Much has been written about the mood at this year’s Expo Real in Munich, which was palpably positive. But, more importantly, the annual property convention highlighted some of the contradictions surrounding the real estate market in Germany (and in other countries) today.

German property has been the target of heightened capital inflows in recent years. Investors have been enticed on two levels: Germany’s macro-economic stability; and attractive yields offered by property investments generally.

Most investors today would agree prime offices in Germany are now too expensive. Much of the talk at Messe München was about greater appetite for risk and investors looking beyond the first-tier cities. AEW Europe encapsulated the theme with a research paper it released that week identifying value outside the core markets. “As concerns about the euro-zone crisis dissipate, investors are prepared to move up the risk curve by looking at markets that they overlooked during the financial crisis,” said Sam Martin, head of research at AEW Europe.

But the debate around whether German real estate offers value centres on the housing market. The real success story for German property investors in recent years has been the residential market, especially the multi-family sector. German pension funds have flooded into the market looking for attractive income returns and inflation protection.

Patrizia, which has a number of German institutional clients, has been particularly active. In 2012 it acquired 21,000 housing units owned by SüDeWo (formerly LBBW Immobilien) for €1.4bn and a 92% stake in the listed GBW portfolio of 32,000 housing units in Bavaria for €2.4bn. During the week of Expo, Patrizia announced that it planned to construct more than 1,000 apartments on a former glassworks site in the Gerresheim district of Düsseldorf.

Jochen Reith, group head of institutional clients in Germany, Austria and Switzerland, told IP Real Estate there were still great opportunities to be had in the German residential market, particularly if investors can gain access to large portfolio deals.

The big portfolio deal that was being talked about was the proposed takeover of Berlin residential company GSW Immobilien by larger rival Deutsche Wohnen. Such has been the vibrancy of German residential market that warnings of market bubbles have emerged at various points from various commentators. The GSW/Deutsche Wohnen merger only added fuel to their fire.

Reith was adamant there was very little risk that a housing bubble will emerge in Germany.

The view is not shared by the Bundesbank, which two weeks later published a report on the “possible over-valuation of residential property in German cities”. It highlighted certain areas of Berlin, Hamburg, Cologne and Düsseldorf as having risen by more than one quarter since 2010, raising fears “of a broad-based property price boom”.

At Expo Real, Axel von Goldbeck said prices for apartments in Berlin were very expensive, but opposed any thoughts of a bubble. “Residential is not cheap anymore, not even in Berlin,” he said. “We can’t talk about a bubble by now, but it is completely unusual to pay  3,000 to 4000 euros, sometimes 5,000 euros, per square metre for an apartment in Berlin.”

Rents have also been increasing for a number of years after what Von Goldbeck describes as “a long period of stagnation”. He said: “That is actually a very normal process, but most Germans are adjusted to very low rents. They are getting nervous when they are having to pay eight, nine, 10 euros per square metre in Berlin, when Berlin used to be a very low priced area, regardless of where you actually lived.”

This is also having political implications. There is widespread agreement among coalition parties in favour of proposals to place a 10% cap on rental increases. “It is very likely that we will have some sort of rent restrictions in Germany,” Von Goldbeck said. “It is completely unacceptable for us, of course.”

He adds: “In a city like Berlin you could live for five euros per square metre. It is an inadequate comparison perhaps, but if you look at London, if you look at Paris, Madrid, any comparable big cities, that is ridiculous.”

The cap would have implications for institutional investors and their love affair with the sector. “They should be concerned,” Von Goldbeck says. “Rents have a direct impact on values, and the expectation is that prices will go up for a couple of years in Berlin. They will go up but much slower than they used to. So that is something that has a direct impact on investment decisions for institutions.”

Somewhat mirroring the investor market, the lending industry was also showed to be increasingly competitive. The results of Germany’s first De Montfort-style property financing study were revealed at Expo Real and showed a substantial increase in competition from lenders.

The ‘German Debt Project’ launched last year by the International Real Estate Business School (IREBS) analysed €146bn in loans, capturing around 50% of the lending market in Germany.

The project – which was initiated by Real Capital Analytics (RCA) but now involves DTZ, Jones Lang LaSalle, Savills and Bulwiengesa – aims to increase transparency and provide Germany with something comparable with the De Montfort study in the UK.
The project’s first results showed that the commercial lending market in Germany declined by €12bn in 2012, despite a strong increase in transactions. The report said growing competition for the financing of core assets would lead to declining margins and increasing loan-to-value ratios between 2013 and 2014.

There were more signs at Expo Real that competition from banks and alternative lenders would remain high, as Allianz Real Estate announced it was planning to lend €5bn, and Union Investment was revealed to be the latest real estate fund manager considering a debt investment strategy.

Roland Fuchs, who took charge of Allianz Real Estate’s European lending programme in October, said: “Our project pipeline is full, and we have the necessary resources to carry out high-volume property-financing transactions over the next few years.”

He said the investor would act as a direct investment partner to team up with established banking partners to provide club deals rather than directly “replace banks or quickly seize market shares from them”.

Christoph Schumacher told IP Real Estate that Union Investment Institutional Property was exploring launching a real estate debt fund after identifying growing interest from investors. It was at an early stage but would be likely to entail partnering with a bank to provide financing at LTVs of 60-75%.