Focus on Germany's core property has 'touch of fundamentalism'

GERMANY - Investor appetite for German core property amounts to “a fetish” with “a touch of fundamentalism to it”, according to IVG Immobilien managing director Thomas Beyerle.

Describing the tendency to focus exclusively on core as symptomatic of a lingering sense of crisis, he said it mirrored “a collective lack of sensitivity of the sort required for a sound risk assessment”.

Although macro factors have up to now supported the perception of Germany as a relatively stable market, he said in a note that positive take-up trends and rental growth could be a thing of the past.

Beyerle told IP Real Estate that domestic investors assumed their international counterparts would pay any price for German assets.

“That’s realistic - sometimes - but there is a lack of willingness to buy on the other side of the street,” he said.

“There is still a lack of feeling for risk in real estate. Investors are only interested in either core or supercore.” 

Although international investors might be expected to have a stronger appetite for non-core assets, he said, they were currently chasing the same prime assets that make up only 1-2% of the overall market.

Overseas investors currently make up 33% of transaction volumes in the German market.

IVG’s Market Tracker, published last week, showed that seven major cities accounted for more than 53% of market activity worth €23.5bn last year.

Prime rents rose on average 2.6% last year.

“It isn’t clear how they plan to make any money,” said Beyerle. “There’s a lot of money coming into the market - but it’s only interested in prime locations. Everything else is secondary.

“You’d get very little for an asset a hundred metres outside the banking district in Frankfurt. Prime prices are rocketing, but there is virtually no activity outside prime.”

Beyerle forecast that prime yields would drop from their current level - hovering around 4.9-5% - to nearer 4%, amid a continuing yield spread between prime and secondary.

“The ocean of money from international investors will increase pressure over the next 24 months,” he said.

“To create value, investors will need to look at other locations and at repositioning assets.

“But for the time being, core is a super-fetishistic segment, and on the other side of the street, you have a great nothing.”