Munich pricing ‘bubble’ set to last due to sustained foreign demand

Strong demand from both local and foreign investors will continue to boost prices for residential assets in Munich, Jan-Baldem Mennicken, board member of Pramerica Real Estate International, said during an Investment Briefing in Amsterdam on Thursday hosted by PropertyEU.

‘There’s a clear bubble for Munich residential,’ he noted. ‘Will it stay a bubble? Potentially yes. Why? People are going for the same investments there. We have competition from new players such as family offices who are going deeply and more heavily into residential, plus foreign investors. That is the ingredient for a bubble.’

Tim Andreas Lasys, managing director of Catella Germany, said the strong demand from foreign investors also extended to retail. ‘If interest increases this year as I expect, then pricing will become much hotter in retail and residential.’

Last year, TIAA-CREF, the pension fund manager for teachers in the US, bought the PEP shopping centre in Munich for about EUR 415 mln, according to those who track the market. The price reflects a net initial yield of 4.6%, which is a record low for prime shopping centres traded in Germany. But given low bond yields, real estate investments offering a spread of 1.5% still make sense, Lasys pointed out. ‘If you look at PEP the yield was below 5%, but this covers the risk in this area which is why (foreign ed.) investors accept such low yields in the retail sector.’

Foreign investors accounted for 30% of total investment in Germany in 2011, compared to 75% in the boom years of 2005-07. But their profile has changed since then, Lasys said. ‘No investment banks, but more pension schemes. We’re seeing more core investors and what they’re looking for is stabilised income and that explains why they are looking at retail and residential investment. These are the less volatile forms of investment in Germany.’

Lasys said foreign investors such as the Swedish pensions funds, which have done deals in Germany in the past, are now coming back again. ‘We are advising AP1 and AP2 who are stepping into Continental Europe. They started in the UK and France and are now investing in Germany.’

Timo Tschammler, head of DTZ Germany rejected the idea of a bubble in Munich residential property. ‘It’s hot but not a bubble. Bubbles pop up and burst. If demand stays at the same level, then it’s not a bubble. Munich is historically the most expensive market for residential and high-street retail prices are comparable to Bond Street in London. There will be ongoing demand for this type of product.’

Mennicken noted that Germany remained a safe bet for many foreign investors. ‘They see the inflation adjustment which is very important for them. If they were to pick a country with the highest likelihood of survival after a breakup of the eurozone that would be Germany.’