With tight supply in bigger cities, investors are looking to Germany’s wealthy regions for value.
With tight supply in bigger cities, investors are looking to Germany’s wealthy regions for value.
‘The phrase we use is “don’t fear the second tier”,’ Andrew Allen of Aberdeen Asset Management told PropertyEU's Germany Investment Briefing earlier this week.
It was a sentiment that resounded across the panel. With supply tight, value limited and a swell of overseas capital into the big seven cities, investors are moving to Germany's wealthy regions and even third-tier destinations.
‘The best returns in Germany are in B locations if you use your market knowledge,’ said Thomas Dörschel of Colliers International. ‘Invest into the best locations in office, residential or retail or enter into early stages of development.’
Kai Schubart of Corpus Sireo Asset Management was equally enthusiastic about provincial possibilities. ‘We see more investors in prosperous regional areas,’ he said. ‘There are good opportunities to invest. You can buy smaller assets together: managed core possibilities, but there are also very interesting developments offering some interesting yields given the risk, which is very low.
‘You have opportunities to invest in stable investments but do have to have local access to that and know what to do with this real estate,’ he added.
FOREIGN CASH FLOWS
This rush to the regions is driven by scarcity of supply in Germany’s big cities, partly as a result of the influx of overseas capital. ‘We see a lot of foreign investment coming to the German market,’ said Dörschel of Colliers. ‘Asian money is looking for core only, diversified US money is looking for opportunistic but also deals like Hamburg’s Harbour City, where American investors bought very good assets for core prices.’
And it seems that the overseas appetite for German assets has not been hurt by broader geopolitical issues. ‘The Ukrainian crisis does not affect the German investment market,’ said Dörschel.
And recent negative economic rumblings – such as the OECD suggesting the European Central Bank begin quantitative easing after lower than expected German growth – are yet to have a significant impact.
‘We’re buying assets,’ said Aberdeen’s Allen. ‘So as much as the background set by the national economy is important, we can’t buy a derivative on the German property market, we’re not buying the German economy, were buying a specific asset.’
A RESI BUBBLE?
Even so, there are some reasons for caution. The Deutsche Hypo Index, which measures sentiment in the German real estate market, fell 11.7% in August from July, a drop not seen since 2011.
The index, which surveys 1,200 players from across the German real estate market each month, saw a decline in sentiment in all sectors. Residential, typically the most stable sector in the index, fell back 10%.
‘On aggregate we think German residential is a bit overpriced but nothing to worry about,’ said Allen. ‘At local levels there are plenty of things to do in a big dynamic market.’
Schubart of Corpus Sireo agreed. ‘The situation hasn’t changed too much in last six months,’ he said. ‘There is high demand and lack of supply. The trend is going in the direction of more investments, especially from German investors. We see stable impact, stable growth of capital coming in and don’t have too many fluctuations.’
But residential investors heading beyond the core seven cities do need local guidance, said Markus Beran of the bank Berlin Hyp. ‘We have a demographic change in Germany, the age pyramid is upside down. There are definitely areas you should not go, areas that are losing population. For example, in some parts of the south they pay you a premium if you tear down dome residential buildings because of the oversupply of the market.’
Allen agreed on the need for caution when seeking residential investments. ‘Is the whole market good value? Absolutely not,’ he said. ‘There are huge differences. In parts of the big six cities at the top end of the market, we’re very nervous that it’s not an area institutional investors should be touching, in our view. But while the German population is not growing very fast, it is in some cities, with young professional migrants and young families that exaggerate population growth. Overall, German residential is absolutely worthwhile.’
That broad confidence was shared by Dörschel of Colliers. ‘There’s a trend to invest in residential. We’ve seen massive investments in a lot of cities, especially the top seven but also in B locations. Yields were decreasing massively, especially for high quality new buildings.’
RETAIL AND INDUSTRIAL SURGE
‘We have seen, compared to last year, a growth in transaction volume in logistics and light industrial compared to last year of roughly 25%,’ said Ulf Buhlemann of Colliers International. ‘It is an asset class that is becoming more acceptable for institutional investors.’
And the restrictive nature of the German retail sector is also a big plus, according to Nic Fox of Europa Capital. ‘What we love about retail in Germany – and outlets are the top of the tree in this respect – is the tight planning restrictions,’ he said. ‘It’s nigh on impossible to get planning consent for an outlet centre in Germany, for all the right reasons, because planning authorities and retail trade unions are very cautious about where they put their retail supply.’
Dörschel noted that the ‘logisitcs market is directly connected with retail, so we see decreasing yields. Locations and lease agreements are key for those investments and the number of specialist funds is increasing in Germany.’
For Fox, however, ‘we think we can only make money out of logistics by developing it. And my issue with industrial as opposed to logistics is it has proved not to be especially liquid. In certain cycles in market, the Brits, Irish, Israelis and Australians have been buyers and when they disappear it is not liquid anymore.’
OPPORTUNISM AND DEBT
Liquidity is less of an issue for banks, but the appetite for risk may not be keeping up with the demand of creative investors, the delegates heard.
‘The German lending market is quite competitive and liquidity is not an issue,’ said Beran of Berlin Hyp. ‘The capacity is there, whether the risk appetite is there is a different story. There are newcomers to the market who tend to fill gaps in this risk curve and say to banks, “can we have a junior piece on top of senior lending”, but most transactions seem to be straightforward senior lending up to normal levels 60 to 70 LTV, in residential maybe 75 LTV’.
Creativity is being further hindered by the reluctance of ‘bad banks’ to shift their assets. ‘The issue in Germany is the recovery in the markets has helped the banks with some of their problem portfolios,’ said Europa’s Fox. ‘While we might have expected over the last two or three years to see a flood – because the numbers are staggering: €30 bn of distressed debt in Germany alone – we’re not seeing this yet because banks are taking the view that the market recovery will allow them to recover a lot of value and they might even make some money.’
Aberdeen’s Allen feels that may slowly shift, however. ‘Disposition of the loan portfolios has been more aggressive – lots of US private equity has been very active in trying to buy distressed loans – but those aren’t property deals. When you start to look at access to the property, it has only started to get a bit more interesting over recent months.’
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The €500 mln question
The panel was asked how they might spend €500 mln on German real estate.
Markus Beran
Head of origination international investors at Berlin Hyp
‘As a bank, investing ourselves is not our core domain, but if we had the opportunity, I’d go down the road of a spread portfolio, part residential, core office in main cities and some logistics.’
Nic Fox
Partner and head of middle Europe at Europa Capital
‘Predominantly in offices and retail: both downtown retail and possibly out of town. Offices only in the big six or seven cities, but retail on a much broader basis because there are 100 cities with a population above 100,000 in Germany.’
Thomas Dörschel
Director of investments at Colliers International
‘I’d go to wealthy B locations, such as university towns with more than 100,000 inhabitants, and the best locations in office, retail and residential.’
Kai Schubart
Director of transaction management at Corpus Sireo Asset Management
‘Office, residential, retail and healthcare in prosperous regional areas. I wouldn’t say ‘B locations’ because it sounds so negative. As a strategic long-term investor, that would be the right strategy, but you have to have somebody on the ground to really manage your assets.
Andrew Allen
Director of global property research at Aberdeen Asset Management
‘We’re generally agnostic about sectors, but most likely it would follow a theme: A, B and C of German cities. But that classification is unhelpful because the second tier is perhaps most interesting. Germany is a big economy with plenty of high quality cities. We would likely be overweight in residential and retail.’