Friday Letter Vorsprung durch debt

Business morale may have hit new lows in Germany, but there is a Korpsgeist (Def: esprit de corp) among private equity real estate fund managers who are turning their attention to the country’s burgeoning debt opportunities.

Private equity real estate firms are actively targeting German debt. One German fund manager told PERE this week that his firm had already switched investments from equity to purely debt because the returns were so much more attractive.

This, despite the fact that German real estate market has long been seen as one of Europe’s more stable property markets. The volatility that has traditionally seen economies, such as the UK, swing from extreme highs to severe lows has generally bypassed Europe’s largest economy.

The credit crunch, however, has shown Germany to be less immune from the effects of globalization than many investors had hoped. As a consequence, corporate morale is now at its lowest level for three years, according to the Munich-based think tank Ifo (another report stated more than a decade), with expectations mounting that Germany will slip into recession.

Yet despite the gloom private equity real estate fund managers are anticipating a raft of investment opportunities ahead – notably in the debt arena.

During 2007, Germany saw an unprecedented volume (and value) of property transactions. Few expect 2008 to reach the peaks of last year, but deal flow is still expected to remain relatively strong, if only for those taking advantage of the rush of investments made over the past few years.

Investors, particularly foreign investors, who sought to exploit the perceived “cheapness” of Germany’s property market relative to other European countries in the property boom of 2006 and 2007, are now faced with higher interest rates and a lack of easily available credit. That scenario – seen widely in the US and UK – is forcing distressed owners to either sell up or recapitalize their assets.

Such “distress” has already prompted UK listed fund manager Invista Real Estate Investment Management to urge investors to look beyond the short-term volatility of [European and German] property markets and concentrate on the larger, longer-term, issues of economic growth, liquidity and performance. Germany, they concluded, was the most attractive investment destination over the next five years when these factors were taken into account.

In the meantime, private equity real estate will be gearing itself up to take advantage of the distress already on offer.

New to – don’t miss real estate industry veteran Steve Felix, who has written commentary for us on why good investors need to “relax and float downstream”. Felix will also be participating at our upcoming not-to-be-missed conference, the PERE Forum: New York.