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Regional focus: One of the few active operators
By Claer Barrett, property correspondent for the Investors Chronicle
Published: October 3 2008
German investors have been popular among UK property owners looking for a quick sale, but the
country’s own real estate sector will not be immune for the Europe-wide slowdown.
German banks are among the only institutions in Europe still willing to finance real estate deals, and
the country’s cash-rich open-ended funds dominate global property investment.
The biggest economy in Europe, Germany’s dominant export performance recorded solid growth in
gross domestic product in 2007, keeping up the momentum in the first quarter of 2008.
However, the economy performed poorly in the second quarter, contracting by 0.5 per cent.
The commercial property market mirrors the gloom. Research compiled by property consultancy DTZ
shows that investment transactions in the first half of 2008 totalled €12.1bn ($16.8bn) – a 55 per cent
fall on the previous year – as the crunch keeps debt-driven UK and US buyers away.
As in London, falling transaction levels are quickly translating into lower asset values. DTZ believes
yields on German office properties have moved out from their historic low of 3.5 per cent in 2007 to an
average of 4.65 per cent today, and are likely to SOFTEN further.
Despite the worsening property outlook, German bank lenders have risen to increased prominence in a
market starved of credit.
As well as the big three – Eurohypo, HSH, and Hypo Real – the regional banks, or Landesbanken, are
muscling in on the action on the strength of their covered bond method of lending.
Known as the Pfandbrief, the method of repackaging property loans and selling them on to
institutional buyers is more highly regulated and requires less leverage than the similar commercial
mortgage backed securities (CMBS) model, which has suffered death by credit crunch.
Crucially, this gives German banks liquidity that their European counterparts cannot match. And the
result? While few CMBS transactions have been executed, Eurohypo research shows that in the past 12
months, €58.5bn of Pfandbrief loans were issued.
Across the world, the German open-ended funds remain one of the few active operators in the real
estate investment market that have the cash and the nerve to execute transactions.
In London, the German fund DEKA recently finalised its £230m ($407m) purchase of Moorhouse, a City
office building, representing a yield of 6.4 per cent. This has come as a shock for a market used to
seeing transactions graze the 4 per cent mark little over a year ago.
This is quite a turnround from 2006, when, following a series of corruption and valuation scandals, the
open-ended funds engaged in the mass-selling of property assets, as investors withdrew their money.
However, the profits generated by selling assets near the top of the market attracted investors back in,
and the cycle appears to have turned in their favour.
“The German funds have always liked London because of the long leases with upward-only rent
reviews, and the fact that the tenant is liable for the upkeep of the building,” Mr Farquhar says.
“Provided that it is a core asset that ticks all those boxes, the thought of falling values is not stopping
them from buying now.”
The ambitions of the open-ended funds are not limited to London.
CB Richard Ellis research estimates that the funds collectively have €22bn to spend on property. The
Asia Pacific region is a big target for many, including RREEF, which is targeting investments in China
and Malaysia, and Union, which has already invested in Japan, Singapore and South Korea.
However, ironically, actual German investment vehicles are struggling. Real estate funds listed on
London’s Alternative Investment Market have performed particularly badly because of their often high
levels of gearing.
“When these funds floated, high debt levels were considered desirable in order to drive high equity
returns,” says Mark Young, real estate analyst at Oriel Securities.
“However, these high levels of indebtedness are now a cause for concern, leading to severe de-ratings
in recent months.”
Develica Deutschland, a German commercial property investment fund, is the biggest faller to date. It
is 286 per cent geared, and has lost 82 per cent of its value in a year.
A separate Aim fund, Deutsche Land, only became fully invested in December 2007, meaning that
much of its investment portfolio of 54 commercial assets was acquired at the top of the market.
Activist investors have been sniffing around the sector because of the deep discounts to net asset
value, but now the powerhouse is slowing, German real estate is less of a tasty prospect.