Lenders look beyond core and prime locations in Germany

Real estate capital is flowing into new segments and secondary cities in Germany as core opportunities in prime locations become increasingly scarce.

Daniel Mair, senior associate at Ernst & Young in Frankfurt, says prime has 'sold out' in Germany. 'Capital is now flowing into regional cities in Germany like Nuremburg and Leipzig and lots of places people wouldn’t have considered a couple of years ago.'

Mair was speaking at the PropertyEU Investment Briefing in Frankfurt earlier last week. Thanks to Germany’s image as the safe haven of Europe, there is quite an overhang of capital to invest in the country, he noted. ‘There’s not enough product which is why some players are willing to take more risk. You can get good returns in the 20 cities beyond the Big Seven.’

Increased demand for secondary product will, however, inevitably lead to yield compression from levels as high as 9% in some locations, he added. ‘We will see higher prices for more difficult product.’

As opportunities to finance prime assets dry up, lenders will start loosening their criteria, Mair predicted. ‘Prime product may not be there, but in Q1 investment activity was at least at the same level as last year and it is growing. More product is not prime and lenders are looking carefully. They might start with 40% LTVs, but they will talk it up. We’re seeing big international banks going into B locations for big tickets of €50 mln. I think we will see more of this because banks are in the business of making money.’

While Germany has its fair share of secondary and tertiary assets and Frankfurt in particular has high office vacancies, the problems are confined to specific districts such as Eschborn or Niederrad, Mair said.

‘There are a lot of empty office buildings in these areas which will never find tenants. But this is a more isolated problem in Frankfurt, it’s not a problem nationwide. We don’t have surplus stock like Spain does. After the Wall came down (in 1989 ed.), we built things that should never have been built, but that surplus stock has been digested. Some developments have been scrapped since the crisis and we never had a building boom with very low interest rates and aggressive LTVs.’