Post-election Germany riding high as the industry decamps to Munich

German consumer confidence has just hit its highest level since the onset of the financial crisis five years ago, with the GfK research group’s latest monthly reading showing the German public more willing to spend than ever before. Angela Merkel was bustled straight into the winners’ enclosure after the election result, with the only issue now being who will be her coalition partner. If the people could have another quick afterword, we’re sure they’d tell her to just get on with it on her own, and rule without coalition partners.

That’s how buoyant Germany is feeling. As the euro-crisis fades from the daily headlines, economic expectations are up, wallets are being loosened in the country’s shopping malls and online stores, and with record low interest rates, Germans are now taking the plunge on those big-ticket purchases. While income expectations declined again in GfK’s soundings, that doesn’t seem enough to dampen the nation’s mood of optimism.

At least, not yet. Paradoxically, despite Merkel’s decisive victory at the polls, Germany is likely to swing sharply left over the coming years. The three leftleaning parties - the SPD, the hard-left Die Linke, and the Greens – now have a majority in the upper and lower houses of parliament. They can’t – or won’t – form a coalition with each other, so they’ll use their time eating away at Merkel’s CDU/CSU alliance. The liberal party FDP have been booted out of the Bundestag, with the eurosceptic AfD also failing to surmount the required 5% hurdle. Merkel is going to be exposed to all sorts of hidden threats from the opposition left, and being the pragmatist that she is, she will accomodate the necessary compromises.

All of which makes it more likely that calls to cap rental levels and to clamp down on housing shortage profiteering, which were part of all parties’ pre-election agendas, will now be heeded. Further regulation, further intervention and higher expenditure for landlords in complying with Germany’s ambitious energy-saving goals can be expected over the coming years. Merkel’s party will be too busy looking for winnable battles to put up much resistance.

As the commercial real estate industry heads to Munich and the Expo Real next week, the mood – while not euphoric – is likely to be upbeat and positive. Germany is riding high in investors’ favours, but in many respects, that is as much a reflection of the lack of good alternatives elsewhere as it is a vote of confidence in Germany’s powers to deliver positive risk-adjusted returns. The euro-crisis hasn’t gone away. The Fed’s recent about-turn on tapering its quantitative easing, which led to jubilation on the stock markets, is being aped by our own European Central Bank, who will do “whatever it takes” to keep the rivers of bounty running and the good German times rolling.

If all of this is designed to suspend the laws of economics for as long as it takes to get the ruling political classes over the magical goal-line of cossetted pensiondom, then it may have some success. Real estate investors would be well advised, however, to scrutinise the small print – particularly where the returns are front-loaded into the first ten years, and where the font on the page starts getting a bit smaller as you get to the bit about what happens in years 11 to 20 of your investment.

German investors in property funds who didn’t take this precaution are currently seeking costly retribution through the courts, particularly in the case of two erstwhile real estate fund operators that were feted like royalty when the going was good. Earlier this month the head of the Hamburg closed-end fund manager Wölbern Invest was arrested on suspicion of €140m of embezzlement from his group’s 40,000 investors, while several other senior managers at Wölbern are under investigation. One of the numerous charges relates to a sum of €40m, which Wölbern say was distributed in dividends, although all those cheques seem to have gone missing in the post.

Meanwhile, ripped-off investors in the Frankfurt-based S&K Group, which had attracted thousands of investors with its schemes to buy undervalued properties and to carve up multi-family homes into lucrative condominums, are being fed a salacious diet of stories in the daily press about the outrageous high living of its founders and top managers while the going was good. That was before the company was exposed as operating a shameless pyramid scheme, with the latest losses for small investors put at well over €100m. Last week Stephen Schäfer (the ‘S’ in S&K) must have come over all funny like one of his company’s countless victims, as – while still handcuffed - he launched himself out of an upper-floor Frankfurt courthouse window in a vain attempt to escape justice. He is still undergoing multiple operations for the crippling injuries he sustained.

While exceptional cases, these tales are a reminder to investors that gravity cannot be defied in the long run. They help illustrate how the German closed-end fund industry has found itself in such a crisis, and how the entire industry – both closed and openend funds – is now being swaddled in layers of regulation and new restrictive forms of compliance, all designed to protect the investor from any possible harm. It’s the German version of ‘elf and safety, - nonsense, of course, and soon to be met by a new law of unintended consequences.

That means opportunities for somebody. If there’s one man who’s been well served by the old maxim, “Where there’s muck, there’s brass”, it’s John Gravken, the founder of the Dallas-based Lone Star. Gravken’s group is putting the finishing touches to its new enlarged $6.6 billion fund targeting distressed commercial real estate loans, of which half is being invested in Europe. Gravken himself is putting in 5% or $330m of his own money into the fund, in anticipation of healthy returns from Europe, his highest amount ever.

Lone Star’s head of investor relations describes the European market for the fund as being “way, way bigger than America right now in terms of the pipeline that we’re looking at. Our people in Europe are working on north of $25bn of files, so that’s pretty significant.”

Yep, we’ll say it is. Go for it, Mr. Gravken.