Catella bullish on investments outside top German cities

Investment

Always at this time of year we look forward to sitting down with the top management of property advisors Catella, to mull over some of the key themes in the industry as we brace ourselves for the challenges of the coming year. After a year which has seen unabated demand in Germany for residential assets, from domestic as well as international investors, we expected Catella to have some interesting perspectives to hand as to where – if anywhere – more value would be found next year, and we left with several interesting ideas to chew over. As we always do, it must be said.

Catella’s view of the German residential market is somewhat jaundiced, as it feels that the mad rush into residential has led to a skewing of the market towards the upper end. Pension funds buying prime residential assets at a multiple of 22-25 times annual rent is an example of over-optimism about future returns, it argues, despite what such funds might believe about the lack of available alternatives. Fear and greed continue to dominate the market, Catella believes. The year 2012 was characterised not by steady market development, but a lot of zig-zagging in different segments of the market; never before were so many deals scuppered at the last moment, nor new deals initiated – uncertainty on the one hand, blind risk-taking on the other…

The key issue is the amount of households capable of paying the rents that such price expectations in the buy-to-let sector demand – an increasingly small group of tenants. Catella identifies a lack of affordable housing for the middle class – where owner occupiership is much lower but rents are stable and sustainable.

In their flight into German bricks and mortar, foreigners are not immune – Catella’s figures show that in Berlin, 23% of apartment buyers are now foreign buy-to-let investors. The market is being driven less by individuals planning steady saving for their retirement than by investor panic about missing out, Catella warns. Increased volatility lies ahead, but so do higher volumes; next year overall at €23-25bn, ahead of this year’s likely €21bn, is forecast.

Nonetheless, the residential market as a whole is expected to remain stable through 2013, with little evidence yet of a national property bubble. Klaus Franken, Catella’s CEO and his team suggested that the best opportunities next year will be in secondary locations outside the traditional Big Seven, in the categories of healthcare and logistics, and in assets with short lease terms.

Separately, the broker said that the sustainable properties fund Sarasin Sustainable Properties - European Cities (on which we’ve reported in these pages) which Catella launched with Swiss private bank Sarasin is now investing the proceeds of its second closing to buy three assets for €72m in Oslo, Stockholm and Amsterdam.  The fund is targeted initially at Swiss institutional investors.