Coming to stay: value investors in Germany

They are called Summit Germany, Dream Global or Thor Equities: international real estate investors with a long-term horizon who hold the German market in especially high esteem. We have looked for the reasons of this persisting trend.

Germany has weathered the crisis well
“Germany’s economy was less impacted by the financial crisis compared to other European countries”, the managers of Summit Germany told us. “In Germany’s six main real estate hubs – Berlin, Dusseldorf, Frankfurt am Main, Hamburg, Munich and Stuttgart – rental demand is rising. We expect to see a large surge in demand around mid-2014”, they added.

Investors’ search for value investments is becoming easier as many inner-city quarters of important German cities are currently in the stage of redevelopment. Dusseldorf’s city, for example, gets a whole new layout through the Kö-Bogen area, Frankfurt’s historic old city center is being renovated and in Cologne, new residential and office space is being built on the former grounds of the Gerling insurance company.

Institutional investors aim at increasing their real estate share
Additionally, many large institutional investors have a high backlog when it comes to real estate investment; many of them want to increase the real estate share in their portfolios. This includes large state-own funds, who also show a renewed interest in Germany, as the Norges Bank IM fund confirmed last month. This pumps enough liquidity into the market to manage also larger acquisitions.

BNP Paribas Real Estate lately highlighted the large increase in portfolio transactions in Germany, which also makes it possible to find buyers for large-volume objects such as many of the projects around Potsdamer Platz in the heart of Berlin. Potsdamer Platz has completely changed since the Berlin wall came down and is seen as one of the examples in Germany were sustainability, extraordinary architecture and an excellent work-life-balance have come together into one place.

“Berlin is a very diverse city with huge development potential”, said Matthias Leube, Regional Head of Asset Management Germany at AXA Real Estate. “However, ignoring location within Berlin can be even more of a problem than elsewhere in Germany, due to the availability of land in the city. As sectors we like office and retail in Berlin”, he added.

No new bubble in sight
Another important factor at the moment is the low risk of a bubble in the German real estate market. While the IMF is already warning of potential overheating in the housing markets of Belgium, Scandinavia or Australia, it definitely excluded markets such as Germany from its warning. Also the Bundebank and the Committee of German surveyors share the relatively relaxed view of the IMF.

“Although prices have been rising in the main cities, particularly in residential, in our view the commercial market is only just starting to recover due to new availability of finance”, the managers of Summit Germany confirmed. Also AXA Real Estate’s Matthias Leube cited the financing side as a positive factor: “The financing environment has significantly improved and obviously also helps the return side.”

Risk appetite is increasing again
Whereas large foreign investors still favor prime locations in Germany, as confirmed by their latest statements, smaller players and investors from Germany are already looking for non-prime locations. “Up until last year, investors were very much focused on prime investments”, confrims Matthias Leube. “This has slightly changed. Today, the need for safety is gradually becoming less of an issue – this was one of the main drivers for people investing in Germany in the wake of the crisis. Still, Germany is a defensive play, mostly due to macroeconomic reasons.”

Nevertheless, risk appetite has considerably increased, adds Leube: “We see a lot of investment activity in Germany at the moment – next to the security issue that some investors still have. People are now moving out of the standard three to the seven largest German cities – depending on their investment focus – to smaller locations and are generally going up the risk curve.”

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