German banks turn their back on bold investors

Despite property investors’ growing appetite for risk, German banks remain reluctant to finance anything but core.

Jan Bettink, CEO of Berlin Hyp, one of the leading real estate banks in Germany, has no plans to embrace a burgeoning trend on the commercial property market in Europe's largest economy. 'Investor demand for value-add real estate may be rising, but we will continue to focus on quality objects in prime locations rented out to tenants with first-class ratings,' he told PropertyEU. Bettink is not alone in his stance. 'We are clearly focused on core,' said Georg Irgmaier, director of commercial real estate at BayernLB. 'When it comes to office buildings, we will finance only core assets in leading cities like Berlin, Hamburg, Frankfurt and Munich,' explained Andreas Pohl, speaker of the board of managing directors at Deutsche Hypo. However, the Hanover-based bank will consider shopping centres in growing mid-sized cities, he added. 'That is, if zoning regulations ensure that no competing malls will be erected. We will not take on risks beyond our control.'

The cautious approach of leading German bankers may dampen transaction volumes in Europe’s leading continental market this year, according to Michael Fenderl, head of research at Aengevelt Immobilien in Berlin. 'It is possible that the market will not rise to its full potential.'

Is that not too pessimistic a view after investment volume reached €9.9 bn in the first quarter of this year alone, marking an increase of 47% or €3.2 bn compared to the same period in 2013? A large proportion of the transactions were portfolio deals conducted by foreign investors and financed by foreign banks, Fenderl pointed out. 'Quite a few deals were also managed by investors from China and other East Asian countries who acquired property solely with their own equity. For investors from Germany and other European countries, however, it is very difficult at this time to get financing for anything but core from German banks,' he added.

At the same time, core assets have lost some of their sheen for a growing number of investors following considerable price increases over the past couple of years, sending yields to unattractive lows. 'Since 2011, yields for core office buildings in Germany have fallen from 5.2% to 4.4%,' explained Helge Scheunemann, head of research Germany at JLL. In order to find higher returns, investors are now turning towards value-add real estate whose yields are comfortably above the 5% mark. Leading the way are pension funds and life insurance companies which are under pressure to achieve higher yields to meet their commitments to their policy holders. 'The hunt for higher yields is making investors bolder,' said Drazenko Grahovac, head of valuation for Europe at Savills. 'With investor appetite for risk on the rise, non-core properties are beginning to look very attractive,' noted Jan Linsin, head of research at CBRE Germany.

The new demand for non-core property stems not only from the hunt for higher yields. 'A growing number of investors believe the eurozone crisis is over,' said Fenderl. 'With Portugal and Greece returning to the capital markets, there is a widespread belief that the Continent is well on the way to recovery.'

However, bank managers do not share this view. 'The eurozone crisis is far from over, it has only been sugar-coated by the European Central Bank for now,' said Berlin Hyp’s Bettink. With unemployment rates still way above 20% in Greece, Spain and Portugal and the economy also spluttering in Italy and France, consumer demand in those countries is unlikely to pick up in the foreseeable future. 'Any new crisis in North America or Asia could therefore have a very serious impact on Germany's export-oriented economy and its commercial property markets,' Bettink explained.

Some German institutional investors hold a similar view. MEAG, the global asset manager of MunichRE and Ergo, only acquired residential property in Germany last year. Allianz Real Estate, the property manager of insurance giant Allianz with €23.5 bn of assets under management, spent the lion's share of its €2.3 bn investments last year within Europe, acquiring landmark buildings like the Skyper office complex in Frankfurt and shopping centres in Poland and Finland. However, this year the focus will be on different markets, said Hauke Brede, chief risk officer at Allianz Real Estate. 'We want to grow our portfolio in the US in order to participate from the stronger economic recovery in America.'

Richard Haimann
Correspondent Germany