Outlook Briefing: German yield play set to continue

International capital will continue to pour into German property next year, but interest rate hikes may dampen sentiment further down the road, PropertyEU's recent Outlook Briefing in Frankfurt heard.

For global real estate investors seeking a safe destination for their money in Europe, Germany will continue to tick the boxes for some time to come. Strong economic fundamentals, combined with cheap debt and low government bond yields, will continue to drive money into the country’s real estate market, boosting transaction volumes and pushing yields down further, attendees at the briefing which was held at end-November heard.

‘I think the trend for continued large capital flows into Germany will continue, as they will into Europe in general,’ said Philip La Pierre, head of investment management at Union Investment Real Estate and a member of the panel. ‘We are in times when money is not an issue on either the debt or equity side. Debt and equity are now competing with each other and that will bring the price of money down further. In addition bond yields are low, so all the parameters for continued investment are there,’ he said.

Fellow panelist Thilo Wagner, director of property for Europe at TIAA Henderson Real Estate, agreed that Germany will continue to capture a large portion of the wall of capital heading for Europe. ‘There will be more money coming into Germany in 2015 and 2016 so we will see yields go down even further. The earliest we expect to see a change in interest rates is 2017 so the yield play is set to continue. On the basis of different occupier fundamentals in Europe, Germany is looking pretty strong.’

Wagner pointed to TH Real Estate’s new US shareholder, teachers’ pension fund TIAA-Cref, as an example of a foreign investor with strong appetite for European – and German – real estate. ‘Prior to the merger with Henderson Global Investors [in June 2013, red.], just $2 bn of its total $50 bn in investments was outside of the US and the same applies to a lot of other global pension funds. For pure diversification reasons, that wall of capital is now heading for Germany and Europe. That is going to continue because we still have a nice spread of property yields over bonds.’

Click here to read the full report from the Germany Outlook Briefing or go to our investment briefing page for the presentation and videos from the event.