undoubtedly played a role in the recent
wobbles on the capital-raising markets.
Not surprisingly, we’ve been here before. Ten years ago, German institutional investors – mainly insurers and pension funds - largely offloaded their huge residential holdings in favour of office properties. These latter were viewed as less risky than the low-yielding residential sector, and less likely to be the subject of government interference. The institutionals’ exit coincided with the early arrival of the foreigners who espied a completely different set of possibilities to make money out of German housing.
While not all succeeded, some of the early ones undoubtedly did. IPD’s DIX index shows a return on German office property over the last ten years of 2%, while those investing in residential averaged 5%. The big risk turned out to be in the commercial sector. At this new juncture, the market appears to be weighing up the outlook for a new set of risks in housing and is taking its time about deciding. With road surfaces melting and rail tracks buckling in the heat, it’s just easier to go and have an ice-cream. Which is what people are doing, for now.
Private equity investor Cerberus, one of the earliest and - to date - most resilient of the new breed of foreign investors in German real estate, is busily rooting around the discount stores looking for wholesale and retail assets at a knockdown price. It’s just grabbed another couple of portfolios from Wells Fargo and the retreating Royal Bank of Scotland to add to its growing pile of retail assets; these particular ones may not be destined for the stock market, but other Cerberus retail properties – such as its Metro and Woolworth holdings - are undoubtedly being readied for public consumption. JP Morgan, Bank of America Merrill Lynch and Goldman Sachs are smoothing Cerberus’ path to an IPO or a REIT listing as we speak.
This is good news. Just this month the AIFM regulations came into force, and everyone will be watching its impact on the German real estate funds industry, both openand closed-ended. The traditional German affection for its beloved funds industry – and its aversion to the rough-and-tumble of the listed sector – will be tested afresh over the coming years. Despite the momentary uncertainty, domestic investors ARE giving a guarded welcome to new listed vehicles, as evidenced by the not-widely-known fact that last year was a record year for capital raising in the listed segment.
Distrust aside, Germany has paradoxically embraced the arrival of several new listed heavyweights in the residential sector, while watching aghast as its erstwhile commercial heavyweight IVG gets sucked down the plughole. New arrivals in the retail sector would be welcome, to join stalwarts like Deutsche Euroshop and Hahn Gruppe. Happily, there’s movement afoot.
By the way, representatives of many of these top companies will be attending REFIRE’s London conference on Investing in German Real Estate on November 12th. It promises to be an extraordinary day of meeting, talking, listening and learning. We hope to see you there.