Service provision plays catch-up

A surge in interest in German real estate raises the stakes for investors. Christian Schulz-Wulkow reports

In recent years, real estate investors the world over discovered a new target for their European investments - Germany. Compared with 2005, the investment volume climbed by 44% to €69.7bn last year; compared with 2004, the investment total through 2006 actually skyrocketed by 172%. Another slight increase to €71bn is expected for this year.

Asset management providers in Germany are less than prepared for this rapid development of real estate transactions; within the international context, the country is still considered relatively underdeveloped in terms of professional real asset management. There are basically two reasons for this: the number of providers of asset management services currently competing on the German market has remained relatively small. Out of these, only a few are in turn specialising in this business segment. At the same time, it is of particular importance for international investors to know that their foreign commitments are subject to professional on-site asset management, marked by a corresponding in-depth knowledge of the respective local market.

International investors therefore tend to rely on service providers that are active in the respective target country of their investments, and that will handle the asset management on their behalf. In the past two years, for instance, a number of real estate portfolios that showed a high share of vacancies were sold to foreign investors. The business plans of these investors often included the stated goal to re-let the vacant areas within a period of between one and two years. Doing so would be a daunting feat to accomplish without a profound knowledge of the German real estate market. As long as real estate investors permit non-professional asset management providers to handle the letting, or are merely represented by proprietary structures in the country of investment, they run the risk of falling short of their ambitious business plan objectives.

More and more market participants have realised that the need for asset management has increased drastically and have begun to offer relevant services. But not every provider is in a position to actually meet investors' requirements.
Investors ought to be sure to avoid some typical risks when selecting and commissioning asset management services. A case in point: conflicts of interest may arise whenever asset managers accept property-locating assignments from several clients with similar investment strategies and investment criteria. This kind of situation will make a client wonder whether he actually stands a chance to get a given property that matches his investment criteria and investment goals. After all, the asset manager might offer the property to another client whose portfolio manifests a similar requirements profile.

Analogously, it could be a drawback for an investor if an asset manager keeps the accounts of several clients that hold comparable properties, all of which are marked by vacancies. Once a potential tenant has been found, the service provider needs to decide in favour of a certain property, and thus possibly against another client; after all, a given tenant cannot be let to more than once. This is particularly true for portfolio sellers that offer asset management services on top of real estate sales. How can you be sure that the proprietary, unsold portfolios will not receive preferential treatment in the future? There is virtually no way to solve this conflict through contract stipulations, and faith alone will hardly make for a solid business foundation.

Another potential conflict of interests arises whenever a service provider pursues ulterior business fields in addition to asset management. This is true, for example, for classic brokerage firms that are making a major effort to expand this line of business. Suppose a company is commissioned by a seller to realise the highest price possible for a given property while another client expects it to acquire a piece of real estate for as low a price as possible, then even a separation of teams will be unlikely to resolve this conflict except under certain conditions. The conflict of interest will be still greater if the service provider in question needs to address a request for space to let. Has the prospective tenant really been given the best offer if the same company manages the landlord's account, too? Or will one and the same company really treat all suppliers of lettable space equally in case such a request for lettable space comes in?

Real estate investors generally have three options in how to organise a professional asset management for their investments in Germany. First of all, there is the possibility of commissioning an independent external service provider. The company Resolution GmbH in Frankfurt am Main, for instance, successfully counselled Oaktree during the acquisition of the Herkules portfolio from the Deka Immobilien Fonds, then took on the asset management of the 49 office properties. The goal is a sustained appreciation, to be achieved by a drastic reduction in vacancies, among other measures. Second, real estate investors can also use existing structures. A case in point: Goldman Sachs can always fall back on the resources of its asset management subsidiary, Archon Group, and use the latter's competences for the management of the Whitehall Fund real estate, among other tasks. The third option is to participate in a platform in Germany or its complete acquisition. The Italian company Pirelli RE, for one, took over DBAG Deutsche Grundvermögen AG in January 2007 and intends to retain the management in order to use its experience in asset management on the German market towards further growth.

In short, investors ought to check carefully when hunting for a professional asset manager whether the selected provider actually pursues the investor's interest on location and has seen to it that conflicts of interest are largely ruled out. Beyond that, it needs to be ensured that the respective provider of asset management services satisfies the owner's requirements in regard to transparency and informed, speedy reporting.