Demand for real estate in Germany is such that even traditional institutional investors are willing to go to secondary cities or put money into alternative sectors in order to stay in the game, panellists heard at PropertyEU’s European Outlook H2 2017 Investment Briefing, which was held in Hamburg in late June.
‘The German market has become so competitive that we are moving up the risk curve, taking development risk and going into sectors like student housing for the first time,’ said Martin Schellein, head of investment management Europe at Union Investment Real Estate. ‘We are now active in most asset classes.’
Union’s focus has always been and remains the core segment, he said, but broadening your horizons has now become a necessity, he said. ‘We are looking at alternative sectors because we want to grow and have a share of growing markets, and because it is difficult to put capital to work in the market. There are many tempting but expensive opportunities out there.’
Not everyone is moving up the risk curve. Some investors prefer to stick to core and choose to accept lower returns, but an increasing number are taking the plunge. Some of the large German pension funds are going into secondary markets for the first time, brushing off long-standing concerns about poor liquidity.
Secondary cities
‘We have devised a secondary city strategy for those institutional investors prepared to take on more risk, like family offices,’ said Sascha Wilhelm, CEO of Corestate Capital. ‘We recently sold a bundle of high street retail assets in secondary cities to a Bavarian pension fund, one of the biggest in Germany, for €750 mln and they want to build it up further.’
They have bought into the strategy, he explained, in the belief that the high street is the heart of the community in smaller cities. E-commerce might damage the big shopping centres unless they are lifestyle destinations, but stores in the smaller cities will continue to do well because they are places to meet and socialise, not just shop.
‘My prediction is that big pension funds going into secondary cities will be a big, growing and interesting trend in Germany,’ said Wilhelm.
Smaller towns
Smaller towns are also likely to be out of the reach of e-commerce giants. ‘You have to be extremely picky in this sector, because undoubtedly a lot of high street retail, especially clothing, is in trouble,’ said Alexander Eggert, managing director of Warburg-HIH Invest Real Estate. ‘But in a small town you are unlikely to use your app to have something delivered and you are more likely to go to the shops.’
The e-commerce trend, however, is unstoppable in the big cities and it is driving the rise of logistics. ‘Our core market is in Germany, which is the right place to be given the level of interest in the sector,’ said Christian Bischoff, CEO of Log4Real. ‘E-commerce is now a reality in the main cities. Amazon is creating quite a stir delivering groceries at Lidl prices. Germany is nowhere near the UK in terms of e-commerce development, but things are moving fast. We are only at the beginning. The growth potential is huge.’
