BRIEFING: Investors in Germany need to scale back expectations

Germany may have become too successful for its own good, PropertyEU’s Germany Investment Briefing held in London this week heard. The market is so attractive and there is so much capital floating around that it is increasingly difficult to find good opportunities.

‘The best performing funds are selling, not buying,’ said Philip La Pierre, head of investment management Europe at Union Investment Real Estate. ‘But sellers have high expectations and pricing is too high. In the German market it is essential to be disciplined, focus on the income and not be lured by returns. That is the only way to make good investment decisions.’ Expectations must be scaled back: returns of 4 or 4.5% may be the ‘new normal’ investors have to accept and get used to, even if only two years ago it was 6% or more.

The solid, successful and very liquid German market is attracting a stream of investors, both domestic and foreign –mainly from other European countries and from Asia, but also from ‘new’ investors like Brazil. The Americans tend to be less interested because of what they regard as low returns. ‘Germany is a crowded place,’ said La Pierre. ‘Sources of capital are immense now, and in my 16 years in this business I have never seen these levels of flows. German banks are flooded with money, and debt and equity are chasing investment opportunities. The pressure of capital is such that I believe there is a risk somewhere down the line.’

‘It is getting more and more difficult to find product, and there are too many competitors outbidding us in the sales process,’ said Thilo Wagner, director of investment at TIAA Henderson Real Estate Germany. A competitive market can be a very frustrating one: ‘We would love to do more retail in Germany, but there are many specialised investors who will outbid you,’ said La Pierre. ‘We usually invest an average of €1 bn in Germany every year, but this year we have not been able to invest at all yet. In this market, wanting something is definitely not the same as getting it.’

With Asia, the US and Canada getting expensive, most investors are looking at Europe, where various factors play in Germany’s favour. The UK is at the top of the market, the Nordics are regarded as small, while Southern Europe is often considered risky. Germany, by contrast, is seen as a good stable destination and the combination of positive sentiment and strong economic fundamentals will only increase the market’s attractiveness in investors’ eyes.

Sentiment is so positive that Grexit, the prospect of Greece leaving the Eurozone, is not causing too many sleepless nights among investors, nor indeed the far more remote possibility of a dissolution of the euro with the turmoil it would entail, the panel agreed. As Wagner put it, ‘even if the Deutsche Mark came back, it would not be a reason not to invest in Germany.’