German real estate is often described as an unexciting, stable core market. But with the market correcting, investors are now seeing it as an opportunity. Barbara Ottawa reports

The market is more interesting than it has ever been," says Nikolaj Stampe, head of real estate at Danish pension fund PKA. "We still believe in the German market in the long   term and the current situation offers possibilities that we haven't seen in the last six months." Asset managers are taking a similar view, generally agreeing that Germany is still interesting for foreign investors, and not only because it is the largest economy in Europe.

"A buyer market will develop in Germany," says Christian Bomhard, head of real estate at Feri Wealth Management. "This is not a crisis of the real estate sector but a financial crisis which has an impact on the real estate sector as far as liquidity is concerned," stresses Martin Lemke, managing director at Patrizia.

This sentiment was echoed several times at Expo Real in October. Thousands of investors and other interested parties gathered to get information on real estate investments and asset managers were hard pressed to field all the questions.
"Despite its slowing economy, the country is benefiting from job growth coupled with robust demand for office space," explains Bernhard Visker, board member at HSH Nordbank.

"The German real estate sector is still sound and the office rental market is better than ever before. In cities like Munich offices are being built after years in which there was very little construction," says Lemke.He admits that a prolonged recession could damage the office market. "But will it really be that bad? The dollar has already appreciated again and Germany will not come under as much pressure as other European countries."

Henning Klöppelt, managing director at Warburg Henderson, notes that "together with an economic slowdown the German market could see a parallel slowdown of investment in office space which would influence the market. However, at the moment the German property market is still very healthy. The fall in prices is not massive - especially compared with that seen in other European countries.

But it has been necessary - otherwise investors might rather aim at other markets with higher yields. We expect a further increase in yields of around 60 basis points within 2009."

Bomhard sees less "necessity for correction" in Germany because prices did not increase as much as they did in other European countries, notably the UK.
So for the most part Germany will remain a "robust, boring market", as Bomhard described it - but exactly that is of interest for some investors.

"Germany is the classic core segment with safe returns. We did not have a boom, only a sideways movement," adds Lemke. "The biggest uncertainty is how the crisis will continue. Highly leveraged buyers are pulling out of the market but pension funds are still here."

Visker notes "the volume of transactions has declined, although it is still above the long-term averages" and that highly leveraged investors "have become significantly more restrained because of the tighter conditions for borrowing. Private equity investors invested a mere €4.5bn in the first half of 2008, which is just under half that in the same period of last year."

HSH Nordbank adds that this money came from only two large transactions. One of them was Goldman Sachs's Whitehall fund's purchase of Landesentwicklungsgesellschaft Nordrhein-Westfalen for €3.5bn. The other was Lone Star's acquisition of a package of properties from the Deutsche Post.

"A remarkable achievement given that the market situation for private equity companies is regarded as extremely difficult at present," Nordbank commented on the Goldman Sachs deal. Bomhard too notes that "many foreign investors are gone now" - especially highly leveraged ones that had been on a shopping spree several years ago.

"Sometimes one has the impression that in the acquisition process they just flew over the objects with a helicopter and then bought an area - and certainly at ambitious prices," he explains. Investors taking the long-term view are rather less concerned by day-to-day movements, according to Visker. "Instead they exploit these cyclical fluctuation by taking up new investment opportunities,"
he says.

Klöppelt  echoes the sentiment. "There is a high uncertainty but generally the interest has not declined - among institutional investors it has even increased," he says. "Institutional investors still have some catching up to do when it comes to real estate so their interest in unbroken - and they are looking for quality."He adds: "The purely opportunistic buyers, especially from the US, are holding back but they will return on a lower level next year."

Stampe confirmed the fund was currently slightly raising the percentage of German real estate in the €14bn portfolio to around 10% of foreign real estate exposure, which in turn makes up about 2% of the fund's total investments.

PKA confirmed it is only interested in investing in the residential sector in Berlin "because we prefer to invest in a market which we can evaluate and we think it is better to concentrate on one segment rather than the whole market."

In addition, Patrizia stressed that its joint venture with APG, the investment arm of Dutch civil servants fund ABP, and Danish labour market pension fund ATP was still running and in September new purchases were made for the portfolio, which has now reached €400m, with a final aim of €700m.And there's another challenge in the market, as one source notes: "The problem which insurance-based retirement vehicles are facing this year is to achieve their minimum returns.

They need investments which are offering good returns while also being within their investment restrictions - and those opportunities have become sparse." However, several asset managers think they found these opportunities which has led to launches of various new funds for institutional investors over the past few months - most of them in very specific areas.

DTZ, together with Danish Euro Ejendomme, just launched a new hotel fund for German and European institutional investors with a target size of €500m. "The fund will invest only in hotel operators with high credit ratings with long-term rent contracts," DTZ explains. Investments will be made into hotels rated two to four star in German-speaking countries. The placement of the fund will start next year, with expected returns of 8% over the duration of the fund. 

German investment company Quantum Immobilien wants to invest up to €250m in car parks in Germany and the rest of Europe using institutional capital. City Parking is the first real estate Spezialfond in this segment in Germany and it aims to reach an 8% to 10% annual return. Two parking houses in Regensburg and Bremen have already been purchased.

IVG recently started a special subterranean storage facility fund - also for institutional investors - with a total volume of €1.7bn. It has sold 70 of its own subterranean oil and gas storage facilities to the fund, 30 of which are still under construction. "The interest in oil and gas storage facilities will increase," IVG notes, and prices being paid are proving it right.

Warburg Henderson expects more sales and a drop in prices, which should mean new purchasing opportunities for its Deutschland Fonds Plus with a target return of 10%.
Regional variations in Germany also need to be considered.

According to HSH Nordbank "only the Munich market is considered to be overvalued" and it does not expect "any major movement" before 2011. It also notes: "In cities such as Frankfurt and Düsseldorf the investment risk has fallen slightly, whereas in Munich and Hanover it has increased."

In Munich and Hanover, HSH Nordbank expects returns to rise from 4.5% to 5% "for price-related reasons, with the investment risk staying at mid-level".
Definite winners of the financial crisis are open real estate funds, which saw net inflows of €5.8bn in the first eight months and are now holding around €90bn, according to figures released by the German investment association BVI.

However, few open property funds are focused on investing in Germany. Is this because of tax issues and a lack of suitable vehicles? The G-REIT sector is stagnant. So far only two have been launched - one by Alstria Office REIT AG and one by Fair Value REIT AG - since the law creating the G-REIT was passed in early 2007.

"I believe 90% of the hesitation can be explained by the credit crisis," says Klöppelt. "The REIT stagnation is connected to the market situation and a lack of trust in the markets but the structures will recover over the next months. It's not a structural problem but a problem of a lack of trust in these vehicles. At the moment, non-listed products are more sought after."

Lemke is also optimistic. "REITs always take some time to develop. We have already seen that in markets which now have a flourishing REIT sector," he says.
But Bomhard is less convinced about G-REITs. "Everyone had been waiting for the German REIT market but it is a toothless tiger, as it does not allow residential properties built before 2007 to be included," he says. "The creators of the vehicle underestimated the power German tenants are granted by law.

Some large companies bought vast amounts of housing, pre-empting REIT legislation, and are now faced with high maintenance costs." Some investors might find it difficult to get the funding for large investments in Germany - especially after the near collapse of Hypo Real Estate which was only saved in the last minute.

Visker thinks the effects are already visible: "It is becoming clear that the financial crisis is also affecting the commercial real estate markets. Germany experienced a huge upswing in recent years. There are increasing signs pointing to a slower trajectory of the markets. Real estate pros also still remember the last German property crisis well. We will not be seeing any more record revenues from leasing offices or rising rents in the near future."