GERMANY - Interest in domestic residential property funds is rising among German institutional investors, according to German real estate fund manager Patrizia Immobilien.

"There is a rethink happening in the market compared to 2006 when German investors mostly sold off their domestic residential property holdings," explained Klaus Schmitt, chief operating officer at Patrizia, which has €2.5bn in assets under management.

The comparatively low return expectations in the domestic market is said to have driven many German investors to seek better performance in foreign markets, even though some investors are concerned about the volatility of their foreign property assets.

They are now returning to the German market as a result, as it is considered to have safe investments and investors "are prepared to accept lower, but stable, returns on risk-free products", according to Patrizia officials.

The interest now lies in indirect investment via fund - an arrangement that also offers the diversification many investors are looking for - as many investors outsourced their property management a few years back, according to Patrizia.

Andreas Menke, a spokesman for the firm, noted investors were interested in residential real estate because the risk is more diversified than in the retail commercial property market.

Schmitt said investors were less worried about the implications of the financial crisis on the residential property market, compared with the commercial sector where investors are already encountering tenants who are unable to pay their rent.

Foreign investors still remain cautious about the German market as many were leveraged and do not yet have the liquidity to go back into the market.

According to the real estate investment house, investor interest is in German cities with positive demographic development such as Munich, Cologne, Hamburg or Frankfurt.

People are still moving into these cities because of the work opportunities yet not enough new flats are being built which increases property prices, according to Patrizia.

On the other hand, Schmitt stressed there was no "average rent development in Germany" but that every region developed quite differently.

Marcus Cieleback, head of research at Patrizia, is convinced that "there is still a lot of potential for institutional investment in the domestic housing residential real estate sector."