Gagfah sets the stage in Germany

The sheer amount of property owned by corporations and municipalities in Germany suggest the need for a national real estate trust vehicle. Some estimates have suggested up to a third of the DAX's capitalization is being held on the balance sheets of companies and local governments.

Yet while the establishment of such a vehicle remains a political issue, private investment firms from New York are more than willing to step in to fill the void. Fortress Investment Group did so in 2004 when it purchased the Gagfah residential portfolio from a German social security and pension agency, one of the first major transactions in the now red-hot German residential market. Fortress paid €3.5 billion for more than 80,000 units, or more than 4.8 million square meters of space.

It was just the first step. When the city of Dresden put its residential portfolio on the block earlier this year, the first time a German city sold all of its public housing in one shot, Fortress walked away with an additional 48,000 units priced at €1.7 billion, beating out a number of competitors in the process. Meanwhile, the city of Dresden retired more than €700 million in debt. With indications that the German economy may by picking up, municipal portfolios are increasingly looking like a smart bet.

According to German press sources, more and more cities are contemplating divesting their public housing stock, meaning prime multi-family assets could come onto the market in cities like Leipzig, Hamburg and Cologne. Berlin has already reportedly unloaded more than 260,000 units, while the state of Hesse sold and leased back office space to the real estate arm of Commerzbank—and is thinking about pursuing the strategy with more of its holdings.

Small wonder then that Fortress is looking to capitalize on the trend it helped to start. Last year the firm raised $2 billion for Fortress Residential Investment Deutschland, which, as the name suggests, is focused strictly on the German residential sector.