The German investment market, one of the biggest in Europe, is probably the least attractive to cross-border institutional investors. Property adviser Jones Lang Wootton estimates that total investment turnover in Germany in 1996 was about Ecu10bn ($11bn), but only about 5% of this was accounted for by foreign investors. In 1997 both total turnover and international activity were down.

There are several reasons for this historic lack of international investment. First and foremost are the low returns achieved by German property: JLW estimates prime office yields at about 5%, retail at 5% and industrials at 7%. The huge weight of domestic investor demand is keeping yields down, despite less-than-sparkling performance from German property.

The prime market is dominated by the open-ended property funds, which are tax-efficient vehicles promoted by the German high street banks. While in the UK the middle classes pile their surplus cash into PEPs, in Germany they buy units in the property funds. The result is a vast wall of money which has to be placed in the property market, regardless of the current state of the property cycle.

In 1996 the open ended funds received new deposits of DM13bn ($7.1bn), but in 1997 they produced dismal returns of between 3.8% and 5.4%, which dampened consumer demand somewhat. New deposits in 1997 fell to DM6.5bn. However, with strict liquidity ratios enforced, the majority of this still has to be placed in bricks and mortar. The open-ended funds are increasingly investing abroad, most notably in the UK, in search of more attractive returns, but in 1997 they are still estimated to have spent DM2.5bn at home.

International fund manager Pricoa publishes comparative data on the relative merits of Europe's property markets, called the Euromatrix". And Germany ranks seventh out of the eight markets surveyed. According to Pricoa Germany scores well for having a relatively liquid market allowing investors to exit when required, but a tax regime which does not aid property investors is seen as a drawback. Significantly, Pricoa currently has no funds allocated for German property.

One of the biggest problems faced by investors is the lack of transparency in the market. However, opportunities for benchmarking may improve once Investment Property Databank's German index is up and running. An experimental index has been produced, but data will not be publicly available before 1999.

Investors have historically found it difficult to establish a balanced portfolio of German property, because the vast majority of retail and industrial properties are owner-occupied, meaning that most funds are heavily skewed towards the office sector.

These negative factors have been exacerbated by the fact that Germany's property market is still in the depths of a cyclical trough. While the UK, Dutch and Scandinavian markets are racing ahead, and while France and Spain are now on an established upward curve, Germany remains in the doldrums.

According to Guy Barker of agents Knight Frank Frankfurt office rents now stand at DM60/sq m/month, down from a peak of DM85 in 1991. Berlin has performed equally badly, with rents falling from DM80 in 1991 to DM50 today. However, there are distinct signs of an upturn in Munich, where rents have risen from DM50 to DM52.50 over the past year.

Observers expect this improvement to spread to other cities during 1998, and Knight Frank is forecasting that German property will produce double-digit total returns in 1999."