The path to German retail success is paved with the graves of fallen heroes

Two further German companies are scrambling to make themselves fit for a public flotation, shunning their hitherto modest self-containment, and now suiting and booting themselves for a new life under the scrutiny of the analysts and the number crunchers.

Ado Properties, a Berlin residential specialist, and Aurelis Real Estate, a project developer and nationwide owner of valuable urban landbanks as a legacy of its old Deutsche Bahn railway holdings, are prepping themselves for IPOs this year. Australian group BGP is also thought to be pondering a public listing of its remaining German housing interests.

With the cost of refinancing so low, and Germany riding so high in popular perception, it’s understandable why these companies, all of whom have majority foreign shareholders, want to make hay while the sun is still shining. There is - still - good mileage in their equity stories.

There are now twelve German real estate companies in the leading MDax and SDax listed segments, with the 800-pound gorilla Deutsche Annington vying for a coveted place in the Dax, representing Germany’s top 30 industrial companies. This could happen within a few months. Most of the listed companies have seen spectacular share price rises over the past eighteen months, with the average for the sub-sector All Real Estate up 60% since the beginning of 2014, compared to the 20% rise enjoyed by the Dax and MDax in that time. Several companies have seen their share prices multiply.

Never has so much money been raised by the listed sector, with new share sales reaching a record €4.8bn last year, 29% more than in 2013. Just last week Deutsche Wohnen raised €907m in a seven-for-one rights issue, by a margin the highest cash capital increase ever in the German real estate industry – and nearly twice as much as the next highest, by Deutsche Wohnen itself, back in 2012.

It would be easy to conclude that all this easy money is providing fodder for a further rash of takeovers, mergers and acquisitions, in a heady dash to fuel investor fantasies with visions of the next great mega-merger with its boundless synergies and lucrative scale effects. But it was Deutsche Wohnen itself which pulled the plug on its own takeover bid for troubled Austrian group conwert Immobilien recently, in a clear statement that the sky was not the limit as to what it would pay to bulk up.

It would also be comforting to believe that German institutional investors have finally fallen in love with the stock market, and are tucking away large blocks of their own property industry as a longterm hold, part of their widely-heralded commitment to increase their allocation to real estate.

Not so, unfortunately. German listed property shares are held 95% - repeat, 95% - by foreign investors. The traditional German aversion to stock market volatility helps ensure that domestic insurers and pension funds give the stock market a wide berth – to the benefit of the rejuvenated funds industry, particularly Spezialfonds. These have added tax benefits for German-domiciled businesses, as well as being easier to justify to disgruntled shareholders, if necessary, since losses are never crystallised quite so clearly.

Apart from investing in REITs, institutional investing in stock market listed companies does NOT count for allocation purposes – and with the REITs industry in Germany effectively stillborn, no help will come from that quarter. So, for the foreseeable, it looks like it’s up to the foreigners to keep the indirect investment flag flying in Germany. With the rest of Europe grappling in recovery mode, it’s Germany’s game to lose.

Now, indirect is one thing, direct investing is another. No matter how favourable the climate, share prices don’t rise forever, as trees don’t grow to the sky. When they cease to rise, they fall. By contrast, investing directly in German real estate always demands a greater degree of involvement – invariably more than anticipated at the outset, as investors always learn.

And sometimes learn painfully, as even retail giant Wal-Mart had to concede when it quit the German market in 2006. The retail behemoth, still the world’s largest private employer, met its Waterloo after a nine-year, €1 billion disastrous engagement with the German market, in what is still discussed in business schools as a classic case of cross-cultural antipathy and corporate mis-management.

No matter. It doesn’t seem to be putting off Richard Baker, owner and chairman of Canada’s venerable Hudson’s Bay Company, from tabling a bid for troubled German retailer Kaufhof, by some accounts topping an alternative bid from René Benko’s Karstadt group. Baker has achieved wonders at HBC since buying up the bits of the company he didn’t own seven years ago, and turned it into a retailing powerhouse with nearly 350 stores under brands including the flagship Hudson’s Bay, Lord & Taylor, and Saks Fifth Avenue.

It’s hard to know how serious he is about Germany, although his retail moves to date have clearly been more about the real estate than the pure peddling of textiles. In the event of success, however, he is less likely to aggravate his staff by compelling them to smile, greet customers warmly, or help them pack their shopping bags at the till – all of which clearly speeded Wal-Mart’s downfall, in a retail market where any signs of humanity other than a rock-bottom price are treated with grave suspicion and mistrust.

The more Canadians in Germany the better, we say. Toronto’s DREAM Property REIT and, more recently, the mighty Canada Pension Plan have been wading in with open arms. But a major retailer, intent on improving Kaufhof...? Certainly, but only after visiting the graves of Intermarché, Castorama, Prénatal, Oviesse, Marks & Spencers...