Mega-fusion shows there’s plenty of life left in German residential

Thirty years ago, as the Cold War was showing tentative signs of the thaw that would lead to the collapse of the old Soviet empire within less than a decade, West Germany was the theatre where any future conflict was still likely to initially take place. This was where the troops were stationed, where the air-bases and missiles were, where the top brass was located.

The late General Sir John Hackett, himself a former commander of the British Army on the Rhine, describes in his gripping fictional novel The Third World War how the coming Russian invasion would play out. The Fulda Gap, about 90 minutes to the east of Frankfurt on the Hesse-Thuringia border, was one of the two obvious routes for a Soviet tank advance, while the other was across the North German Plain.

The Fulda Gap had enormous strategic significance for any possible Soviet advance, and defending it became the focal point for the US Army’s Fifth and Seventh Corps, along with a myriad of auxiliary units, all stationed in the southern half of Germany. The British forces, much less in number, were in their own zone in the northern part of the country.

Anybody with memories of the time (and that includes your editor, whose early career included a stint selling dictation and early word-processing hardware to numerous US battalions of the US Army’s Third Armoured Division scattered across the region), can testify to the sheer visible presence of such a gathering of armed forces.

At their peak, the US Army had 950,000 troops and dependents living in army-managed housing between Würzburg and Wiesbaden, between Mainz and Munich, and between Giessen and Garmisch-Partenkirchen. It managed more than 200 separate barracks and military installations across southern Germany, all of which involved complex housing arrangements for its personnel.

Those days are over. Nearly all the troops have gone, and the remaining bases have been consolidated to provide a minimum skeleton force and landing and hospital arrangements for US adventures in further climes, like Iraq and Afghanistan. Most of the installations and their accompanying housing have been acquired by German municipal authorities and turned into affordable housing for local citizens.

The departure of the troops is seen as an inevitability of an altered geopolitical world, and there are few in Germany who would hanker after their departed allies. But for countless numbers of people who provided services to this vast community, their memories will take a little longer to fade away. Products and services of all sorts could be sold – from insurance to rent-a-video, from car-washing to childcare – an entire community was there, waiting to be serviced by people who understood their needs. Many thousands of us answered the call.

950,000 people is a lot of people – it would equate to a city with the fourth-largest population in Germany, after Berlin, Munich, and Hamburg – and ahead of Frankfurt, Düsseldorf and Cologne. What marketing organisation wouldn’t be licking its chops at the prospect of having first dibs at providing such a large population with an array of services on which they can earn a cut, while using their clout to force down supplier prices?

We have listened carefully to the bosses of big German housing companies like LEG Immobilien and Deutsche Annington in the last couple of months, as they talk about their business models. Thomas Hegel of LEG has set an official expansion target of a further 5,000 housing units a year for the next while – but in truth, as he himself concedes, “the sky is the limit”. The key ambition is to develop a suitable platform – standardised, IT-supported, geographically conform – which can accommodate add-ons of new housing portfolios and genuinely create the much-vaunted synergies that are supposed to come with size.

While the growth in rental income may be constrained by legislation and local competition, the big German housing companies are still finding ways to increase yield per square metre while (just about) staying on the right side of tenants’ associations and local public opinion. True, their overhead is high and a certain level of maintenance and investment is critical to gaining and retaining half-satisfied tenants.

But the scope to increase income by providing ancillary services, such as PayTV packages, opens up whole new possibilities of boosting bottom-line performance – and this is part of the attraction for the biggest listed real estate companies to achieve even greater critical mass.

The new Deutsche Annington-Gagfah combine, which will have direct access to and intimate knowledge of the needs and interests of more than a million of its own tenants, is paving the way for a new wave of consolidation in the German residential listed sector. Despite looming threats of rental caps and restrictive social charters that will hamstring landlords, the segment of the market that has size and scalability is in rude good health, and looking to flex its muscles.

The dizzying rise of the share prices of German companies in the sector show no sign yet of levelling off; on the contrary, they are finding further support in the evident investor enthusiasm for supporting large-scale mergers and takeovers. We wouldn’t be sounding the death-knell yet on a sector that, perhaps only now, is beginning to look across the Atlantic to learn from the leading commercial housing and apartment providers that there is more to securing an income stream than just trying to push up the rent.