EUROPE - Germany, despite having the largest real estate market in Europe, remains a difficult sector to break into for foreign pension funds due to high supply levels and a difficult regulatory framework, according to Standard Life Investments (SLI).

Mark Meiklejon, investment director at SLI, said the German real estate market was currently over-supplied and offered less flexibility than other European countries such as the UK.

"While some investors are seeking to invest in both residential and commercial properties in Germany, we do not see these sectors as highly attractive, mainly due to the fact the regulatory structure of leases offer limited flexibility, and they are becoming more and more over supplied," he said.

"We now see a big gap in the market, with some sectors appealing more to us, such as logistics."

Meiklejon compared the German market with the UK, where he said the bulk of the demand was at the very core end of the market.

"Offices and commercial properties in the UK, and more especially in the South East region, offer a very attractive investment return, with high yields due to high level of demand," he said.

Other European centres such as Paris and Stockholm also benefit from the same positive demand, according to SLI.

Last month, the ZitelmannPB Real Estate Stock Barometer of 14 analysts' views of the German market showed that some investors are re-thinking their approach to the German commercial market.

Investors were also pessimistic about the residential market, with THProjektmanagement managing director Thomas Herr urging investors to focus on "furtive" risks in the development market, including construction-related cost increases of 15% since 2009.

However, some analysts and fund managers still see the German commercial real estate market as one of the most attractive in Europe.

As a result, the first half of the year saw some foreign pension funds such as the Canada Pension Plan Investment Board stepping into this market.

The Canadian pension plan acquired a 50% stake in a German regional shopping and leisure centre, CentrO Oberhausen, through a joint venture with Stadium Group.

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