Investors target residential portfolios in Berlin on back of soaring rents

The residential sector in Berlin is booming. While most of Germany is seeing rents hold steady or even falling, in the German capital they soared 13% in the past year.

No wonder then that investors are flocking to Germany’s capital city to get their hands on some of the large residential portfolios up for grabs.

One company banking on Berlin is local listed residential group GSW Immobilien, spurred on by rising rents that are now outstripping sales prices in terms of growth. According to Bernd Kottmann, the incoming CEO of GSW, who replaces Thomas Zinnöcker on 16 April, prices in Berlin ‘are rising very fast’.

‘Rents in Berlin last year jumped by 13% from €6.60 per square metre to €7.50 per square metre. Nonetheless, residential rents in Berlin are still amongst the cheapest in Germany - almost half of those in Munich, which are typically around €12 per square metre,’ he said.

In addition, 87% of people in Berlin rent, so the rental market is huge, he added - bigger than in Paris or London. Vacancy rates are also low, at around 2.6%, due to a tight construction pipeline in recent years.

Subsequently, investors are keen to muscle in on the action: ‘Investors are drawn to the sector because they see it as a safe haven with stable cash flows at a time when many of them have lost faith in the stability of the euro. Also, alternative investments, such as bonds, are producing a negative return once you factor in inflation,’ Kottmann added.

GSW is only active in Berlin, because it provides enough investment opportunities given the size of the rental market, according to Kottmann. In total, there are around 1.6 million apartments in the city, of which GSW owns 60,000, or 3.5% of the market. ‘As such, we see plenty of opportunities to grow our business in Berlin and there is no price bubble,’ he added.

In GSW’s financial results published in March, the group said that its rental income increased by 10.4% last year to €202.1 mln. Rental income was boosted by the acquisition of 7,000 apartments in Berlin last year for €347 mln. The group had €3.3 bn of AUM as of 31 December 2012.

Kottmann is not permitted to discuss GSW’s investment strategy until he has been in the role for three months. However, last year, GSW was a very active investor in its home market. In November, it acquired a portfolio of 2,600 apartments from Zentral Boden Immobilien for €147 mln. Also, in October, the group acquired an additional 4,400 apartments in three transactions with a combined value of €200 mln. Most of the properties are in Spandau (43%), Mitte (26%) and Charlottenburg-Wilmersdorf (11%).

It is easy to see the attraction of residential portfolios, which are gaining in popularity with investors who are using the arbitrage between interest rates and their entry costs to snap up large portfolios, according to Andrew Groom, head of valuation and transaction advisory services at JLL in Frankfurt.

‘They’re even more interested in residential portfolios than they used to be. I think rents will also continue to rise this year, fuelling demand,’ he said. According to JLL, up to €10 bn in residential portfolios are likely to be transacted in Germany this year, compared with €11.1 bn last year.

Earlier this week, German state-owned bank BayernLB sold GBW Gruppe portfolio of more than 32,000 residential units to a consortium led by Patrizia Immobilien. The consortium paid €2.4 bn for the listed German housing company.

This is the second €1 bn-plus German residential property portfolio transaction Patrizia has masterminded in just over a year. In February 2012, a Patrizia consortium acquired the LBBW portfolio for €1.4 bn.

Private equity groups such as Cerberus are also believed to have placed bids as well as a consortium of German local authorities, including authorities in Munich, Nürnberg, Augsburg and Regensburg. Austrian investor Conwert Immobilien Invest is also believed to have bid.

The sale was a requirement of the European Commission which had given BayernLB until April to spin off the company in return for state handouts during the financial crisis.

Blackstone is also in the process of selling a portfolio of around 5,000 apartments in Berlin, according to those who track the market. Blackstone declined to comment. In addition, Deutsche Annington, Germany’s largest residential landlord - it owns 186,000 housing units which were valued at €9.9 bn in their company report in 2011 - is planning an IPO this summer, likely on July 4.