German investment set to rise
For many years, office properties in Germany’s top cities were seen as a secure, albeit low-yield investment. Demand was dominated by domestic investors such as open-ended funds and life insurance companies. In 2003, however, prime yields for office properties in major German cities increased by around 0.5 percentage points, as established by joint research by Cushman & Wakefield, Healey & Baker and our company IVG Immobilien. However, they remain in a yield corridor of 5-6%, and are therefore significantly below levels in western Europe of 6-7.5%.
The reasons for the current rise in yields are the trend towards rental agreements with shorter terms and therefore higher risks, as well as generally more pessimistic earnings expectations for commercial property in Germany. Nonetheless, there is a shortage of suitable transaction properties: the much-sought combination of economic rent prices and long-term rent agreements with companies with strong credit ratings is hard to come across today. The interest of international investors is stable, but is often left wanting, as potential sellers are hesitant to step down from their high price expectations.
This is why investment volumes declined at the five most important investment locations by 20% to E5.2bn in 2003 according to Atis Real Müller. The individual cities were all hit to a varying degree. In Frankfurt, traditionally the leading location, volume dropped by around 40% to E1.6bn; nonetheless, Germany’s banking hub remained the country’s leading location ahead of Berlin at E1.3bn. In particular, Frankfurt suffered from a lack of long-term let properties at fair prices. However, in the medium- and long-term, Frankfurt has opportunities in quarters that are today less developed than the core financial district – such as around the airport, where logistics properties also offer interesting prospects.
The second most important investment location is the capital, Berlin. Markets here are suffering doubly under the weakened state of the local economy and the large surplus of availability that has existed since the construction boom of the 1990s. However, Berlin has recently shown greater stability than the Frankfurt market, which is highly dependent on economic developments. In addition, the capital is a location with particularly good medium- and long-term prospects. The rent and price levels are far lower than in metropolises in other European countries, and therefore have the potential to rise. There is a stable demand base through the government and a large number of public institutions, associations and media.
In third place is Munich. The office market here has now settled after a strong boom lasting several years; investment activity has slowed by a mere 20% to E1.1 bn. Prospects in Munich are good, which it owes to its status as Germany’s high-tech centre, and to also having powerful companies in its financial sector.
Other key investment locations in Germany are Hamburg and Dusseldorf. Both suffered recently as a result of the economic crisis, but have a healthy economic structure and growth potential. There are also investment properties in a large number of other German cities, though the selection here is not as wide and there is less chance of a later exit, as these locations are less sought after by key investor groups.
While there have been some attempts at trading with large property portfolios distributed over the entire country, few of these deals have gone through – because buyers and sellers had different price expectations, and in some cases because offers were not prepared to the extent demanded by international standards. The most spectacular deal in recent times was the acquisition of a multinational portfolio from Deutsche Bank worth E1.04bn by the Blackstone Real Estate Group in December 2003.
International, and particularly American investors, are also turning their attention to German residential portfolios. In Berlin, an international consortium made up by Whitehall, Goldman Sachs and Cerberus acquired the previously state-owned company GSW, with 66,000 apartments, for E2.1bn. International investors are reluctant when it comes to retail and commercial properties. There is a surplus in both these sectors in a lot of cities, as a result of which profitable long-term tenancies are no certainty.
The investment volume in Germany is expected to rise again when the economy here picks up and prospects improve. Markets in Germany are becoming more professional and have already largely adjusted to international standards. Domestically, open-ended property funds may become less important, as in future they will probably receive fewer large sums than in previous years. In line with international trends, a new key investor group could be REITs, which are currently being examined for introduction in Germany.
Bernd Kottmann is member of the board of directors of Bonn-based IVG Immobilien AG for portfolio management