The German Property Federation is one of Europe's younger real estate trade associations, having been set up just two and a half years ago. As its chairman Eckart John von Freyend noted in an interview with IPE Real Estate in 2006, it was set up to address the fragmentation of the German real estate industry. Among the challenges ahead is the need for closer cross-border co-operation as John von Freyend explains to Martin Hurst
The vast array of different bodies representing the real estate industry, the paucity of co-operation between them and the need to present a more united front to government and others are among the issues which led to the creation of central industry associations in several countries - more recently in Germany.
Progress towards effective representation of the German real estate industry's multiplicity of stakeholder organisations has been one of the association's key achievements since it was established in 2006. "Having set up our headquarters in Berlin we have established contact and are developing our relationship with government and regulators there," notes Zentraler Immobilien Ausschuss's (ZIA) chairman Eckart John von Freyend.
Amid the hubbub of activity at this year's Expo Real in Munich he adds that ZIA now has around 100 members - mostly companies - from all parts of the real estate industry representing €300bn AUM. "The membership is still growing strongly," he says.
Another issue facing ZIA has been the pressing need to make the real estate of Europe's largest economy more investable. The first practical matter in which ZIA became involved was the development of the REIT law. John von Freyend notes: "The law as it stands is good with the exception of the exclusion of residential which is without justification and is purely ideologically motivated. But that will change - it's just a matter of time."
Currently there are only two REITs in Germany - Alstria Office and Fair Value. G-REITs were launched at the top of the market, just before the credit crunch set in. "The REIT regime in Germany and elsewhere would obviously work more efficiently if the capital markets had not undergone such a drastic change in recent months," he adds. "All those who planned a REIT, such as IVG, are holding back in the current circumstances. But the framework is there - we only need to wait another two or three years when, as the market recovers, international investors will find German REITs a meaningful investment proposition."
There is one critical difference between the business cultures of Germany and the UK which has a direct bearing on the current and future development of the G-REIT - it is called culture. In the UK it is normal for companies to sell and lease back their real estate so that they can invest the money in the core business of the company. Not so Germany. "In Germany this is seen as a sign of corporate weakness," says John von Freyend. "This mentality is changing but it will take years."
Typically, foreign investors allocate less to German real estate than one might expect given the market's size. How can we make Germany more attractive to foreign investors? "The basic structure is there - it must now be developed," he continues. "One key issue is that unlike the UK and France, which have obvious centres in the form of London and Paris, Germany doesn't have a central point so we have to focus on six or seven centres simultaneously, so much more work is involved."
A central problem is access - too few means to invest. John von Freyend stresses that in the last few years the German real estate market developed very strongly. "It has become more international - the rules are now more harmonised with the Anglo Saxon system, which is important given that historically the German market has been far less developed than Anglo Saxon markets.
After two wars and two periods of high inflation we used a system of accounting and finance that used book values for buildings, because for us buildings were used as a means of security on which to base loans. In the last few years this was all changed to IFRS with the result that buildings are now posted in the balance sheet at market value. Although this causes its own problems the end result is that much more real estate is flowing from company balance sheets into specialist real estate companies. This process has been interrupted by the finance crisis but it will continue."
As a result of this flow Germany today has much larger real estate companies than before. "We have the big open-ended funds, closed-ended funds and major listed companies," he says. "They are now very professional but the industry is still nothing like as well developed as the UK or US markets. This is one of the main reasons why foreign funds are underweight in Germany, but they will invest more and REITs will play a significant role."
There is also the matter of double taxation. "We want to ensure that foreign investors who already pay tax in their country of origin on their investments in Germany do not then pay German taxes as well," John von Freyend notes.
All important is when the market will recover. "We will have at least another 12 months of very difficult market conditions," he says. "We would have seen a downturn in real estate even without the credit crisis, but the lack of financing exacerbates the downturn and means it's difficult to predict when the market will begin to recover."
But John von Freyend stresses that the market must take its course. "Economic cycles are a fact of life and we are now in a more difficult phase. Government can't and shouldn't intervene in this process. This only increases the national debt and does not have any concrete results."
He adds: "Germany is in a better economic situation than the UK - German business reorganised itself successfully. Is it too export dependent? I would say it is export intensive, and that due to the fact that Germany has much stronger links than before with the rest of Europe which accounts for 80% of exports, it is much less affected by a downturn in the US than was the case in previous downturns."
Confidence has been rocked recently by a deepening of the banking crisis. In October a credit line was extended to the bank Hypo Real Estate, Germany's second largest commercial property investor. Was this a good thing? "One side of me thinks it would be better to let a bank which has based so much on speculation go under," John von Freyend says. "However, we must also think responsibly in terms of the knock-on effects that such a decision could have. I think the decision was right in the circumstances."
Will there be more such cases? "So far there has been only one, and that has now been cleaned up. But people must not be led to believe that all such cases will be rescued by the authorities and bailed out by the taxpayer," he adds.
How can we avoid these problems in the future? Should the regulator act? "I'm not a financier but I think the reaction to bring in more regulations is not always the best way," John von Freyend says. "There are endless regulations - especially in the finance system. It is important to ensure that regulation addresses all the key risks; we must be careful not to over-regulate. Often deregulation is more far-sighted and a better way to manage risk than the regulation of every last detail."
Sustainability continues to grow in importance in spite of the downturn; regulation continues to march on, although the pace may be slower until markets recover and optimism returns. One issue is that different countries bring out new energy efficiency standards for buildings and they are all different. "Harmonisation will be achieved through a long process of discussion," says John von Freyend.
He adds: "We also need to make sure that we don't just focus on new buildings because most of the potential improvement in the environmental performance of real estate lies in improving the green performance of existing buildings.
The importance of sustainability in new build from an investment perspective is a relatively easy argument. The challenge will be to convince the investor of the case to invest in improving existing buildings. We could use tax incentives and special depreciation rules to encourage such improvements."
Sustainability, REITs and double taxation are examples of issues where co-operation between real estate industry bodies across Europe will pay dividends. "Co-operation with other bodies is important, but we can still improve," says John von Freyend.
"There is a new openness to this and I think we should exploit this by working as closely as possible with the British Property Federation and our other counterparts in France, Italy and elsewhere. I have worked in Brussels before and my experience there makes me convinced that we urgently need a European Property Federation - we could all benefit from that.
We have one currently in the form of the EPF but from the evidence so far I'm not sure that it can provide effective leadership in Europe. It would be good if Business Europe - the organisation that brings together the national employers' organisations such as the CNPF in France, the CBI in the UK and the BDI in Germany - could set up a European real estate unit."
European co-operation brings us back to the subject of the REIT. John von Freyend stresses that a key task of a European real estate body would be to assess the future of the European REIT. "Whether that is an EU-REIT or a system whereby countries recognise each others' REIT regimes is up for debate," he says. "I think a system of mutual recognition is achievable because the existing REIT regimes in Europe are so similar. In Germany this matter is the subject of intensive discussion and we hope to decide which model is preferable in due course."
If the G-REIT is to progress towards a system of mutual recognition, possibly resulting in a EU-REIT, there are a number of technicalities that have to be dealt with. When G-REITs were first launched last year a fiscal allowance in the form of an exit tax break was provided to encourage companies to move their real estate from their balance sheets into the investible market.
John von Freyend points out that due to the market conditions which have resulted in only two REITs being established almost no use has been made of this tax break, which expires next year. "So we need an extension to at least 2012," he says. "We are currently lobbying government for this."
Another important goal is to ensure that no investor may acquire more than 10% of a G-REIT - the maximum allowed under G-REIT regulations.
At the moment management of a G-REIT cannot prevent a main shareholder from acquiring more than 10%, which could mean the loss of REIT status for a company. "The law regarding maximum voting rights must be improved whereby any change that would increase the shareholding of a given party to more than 10% must be subject to board approval," he notes. "Otherwise one investor could jeopardise the whole company. These are things we can still organise before the REIT market recovers."