Investors home in on German residential
German residential property has become the biggest ‘must-buy’ in European real estate, not only with billion-euro deals involving opportunity funds, but also with more interest from other institutional investors.
Former Nomura banker Guy Hands last month bought e7bn portfolio of 150,000 German homes from utility group E.ON in Europe’s biggest residential deal.
Deutsche Annington Immobilien Gruppe, the German housing business owned by Terra Firma, the private equity firm run by Hands, bought the properties from E.ON subsidiary Viterra.
Rivals for the portfolio included groups such as Fortress and a consortium including Cerberus and Goldman Sachs’s Whitehall Fund. Cerberus is understood to have been the next highest bidder, but offered €1bn less than Deutsche Annington. The deal follows earlier €1bn-plus transactions in 2005 and 2004 involving companies such as Blackstone, Goldman Sachs, Fortress and Morgan Stanley.
The table below shows the largest deals in the past 18 months.
Last month Prudential Real Estate Investors (PREI) raised $140m of equity from institutional investors for its German residential investment strategy to invest in the expansion of DeWAG Deutsche WohnAnlage (DeWAG), a Stuttgart-based residential real estate investment group. Investors include Belgian, Dutch, Irish, UK and US institutional clients.
The increase in the commitments to DeWAG, through Prudential’s Luxembourg-based affiliate, German Residential Investment Holding, follows the successful growth of that business after an initial investment in DeWAG by Prudential’s London-based merchant banking team, acting on behalf of investors in December 2001.
DeWAG’s portfolio has grown from around 200 housing units in December 2001 to more than 3,300 housing units today.
A report from German bank Eurohypo says there are a number of sound reasons for investing in German residential real estate, despite the continuing depressed state of the German economy.
“The last period of stagnation of the German economy should not hide the country’s traditional and continuing economic strength,” the bank argues. “Confidence has weakened, but stability, export capacity, and the ability to benefit from the development of the new Eastern countries are confirmed. The recent important structural reforms will increasingly produce their full effect. We believe in a process of slow recovery.”
In the German residential market, values have remained flat for the 12 last years, a unique situation in the EU, but Eurohypo admits that does not mean the market has bottomed out.
However, it argues that a number of structural factors, especially the rate of new household formation and tight supply will benefit investors over the long run (10-15 years). Additionally, only 44% of German own their own home.
Also, the German finance ministry is planning to include housing companies in its prospective REIT legislation, which would give investors a potential exit through an IPO.
Analysts at Dutch merchant bank Kempen & Co argue that “only specialised parties and the early adapters will benefit from the favourable market conditions for German residential property in the longer run.
“The German residential market has proved not to be an easy investment market and requires in-depth market knowledge due to high tenant protection
leading to low potential rent increases, low economic growth leading to low turnover in weaker economic areas and the political sensitivity of job cuts (in some cases necessary to turn around a social housing company).
“We would not be surprised if some foreign investors get burned in the German residential market in the years to come as some parties seem to lack local expertise.”