GERMANY ROUNDTABLE: The globe’s ‘most wanted’

Germany is a “lively” market, of that there is no doubt. Many of the Frankfurt skyscrapers that from high up in CBRE’s headquarters building seem to be almost lined in a row, have either been sold recently, are under offer or will shortly come to market. The famous 63 story MesseTurm, for example, which is the second highest office in Germany, is said to be under offer to The Blackstone Group on behalf of its fourth European Real Estate opportunity fund. Indeed, the same firm is rumored to be buying a second skyscraper next to MesseTurm.

Meanwhile, the 47 story Trianon tower built in 1993 that serves as the headquarters of Deka bank is about to come to the market, according to sources. Madison Realty International acquired a 56.9 percent equity stake in the high riser in 2012 from Morgan Stanley’s P2 Value fund that was liquidating. The whole property will soon be available to buy.

And, outside of the core financial district other properties have been placed on the market. For example, troubled IVG Immobilien that was taken over by creditors this summer is apparently putting on the market The Squaire office complex by Frankfurt International airport. The target price is reportedly €850 million. In one of the larger transactions to have already taken place, Tower 185 in Frankfurt occupied by accountant PwC was sold last year to PwC’s pension fund for a chunky number.

Peter Schreppel, who heads up CBRE’s business in Germany, states emphatically: “It is a lively market. While transaction volumes are not back to standards of 2007 when €1 billion-a-week was traded, it is extremely active. If you take a look at all the quality investors around, it is not the 90 percent loan-to-value buyers. It is a different ball game. What we as a global company find very interesting is that there is a lot of global money into the market. If you look at the roughly €17 billion that has been traded in the market in H1 of 2014, half of that is from foreign investors and that is what makes the German market very lively.”

Tobias Gollnest, commercial real estate head of investment at Corestate Capital, emphasizes, that retail properties represented a market share of almost 30 percent. That makes it the second biggest asset class behind offices. More than €5 billion has been transacted, which is an increase of 36 percent year on year. “We find this asset class very interesting,” he says.

It seems everyone around the table recognizes that the previously high-octane German market that kicked off in 2003 when Blackstone agreed to buy a $1.2 billion office portfolio from Deutsche Bank used to be a very domestic market – German buyers and German sellers. Now it is so global. “Basically, every skyscraper here in Frankfurt has either been sold or is under offer at the moment and if you don’t take these properties to a worldwide audience you haven’t done your job properly because the interest is there,” confirms Schreppel.

In fact, PERE landed in Germany on September 1 at a time of debate concerning whether there is a bubble or not in prime offices. Office yields in Frankfurt stand at around 4.7 percent and there is much demand, yet only a certain amount of supply. The country has just been named by a study as “most attractive market” for international investment beating Brazil, China and Mexico adding fuel to the fire.

Carsten Czarnetzki, investment director and fund manager of Europe Value Investors at AEW Europe, draws a link to a recent study suggesting that if the largest institutional investors were to increase allocation to real estate by just one percent, it would create demand for tens of billions of euros more of property, typically prime offices. “All of that has to be invested somewhere,” he says.

Apparently, that somewhere is currently Germany. Matthias Leube, head of real estate in Germany for AXA Real Estate says that the country is actually “top of the list” for most of its investors. The country’s favorable macroeconomics is a big reason, with Munich and Berlin being the two most popular cities that capital wants to enter, he reveals and he should know. In 2012 AXA Real Estate was at the vanguard of the trend when, acting on behalf of AXA France Insurance Companies and Norges Bank Investment Management (NBIM), the manager of the Norwegian Government Pension Fund Global, it acquired two office buildings in Frankfurt and Berlin from Royal Bank of Scotland for €784 million. They followed with the €164.1 million purchase of the SZ Tower in Munich last November.

No wonder UBS Global Asset Management has been taking advantage of demand by selling stock. Tilman Hickl, head of global real estate in Europe [ex Switzerland] says the firm sold in August the Isator City office and retail complex in Munich to Allianz Real Estate for €120 million. He observed a ground-swell of interest from Asian bidders, though the property did include a multiplex inside it which narrowed the field. The firm’s German open ended fund, Euroinvest, also sold in June two offices in Frankfurt and Stuttgart.
Hickl of course recognizes that being a net seller goes against the grain of being able to charge fees upon assets management, but he feels the position on Germany makes long-term sense. “Selling properties means losing AUM and this is not usually something that management likes to see. But being bold enough to put investment performance over your own growth targets I think is the way for longstanding success. Either we give it back to investors or we simply change the fund strategy,” he says. “The old strategy was to buy very big properties in Europe at a discount. There was a premium for these properties because there was not much finance available, but now that premium effect has completely gone. We switched to looking for core property opportunities in Spain and Italy, so we kept the money from sales in Germany but we changed the fund strategy.”

Buying big core buildings in Germany’s cities is not without risk. Tobias Gollnest, executive director of commercial real estate at Corestate Capital is of the opinion that some investments are in danger of actually turning sour. He elaborates on a point made by Axa Real Estate’s Leube that one has to invest in the properties. Gollnest says: “My personal view is prices are too high for the kind of property we are talking about. I believe that for the kind of yields that have been mentioned, you would lose money. What we learned compared with 2007 is that one has to spend money and invest in the property. For example, the MesseTurm is a building from the 1980s. The space efficiency is not that good. The flavor of the tenants has changed compared to what it was. Now tenants want windows from floor to ceiling. You have to work with your asset.”

He recalls at his previous employer, the Luxembourg-domiciled private equity firm, Freo Group, it co-redeveloped a 16 floor building originally developed for JPMorgan in the mid-1970s. The first time it was refurbished was in 1993 and Freo came in and rebuilt it in 2011. “The life cycle of this property was 16 – 17 years, not 3 years.”

Leube at AXA Real Estate explains: “In office investments, life cycle is something you need to factor in. When you see that office buildings are knocked down or fully refurbished after only 15 – 20 years, as they become obsolete. You need to factor that in when you buy core assets – that you have to keep it to standards.”

UBS’s Hickl adds: “It is one of the most frequently made mistakes. We have a property in Warsaw for example that was built in 1996 and we will probably tear it down because we cannot let the space. People do not really like it anymore for reasons everybody stated.”
As a broker behind some of the properties trading, CBRE’s Schreppel addresses Gollnest’s point about buyers potentially losing money. “One has to look at what is happening in speculative development and the opportunity to improve buildings to get them into competition with the best office property,” he explains. “If you look, there is hardly any (speculative development) going on. We as a company need to move in three different cities because we are expanding, and I can say the choice of good quality property is 5 at the most and there is nothing in the market at the moment to be absorbed. So even the buildings which are not up to scratch are still going to find tenants.”

AEW’s Czarnetzki adds that in some markets supply still lags long term averages, supporting rental growth in the short/medium term. “Developers are still cautious and this lack of supply will affect rents positively.”


Corestate is far removed from the kind of large scale core office acquisitions that hogged the discussion so far, so Gollnest does not have to worry himself about losing money in the way he described. “I would liken our firm as some kind of a speedboat,” he says. “We don’t have an existing fund in place but since the Lehman Brothers crisis we have focused on separate accounts making us very flexible in terms of investor appetite. Skyscrapers are not our business. Our sweet spot is something between €20 and €200 million.” Gollnest emphasizes that Corestate is looking for special situations which makes it “interesting” for its investors. “Risk-adjusted returns are very important,” he says, adding the company expects another deal to be cemented by the end of the year.
For the other managers, however, they have much larger businesses and an array of strategies. AEW’s Czarnetzki, for example, works for a firm with a very large separate account and fund business that boasts a multitude of investors mostly being French with some international capital. In November last year, AEW advised the France’s CNP Assurances on buying three retail properties in Germany for €924 million in conjunction with TIAA-CREF. It is also marketing and investing for its Europe Value Investors fund, which held a first close of €101 million early in summer and which has a target investment capacity of €700 million. The strategy is to take advantage of the strong demand for stabilized core assets, targeting the most liquid European markets. “We will invest in office assets that can be managed or repositioned to core to take advantage of the demand,” says Czarnetzki. The target locations are Germany, France and the UK. Apart from that fund, it has a pan European logistics fund very much focused on Germany for which the firm just bought a small property in Bremen.

UBS is more similar to AEW Europe and AXA Real Estate than Corestate in that it manages five commingled and five separate account mandates that are either 100 percent focused or partially-focused on Germany. Hickl echos what AXA Real Estate’s Leube said earlier when he says most of UBS’ global clients put Europe top of their list, and Germany within that. And, significantly, three of its mandates are core-plus/ value add programs in Germany because investors have “grown frustrated” with the yields of core property, says Hickl. Apart from that, UBS has two logistics spezialfonds that invest only in Germany. The first is fully invested and Hickl reckons the timing was “perfect”. The follow up fund, however, is finding things more difficult. He observes: “Everything is expensive. A lot of people have discovered that logistics is a very interesting asset class. Another problem is a lot of logistics developers now liaise with investors.” He sums up: “We will continue to sell core property in Germany especially on the office side plus but we will still be active looking for good logistics property if we can still locate them.”

Axa Real Estate’s Leube reacts to the sell-side stance of UBS when it comes to core offices with understanding. He says the perception of a lot of investors is that this is a very hot market. “That’s why people are starting to sell.” His response to why and whether investors should continue to acquire core offices is a pragmatic one, however. “The large pension funds and sovereign wealth funds have in the past invested a lot in bonds and in Germany government bonds trade below 1 percent, so what do you do with you money? Do you accept maybe a much lower yield in real estate which is still much better than a government bond? The question then is how long does it stay in that domain. Are we getting into a new Switzerland situation? Are we becoming a long-term low-yield environment without much growth and not a lot of inflation and are global yields acceptable? With the new environment and the new European geopolitical crisis, people are starting to become defensive again. This seems like a very hot market but if you put yourself relative to other investments and opportunities then you understand that we might be in this phase for quite a long time.”

Assessing the firm’s overall strategy for the forseeable future Leube says on behalf of its clients AXA Real Estate has been buying and selling $1 billion a year in Germany. It has been a net buyer at around €600 million, but it could be par this year. “We will continue with deals, focused across the entire risk spectrum. I think we will see further yield compression and we are looking for smart investments. Even more people are interested in investing in Germany. This is an environment we need to get adjusted to for some time.”

As CBRE’s Schreppel underlines, debate is turning to what is going to happen afterwards because the buyers from a ‘characteristical’ point of view are not real traders any more. “This is the characteristic of the buyers at the moment; buy and hold for all of the logical reasons such as what would you do with the money in these financial markets. I think that everyone around the table will agree on any side of the market the yields are getting under pressure which is a logical consequence of the market forces. Are we in a bubble? I would tend to say ‘no’. I truly believe that isn’t the case, but who knows in two years’ time.”

He adds: “Asia is definitely a region we should be talking about because if investors from that region just lift their game by 1 percentage point, and transfer that into equity plus leverage, one could buy a whole city if they wanted. It always starts in the same way. Telephone calls, sending out the research material, another set of phone calls and now Chinese investors are actually pitching over. They are personally getting a feel for the region now and the next step will obviously be deploying the money.”

The participants explain that Germany has it quirks. Many investors are more educated now, yet some facts are still surprising to the uninitiated. For example, Germany’s capital Berlin is not even a headquarters location for any company listed on the DAX 30 stock exchange. Frankfurt, meanwhile, has a tiny direct population of just 750,000, though the catchment area obviously has many millions.

But funny aspects like that do not put investors off. Sums up Schreppel: “Foreign capital just sees that Germany by and large is fine, and at the moment Germany is where investors want to put their money.”

He adds: “You have to realize that there are 5 big cites in comparison to the usual single city view of the UK and France.. Most of the cities do work separately. The most volatile is Frankfurt, but then again that isn’t very volatile by comparison to London. There is a lot of private local capital in Munich for instance, which can outbid any other capital and then there is the rental growth, which in Frankfurt can go fairly high by German standards, but in other cities can be very low.

He predicts Germany overall will see large transactions volume by the end of the year as it stands at around €35+ billion so far. He also believes yields will continue to reduce fractionally which will set in train a certain “impulse” to go into secondary locations.
Gollnest agrees: “Although yields are decreasing in secondary cities there is still a more significant spread between core/core plus properties in the Big 7 and comparable properties in B-cities. When a property shows a good building quality, is well located in the city and has a strong rent roll, it might become a very attractive investment opportunity. Same applies for B-locations in A-cities.”

Chimes CBRE’s Schreppel: “I think the best properties in secondary markets are clearly becoming of interest now.” Speaking generally about investment, he adds: “There are interesting new international players that are maybe behind the screen of an AXA Real Estate, AEW or UBS. We will see the money flow coming in for sure.”

Whatever happened to the banks?

In the aftermath of the global financial crisis in 2008, people expected a deluge of German asset sales from banks, but it has not really materialized.
Leube: It has been a slow process. There is a lot of capital around for any type of risk so for banks it would be the perfect time to come out with portfolios. Some banks have split into good bank, bad bank structures.
Gollnest: What was distressed has now been bought. The asset quality of that time was really poor, now we have a lot of capital in the market. If you are a professional buyer of distressed assets in the market you will have difficulty finding a bank to support you. These are the two main reasons why we didn’t see a wave of distressed deals. Corestatae did do it in the past in the residential sector. Today the market is driven by core and core plus assets.
Hickl: One additional reason why there haven’t been as many loans on the market as people expected there to be is because of the economic recovery. Some of the distressed loans simply aren’t distressed anymore.
Gollnest: I would say they are still distressed in terms of loan to value, but they can cover the interest payments because the rate is so low so there is no real pressure for the banks to sell.
Czarnetzki: It would be interesting to see how the ECB’s asset quality report due in November will affect banks and the ‘extend and pretend’ strategy they employed over the last few years. This could well be the point when additional stock will hit the market.

Carsten Czarnetzki
Investment director and fund manager of Europe Value Investors
AEW Europe
Czarnetzki is an investment director at AEW Europe and is responsible for its Europe Value Investors Fund which is currently raising capital to assemble around €700 million of assets. The London-based professional joined AEW two and a half years ago having previously worked as a principal for Starwood Capital Group in both Europe and the US. He started out at Deutsche Bank’s consumer real estate and leisure mergers and acquisitions business before moving to Italian insurance company, Generali, and ultimately AEW Europe. AEW Europe is part of a global real estate investment manager with €36 billion of assets, €18 billion of which are located in Europe.

Tilman Hickl
Head of global real estate, Europe ex Switzerland]
UBS Global Asset Management
Hickl is based in Munich and is head of global real estate in Europe outside of Switzerland for UBS Global Asset Management. He was formerly at Pramerica Financial where he was managing director of the investment company and head of sales for open-ended and closed-ended real estate funds. He has also held positions at Ernst & Young, Oppenheim and at Deutsche Bank where he served as Europe head of sales in its real estate financing division for the north east region.

Tobias Gollnest
Executive director, commercial real estate
Corestate Capital
Gollnest oversees Corestate’s investments in commercial real estate, comprising the asset management of existing assets as well as new transactions. He recently joined the Zug-based firm having been executive director at Freo, a Luxembourg-based private equity firm involved in real estate development where he was in charge of domestic real estate transactions. He started his career in 2001 at the structured finance and real estate investment banking division of Eurohypo bank, and also had stints at Barclays Capital and Merrill Lynch.

Matthias Leube
Head of real estate, Germany
AXA Real Estate Investment Managers
Leube began his career in 1992 at property services firm Jones Lang LaSalle where he stayed for 11 years and was European director before joining Deutsche Bank. He worked for Deutsche Bank as managing director for 8 years responsible for the bank’s occupied portfolio of real estate for which he led a rationalization program in Germany and then London where it was the largest employer in the city. He swapped to the investment management side of real estate in 2011 when he joined the Cologne office of AXA which has €47 billion of property globally, some €5.5 billion being in Germany.

Peter Schreppel
Chief executive officer, Germany
Schreppel has been active in the real estate business since 1998 notably in cross-border investors’ relationship management. He joined the global property services giant in 2002 and took over the lead of the international investment department in 2005. Since March 2011, he has been chief executive officer for CBRE’s entire business in Germany which has grown to 550 people.