Baggy and loose at the seams
If you go to a dinner party, it is important to dress correctly if you hope to be invited again. Similarly, if you play football, it is essential to wear a comfortably fitting uniform to achieve optimal performance.
And, if German real estate wants to attract global real estate capital for the long term, it is essential that it ‘dress’ in a manner consistent with global capital best practices. But these practices have changed dramatically over the past decade, leaving Germany in old and poorly fitting capital market clothing, which was once modern and appropriate, but is today restrictive and outdated.
Since the global real estate meltdown of the early 1990s, real estate capital flows have ever increasingly become part of the broader global capital markets.
No longer is it a specialised club playing by arcane rules. Real estate capital today comes from investors who one day are investing in emerging market bonds, the next in multi-strategy hedge funds, the next in ETFs or index funds, and the next in private equity or venture funds.
Today’s capital constantly moves across borders and investment categories in search of risk-adjusted returns.
To be in the mainstream of these global capital flows, four basic conditions must be met:
■ A degree of market transparency which allows the rapid and accurate underwriting
of risk and return opportunities;
■ Investment vehicles which are familiar to
■ Governance and reporting standards which instil investor
■ Economic growth.
Failure to satisfy all four of these conditions means that while high risk global capital will occasionally appear to exploit inefficiency, over the long term real estate pricing will be
punished by its failure to “dress” for global capital.
Market transparency means that unbiased and honest data are regularly disseminated by both public and private owners on the fundamentals of space demand, supply, and pricing. In good times and bad, high-quality information must be available in order to attract global capital.
It is not by chance that the US and UK, which are by far the world’s most transparent real estate markets, dominate global real estate capital flows.
Significant publicly traded equity and debt are the primary engines for such transparency. Disclosure statements provided by such public entities provide sunshine to the often dark world of real estate. Publicly traded real estate means that information is available not about public firms and public debt, but also on the markets in which they operate.
As such, publicly traded debt and equity generate enormous transparency about private real estate opportunities.
Two equity investment vehicles have come to dominate global real estate equity investment opportunities:
■ Tax transparent publicly traded REITs;
■ Lmited-life real estate private equity funds.
These two vehicles mimic the public stock and private equity investment vehicles predominantly utilised by global capital. Simply stated, these vehicles - which are not flawless - are understood by global investors. While investors realise that these vehicles are not perfect, they are widely understood and practicable across many countries and industries. Simply put, they work.
The failure to embrace these two dominent equity investment vehicles, and the maintenance of archaic vehicles, means that a country remains a backwater in terms of global real estate capital.
And such a status is unacceptable for the third largest economy in the world. Hence the protection of open and closed end funds, the delayed introduction of a globally compatible G-REIT, and tax structures which discourage traditional private equity funds, merely punish the owners of German property, the vast majority of whom are Germans.
Clear reporting and strong governance attracts global capital. Sadly, no country is flawless in this regard. However, internally managed portfolios, where profits (and, more importantly, losses) are shared by owners and investors, are critical.
These structures characterise both publicly traded companies and private equity funds. And the delivery of accurate, timely and externally monitored reports is essential.
While no structure is perfect in this regard, it is clear that most property ownership in Germany seriously lags behind global best practice in terms of governance and reporting.
Finally, global capital seeks economic growth opportunities, as growth overcomes underwriting errors. And growth in real estate means economic growth, something Germany sorely lacks.
The past 15 years have amply demonstrated that government interventions only hinder economic growth.
The answer for growth in Germany is not a little less government; it is a whole lot less government. And in a hurry! Economic growth not only attracts global capital.
For 15 years, Germany’s government has failed to create growth. It is time to give “markets” and less government a chance.
In summary, it is time for Germany to purchase a new capital market wardrobe. Failure to embrace the necessary changes will punish property owners of the world’s third largest economy for many years to come.
Peter Linneman is Albert Sussman professor of real estate and professor of finance and business and public policy
at the Wharton School, University of Pennsylvania