Uber alles once more Germany has engineered a remarkable turnaround and now sees one in four investments in Europe. John Neale finds out why
The renaissance of Germany is one of the great property stories of the past few years.
According to Robert Orr, head of Jones Lang LaSalle’s international capital group, Germany now accounts for around 25% of all European property investment transactions, compared with around 10% two or three years ago.
He adds: “We have seen quite a dramatic increase in transaction volumes over the past three or four years, from $10bn to $50bn last year. We have already seen $27bn of transactions for the first half of this year.”
Much of the initial investment interest in the country was driven by the incredibly low borrowing costs on offer, and the high yields available on reasonably securely let stock – a no-brainer for debt-backed investors.
Also, while foreign buyers had seen the recovery in the German market, many domestic funds were still wary of their homeland, having burned their fingers in the 1990s and subsequently diversified internationally. They were slow to see the upturn at home, producing a window for foreign buyers. Now they are buying at home again, pushing yields down.
Orr says: “Highly-leveraged buyers are struggling everywhere in Western Europe, and there is a reverse yield gap. Even if they can find the odd high-yielding property, there is a big question mark over whether they can get the funding.
“The cash buyers clearly recognise this situation and are looking to use their cash position to their advantage, and we are seeing some pricing pressure on deals in Germany – although the withdrawal of the debt buyers has already called an end to yield compression.”
This does not mean, of course, that there are no longer good opportunities for investment in Germany. Quite the contrary: rental growth is definitely on the agenda.
Peter Schlepper of CBRE’s Berlin office says: “It is the main driver in the market now. The rents being paid in German cities, certainly compared with similar cities in Europe, are still relatively low. But we are now seeing the red carpets from the landlords being rolled up and rents starting to rise.”
Most commentators agree, however, that rental growth is not automatic. It is a matter of finding the right location and being able to add value to the investment.
Dr Paul Kennedy, director of European research at Invesco Real Estate, says: “Germany is not a macro play. If you do that, you will be led to the major cities, where a large proportion of buildings are correctly priced or overpriced. You need to get exposure to the country – go in as a local, look at some of the smaller buildings. You need to be prepared to work at the buildings you acquire, to add value.”
Retail stock
Catalyst Capital is one company that has invested heavily in the German market, and continues to do so – albeit with particular attention to the retail sector. Much of the retail stock is in need of improvement, and there are signs that consumer confidence is increasing.
Partner Tony Yiannakis explains: “The majority of what we have bought have been shopping centres. There has been a complete lack of confidence among German consumers for a number of years now there is a sense that things are getting better.”
Amid all the bad publicity regarding the economy (see panel), it is easy to forget that this country is, after all, the natural centre of Europe.
Knight Frank partner Richard Laird says: “There are certain inherent features of the German market that will continue to be of interest to pan-European investors. It is the most populous country in Europe there is tremendous depth to the market and it is a federal republic, meaning there is not just one major capital city and a much smaller secondary city, there is a variety.”
