Friday Letter Letter from Frankfurt

PERE visited the financial hub of Germany this week to be told that domestic investors want core, but will limited opportunities alter their attitude to risk next year?  

German institutional investors are a conservative bunch by international standards, so it is probably wishful thinking to say they might want to put money into value-added or opportunistic deals in the near future. That at least is the view of the professionals PERE spoke with in Frankfurt this week during a whirlwind tour.

Like the rest of the world, the German institutional investor has an appetite for core, perhaps even more so than those in other countries. Whether they are insurance companies, pensions, endowments or family offices, the vast majority are seeking safety via risk-free assets (if such things exist). They want their fund managers to buy nice stable assets in strong locations, and without a trunk-load of debt, danke. In some cases, they don’t want any debt period, making opportunistic returns practically impossible.

Very broadly, one property company PERE met said German investors are happy with returns of 4 to 7 percent currently, and so core properties fit nicely into that spectrum.

Further evidence of the love being shown to core comes from Frankfurt-based property firm, DIC Asset Management. It currently is making progress on an equity raise for its debut fund, which has been structured as a German Spezialfond – especially made for institutional investors – and will target core assets. DIC said it was approached by investors, rather than the other way around, to create the vehicle, which it is populating with stable assets already owned and managed by the company.

There is an argument for saying that German investors won’t necessarily restrict themselves to core forever. At least one market participant in Frankfurt seems to think so, noting that some of these investors have recovered their own financial health or have sorted out their risk strategy and may go up the risk spectrum. “We see them possibly moving to core-plus, value-added strategies,” he added.

More likely, these investors may look outside of Germany’s prime property locations to secondary or tertiary locations. A key reason for this strategic shift is that there is a lack of core assets being sold, which may force investors to accept something else within reason.

According to most people PERE has spoken with, however, it is international investors rather than domestic ones that are showing more interest in going up the risk spectrum. Foreign investors from the US, for example, are looking for a “story” such as economic growth, which they can find in Germany. Furthermore, they are looking for firms with a track record and teams on the ground with asset management expertise.

The snag for opportunistic fund managers wishing to tap German investors is that they remain very conservative at heart. A deep reluctance to take on debt or use non-German fund structures, as well as generally lower return hurdle rates, mean they don’t necessarily mix well with non-German investors in a fund.

This is the kind of issue that some managers are grappling with presently as they foresee Germany becoming an economic force and outgrowing the rest of Europe. This, they figure, must translate into Germany becoming a stronger capital base than neighbouring countries, but certain business culture differences make it difficult to attract investors. This struggle will no doubt be played out for many months to come.