There´s a fair measure of truth in that old chestnut beloved of smart money men, that when everyone’s thinking the same, then nobody’s thinking. Right now it seems as if almost everyone is thinking that the German residential circus has played out, it’s time to take profits, the caravans are moving on. Institutional money is switching tack, back into the commercial segment, and its beloved office properties.
Hardened investors smirk when they see Germany’s mass-market newspaper Bild-Zeitung explaining to its readers on the front page – as it did in November - how they can clamber aboard the housing bandwagon with NO MONEY DOWN! The power of low interest rates will do it for them, advise the paper’s crack team of financial advisors. Cue the sound of experienced hands rushing for the exit, reminded of Baron Rothschild’s advice that when your shoe-shine boy starts giving you stock tips, the game is up.
Not so fast, say the researchers at property analyst BulwienGesa. Board member Andreas Schulten points out in the market researcher’s latest study how the actual level of new residential building is still trailing the level of building permits issued – and by a long measure, at least in the 20 to 30 most dynamic urban areas in Germany. Schulten sees rents rising a further 5% this year – about the same as the last two years – while purchase prices should rise by 6%, his team believes. This represents a slight slowing down, to be sure, compared to the nearly 8% price rises of the last two years. But such returns are not to be sniffed at.
There is still too little housing being built and refurbished in the right places in Germany, as the flight from the countryside and the provinces into the cities gathers pace. Potential investors are digesting the implications of the pending ‘rental brake’ or Mietpreisbremse, and a number will be encouraged to invest in a different asset class. But for those committed to property, the prospect of two to three more years of minimal interest rates will keep them from wandering too far from the industry they know.
Add to that potent mix a wave of immigrants entering the housing market at the lower end – again, in the bigger cities and housing analysts like BulwienGesa and the DIW Deutsches Institut für Wirtschaftsforschung are understandably loth, then, to sound the death knell on the residential sector just yet.
And what of the German market for commercial investment? More than €30bn in capital flooded into German commercial property last year, half of it into offices. Brokers and other advisers point to the cheery prospect of a wave of sovereign fund and Asian money flowing in to a market where domestic investors might fear to tread. Many had reason to be grateful to Korean and other Asian investors in helping them to make their numbers last year.
Indeed, what’s not to like about the recent tie-up between ‘Old Europe Hand’ Europa Capital and Beijing-based Ilex Partners, which is helping China’s leading institutional investors to find their feet in Europe’s (and increasingly Germany’s) real estate markets. Chinese insurance companies have only recently been unshackled from cumbersome legislation previously preventing them from investing in overseas property, and thery’re raring to go. Such a partnership is a two-way street, of course, and provides reciprocal arrangements for Europa Capital in booming Asia – but as a business model it looks to us like a harbinger of things to come.
Take Union Investment, Germany’s most active real estate investment manager. Last year its real estate funds under management surged 12% to €24bn, nearly all of it invested in mutual funds for private savers. As Dr. Frank Billand, the chief investment officer for the group, confirmed recently, the US is looming increasingly large on his group’s investment plans, as there simply aren’t enough assets in Germany that meet his stringent criteria. A further $2bn has been earmarked for the US over the next three years, as much again as it holds there now after fully 30 years of investing in the American market.
Union Investment, as a blue-chip investor burdened with a mandate to protect investors’ money at all costs, is obviously limited in the type of core property it can invest in, home or abroad. Overly-adventurous opportunistic investing would rapidly incur the wrath of its investors, who didn’t sign up for any buccaneering strategies with their precious pension pots.
Likewise at fellow co-operative investor Deka Immobilien, the second largest German investor and the largest domestic player, the mood of caution pervading the top management corridors is real. It will invest a net €2.3bn this year, but group CFO Matthias Danne sees the company facing peak prices and flat rents in its major markets, with little prospect of significant rent rises ahead, despite climbing capital values. Many current prices are purely driven by low interest rate levels, he believes, rather than fundamentals.
Looking for richer pickings, opportunists such as private equity investor Blackstone, whose investing nose has served it well in Germany, has been a net seller of German residential and a net buyer of commercial property since 2012 – and it isn’t queueing up to invest in Frankfurt office at 4%. It needs more, or it’ll look elsewhere. Blackstone and a raft of other investors are targeting assets that were bought at the height of the boom, and where their lenders or their cashstrapped owners are now running out of road. These include the seven stricken open-ended funds, whose offerings are withering in value each day they remain unsold, on their way to a sell-by date of 2017. For the opportunistic buyer, this is a specialist business, indeed.
When Union Investment and Deka, who have no effective limitations on the amount of money they can raise from their distribution networks, are exercising such caution in Germany, others need to double-check and then stress-test their own value-added assumptions. New entrants notwithstanding, the Chinese didn’t get to where they are today by leaving lots of money on the table for the foreigner.
