Real estate in Germany is attracting more international investment than ever before. Barbara Ottawa looks at the implications

One off-the-record comment by an investor attending this years’ iii-investment symposium on indirect real estate investments was: “Interesting market but already a bit crowded, isn’t it?” According to IPD’s global property index, Germany has overtaken the UK as the most sought-after investment market for real estate investors.

Similarly, CBRE noted that, while London is again the most attractive city in Europe for investors, it is followed closely by Munich and Berlin, making Germany the most attractive country – and more than one-third of the surveyed investors confirmed this.

A report by IVG calculated a more than 50% increase in transaction volume in the office segment in 2012 to around €10.7bn. The purchases were again focused mostly on the seven largest markets, which represented 86% of the office investments.

This brought down initial yields in prime office locations from 4.99% to 4.84%, on average over 2012, according to IVG. Nevertheless, the spread on 10-year bunds “still rose by an average of 335bps due to sharp declines in interest rates”, the report said. It added that the prime yields were “close to the low of 2007”, a year that many analysts, in hindsight, have called a time of “exaggeration” for the German market. For 2013, IVG expects the spread to tighten as bund yields are forecast to break the 2% barrier.

In the first quarter of 2013, the demand for German office properties fell considerably compared to the start of 2012, but Colliers International expects the 11% drop in the transaction volumes to be temporary. The decline was most pronounced in Berlin, Frankfurt and Düsseldorf; the only major cities reporting an increase in transactions were Munich and Hamburg thanks to several large rental agreements.

Consensus among analysts is that the vacancy rate, especially in the prime locations, will decline slightly more after having reached a 10-year low at the end of 2012. “Despite the numbers of new constructions increasing again since their all-time-low in 2012, the share of speculatively developed office properties remains low,” said Andreas Trumpp, head of research at Colliers International. For 2013 and 2014, the real estate company calculated that around two thirds of the €2m sqm new office space coming to the market is already pre-let.

Neither will the dissolution of the formerly open-ended German real estate funds (GOEFs) be any great help in satisfying the demand for German core property, since many of the assets that are being sold off piece by piece, were invested outside Germany.
Furthermore, not all of the held properties are offices. SEB Asset Management sold properties for €300m in Berlin from its SEB ImmoInvest fund. At the beginning of the year, SEB Asset Management closed a deal with Dundee International REIT on a German office property portfolio for €420m. Nine assets out of 11 in total were from the fund. Other markets like the Netherlands might be suffering more from this as GOEFs might be selling properties worth as much as €1.4bn in this market alone this year.

It is almost certain that property yields all over Germany will remain comparatively attractive this year, but maybe even more so in secondary locations as these cities are not covered by most international investors that lack local expertise.

According to INREV research, the share of German investors moving into real estate funds has been decreasing for three years, mainly because of “diverging interests” between investors and fund providers. While 40% of the investors said they would be looking into value-add strategies, only 10% of fund managers intend to offer products along that line.

A similar disparity regarding GOEFs was identified by rating agency Scope. While the company’s research showed “considerable interest in residential property”, there was currently only one open GOEF on the market specialising in the sector. In the other open GOEFs, the share of residential property was “marginal”, Scope noted.

A one-off opportunity to secure what might be the last major core residential portfolio in Germany was seized by Patrizia in April. The real estate company bought GBW, a subsidiary of regional bank BayernLB, and its €2.5bn portfolio comprising 30,000 flats in the German province of Bavaria.

Overall, the residential market in Germany is tightening as fewer apartments are being built than are being sought – at least in the conurbations. According to research by Patrizia, the “gap between supply and demand in the rental sector is increasing” as the number of apartments being built is not increasing in line with population growth.

However, IVG noted in its most recent paper on the German market that “demographic challenges due to shrinking populations outside the conurbations” are among the risks investors have to consider in the German market, along with a “bottleneck in real estate financing due to Basel III” which could increase distressed sales and a mid-term upward pressure on the initial yields as interest rates are rising again.

A comparatively strong outlook for the domestic industry will help countries like Germany, the Nordics and the UK “weather the short-term volatility and the currency woes in the euro-zone better” than other countries, according to Robert Stolfo, senior director, client portfolio management at Invesco Real Estate.

This also shows in a heightened interest in German logistics and warehouse properties identified by CBRE. In the first quarter of 2013, €641m was invested in the sector, representing a year-on-year increase of 84%. “The share of logistics properties in the total commercial transaction volume climbed by almost three percentage points to 10%“, CBRE added. The investments were mostly in distribution warehouses followed by storage and production halls.

An improvement in the global economic outlook might slow down investor interest in Germany as a safe haven and Invesco Real Estate cautiously forecasts a possible increase in risk appetite for the second half of 2013. But cities with a “dynamic, strongly export-oriented economy like Munich” should profit from the expected economic recovery outside Europe, Stolfo added.