GERMANY ROUNDTABLE: The cost of mass appeal

It would be difficult to find two groups with less in common than refugees fleeing conflict in the Middle East and decision-makers at global real estate investment firms.

However many individual members of those two ill-matched groups do share a perception of Germany: as a beacon of safety, stability and prosperity within Europe.

Germany has opened its arms to welcome international real estate investors, and they are responding with enthusiasm. Around €24 billion of property was traded in the German commercial real estate investment market in the first half of 2015, according to CBRE research, an increase of 42 percent on the same period the previous year. The share of the value of those transactions accounted for by foreign investors was 57 percent of the total.

The ongoing sale by SEB of the famous Potsdamer Platz development in Berlin at an asking price of around €1.4 billion has attracted interest from some of the biggest names in global real estate investment and the increasingly international nature of the German market is quickly established as the dominant theme for the participants of this year’s PERE Germany roundtable.

“This year, for the first time ever, international investors are most active on the sell as well as the buy side,” says Stuart Reid, head of Germany at fund manager Rockspring. “Global investors are making the market.”

Sky high

The influx of foreign money has driven prices up. A sale price of over €1.4 billion at Potsdamer Platz would represent a yield of less than 3.5 percent for a property with a very large chunk of vacant office space. Could the German market, historically renowned for its stability, be overpriced and heading for a correction?

Sascha Wilhelm, chief executive officer of real estate investment manager Corestate Capital thinks not: “I have often been asked if prices are too high, but prices are always relative to the alternative investments you can make. In some parts of Berlin, Hamburg and Munich there are extremely high prices at the moment, but the spread between government bonds and real estate returns in Germany is still extremely healthy,” he argues. “At the moment government bonds are at zero. We have built up a portfolio of approximately €370 million of high street retail assets and we calculate to dividend out interesting returns at around 6 percent.”

Leasing risk is low because of the continued strength of the German economy, adds Reid. Ten years ago, Germany was ‘the sick man of Europe’ but the economic crash and the ongoing Eurozone crisis have kept interest rates low and depressed the euro exchange rate allowing Germany’s manufacturing sector to drive an export-led boom that is the envy of its neighbors.

Reid observes: “The euro has depreciated against the dollar by about 15 percent over the last 12 months yet there is very low unemployment, GDP continues to grow, and interest rates are at rock bottom. Because it is part of ‘euroland’ the macro economic conditions for Germany are actually rather false. As long as that carries on – and I believe that if the euro stays together that will carry on – Germany will benefit and there will be no correction.”

Ralf Klann, head of asset management at real estate advisor Bilfinger Real Estate, takes a slightly more cautious stance: “Some of the yields being paid are below sustainable levels,” he warns.

He adds that easier financing terms offered by the banks could lead to the market heating up further: “We have seen margins coming in and loan-to-value ratios slowly going out, which indicates that people are evaluating the risk differently. It is difficult to say when the tipping point is going to be, but it doesn’t look like it is going to be in the very near future. A correction probably won’t happen this year, and it may not happen next year, but it could happen within this decade.”

There are some macroeconomic challenges for Germany, suggests Dirk-Reiner Voss, head of real estate for Germany at law firm Dentons, including the cost of dealing with the migration crisis and reduced buying power in markets for German manufactured goods: “We are seeing a decline of exports to the Eurozone – in particular the south of Europe is not developing as well as Germany – and we also see that exports to China are getting more difficult. However, the mood in the industry is unexpectedly good so obviously industry leaders think that they can handle these challenges,” he says.

International capital

Its strong economic performance has moved Germany up the pecking order of destinations for international capital within Europe, argues Reid: “Going back 20 years, global investors would go to London first, then they would go to Paris and then they would come to Germany. They would say Germany is difficult to understand because it has seven big cities and it is so regional and they sometimes ran out of steam by the time they got here. What we have seen in the last five or six years is they are coming to London and then jumping much more quickly into Germany and bypassing France.”

Before joining Bilfinger Real Estate, Klann spent five years at Middle Eastern sovereign wealth fund Abu Dahabi Investment Authority (ADIA). For his new employer he will seek to use the insight he has gained into the mindset of overseas institutional investors to grow the advisor’s international client base. He believes that Germany benefits from being perceived from abroad as a low-risk investment destination: “Germany is often perceived to be a ‘boring’ – I flip the coin – it is a ‘safe and secure’ market,” he quips. “Germany is perceived everywhere in the world as representing stability, reliability, accuracy. It is a strong advert for German real estate.”

The weakness of the euro against the US dollar has encouraged American investment in Germany. Klann points to US teachers’ pension fund TIAA-CREF’s recent creation of a €4 billion partnership with two of Sweden’s state pension funds, AP1 and AP2, to invest in European office property as an example of the trend. Canadian Pension funds have also been big investors in Germany: in May, Canada Pension Plan Investment Board established a partnership with European real estate investment trust Unibail-Rodamco to invest €394 million in German retail property.

Among Asian investors South Koreans have so far been most conspicuous in their appetite for German property. Chinese money, conversely, has not yet been a major force in the German market, but that may soon change, says Wilhelm: “Chinese investors in real estate have been more the gambling type of investor and they still see Germany as a market with rents that are quite flat. I am pretty sure this will change as they realize they have huge volatility not only in the equity markets but now coming to the base Chinese economy itself, so they will look for lower risk investments. They could be the next ones to step into Germany.”

Earlier this year, Dentons announced its combination with Chinese law firm Dacheng. Upon launch it will be the biggest practice in the world by headcount with over 6,000 lawyers. The company hopes to use its size to capitalize on an increasingly international real estate market by providing a full range of services across national borders.

Voss says that Chinese capital is already investing in the German market: “We have advised on a number of investments for a Singapore REIT, IREIT Global, and the money for that is nearly 100 percent mainland Chinese. They are no gamblers. They have invested in low risk assets like office buildings rented long term to Deutsche Telekom. We had unsuccessful bids for transactions for Chinese investors so the interest is there. They need to get familiar with the German market and used to how deals are done here. That will take some time, but we will see an inflow of money,” he surmises.

Domestic funds take more risk

“What I have learned from discussions with German life insurance companies is that they are facing the challenge that they need to pay out on policies at 3 percent on average still,” says Wilhelm. He adds that, in the past, their investment teams relied heavily on bonds, but with returns from government securities so low they are now looking towards real estate to boost their income.

“They are having to climb up the risk ladder, but they do not have the teams or partnerships in the market. Allianz told the market they want to increase their total real estate volume to 10 percent. They are now looking for integrated platforms that can handle these investments because they do not have the experience on their own,” he says.
Reid reminds the other attendees that big German open-ended fund managers, Union Investment and Deka have both recently launched retail core-plus property funds with local German asset managers. “There are a number of institutional funds which five years ago would have only bought core brand new, fully let, low management real estate in this sector, but now those assets are more expensive and difficult to find because there has been very limited development in this country, so they are teaming up with asset management platforms in order to do more core-plus and value-add,” he observes.

Voss adds that the German funds are also beginning to show an interest in funding development: “There has been very limited development over recent years. Now, because of yield compression, open-ended funds will take the risk to do forward-purchases and developments on their own, which is something they wouldn‘t have done in the past,” he says.

From opportunity to income

Prime office and retail property is now expensive and hard to obtain because of the high level of demand, but openings to gain opportunistic returns are also limited. The flood of distressed property entering the market that was anticipated in the years following the crash has failed to materialize.

“It has dripped through the system,” explains Klann. “The German bad banks have managed that distressed property in a very sensible way. Instead of pushing it all out they have managed it into a core or core-plus asset and then sold it, although I still feel that there must be some stuff out there waiting for its new harbor.”

Driven by the demands of its investors Corestate’s focus in Germany has changed from securing opportunistic returns to buying property that satisfies investors’ demands for an income dividend. Wilhelm says: “We had for example a portfolio of approximately €1.3 billion of value-added residential properties. We managed that proactively and sold most of it in 2014 and the beginning of 2015. There are a lot of players with cheap money in their pockets buying big residential portfolios at the moment. Their overall strategy in the medium term might be to sell the whole platform to domestic listed landlords.”

Residential has been one of Germany’s hottest real estate sectors in recent years. In September, Vonovia, formerly Deutsche Annington Immobilien, joined the DAX index of Germany’s biggest publicly traded companies, an indicator of the rising significance of the sector. The company has amassed 370,000 apartments and collects around €1.1 billion a year in rent.

After cashing out of the residential sector Corestate has moved into retail, buying high street properties in prime locations in the German secondary cities. Wilhelm says: “We have bought assets with a total value of around €370 million and plan to buy an additional € 250 million this year with an average transaction size of approximately €5 million, cherry picking them piece by piece. There are very good secondary cities in Germany where the Mittelstand [of small and medium sized enterprises] is strong and there are big universities. Around 80 or 90 of those locations are very interesting to us. The tenants are as strong as you see in the shopping streets of the main cities so you get the same downside protection, but with higher yields.”

Corestate is one of a handful of investment managers seeking value in Germany’ retail property market. Rockspring focuses on a different section of the retail market, investing in out of town shopping through its €650 million German Retail Box Fund (GRBF) and a number of other discretionary funds. In February, the firm, together with Dutch pension fund manager PGGM and Belgian insurer AG acquired a €350 million portfolio of German retail warehouses in a GRBF sidecar vehicle.

Reid says: “The institutional funds like Union and Deka and the international money are now buying that product. Yields have compressed, but still you have a 200 basis points to 250 basis points yield spread between core and core-plus or value-add. We will continue to buy the older centers that perhaps have been under-managed and over a period of six to eight years, manage them to core, and then exit.”

Both fund managers are also looking to achieve higher returns through development. Corestate manages around €200 million of assets in the student housing sector and has built up a development team to create more. Meanwhile, Rockspring has teamed up with logistics developer Verdion to develop two schemes totaling 2.25 million square feet in Germany over the next five years.

The year ahead

The discussion closes with the attendees setting out their plans and expectations for the year ahead. Klann expects the market to remain stable with greater demand from insurers increasing their weighting in real estate and from international investors.

Beyond that period, the prospect of interest rate rises may lead to some cooling at the top end of the market: “If the margin is shrinking for those investments that have been very optimistically priced that may have an effect on what is traded,” he says.

Both Klann and Voss stress the importance of being part of a large multinational group in being able to provide advice to investors looking to place their money in a number of different countries. Voss anticipates greater demand for legal services relating to large pan-European portfolio sales and says that Dentons will be growing its team accordingly.

Wilhelm says Corestate will be looking to grow its high street retail portfolio and will also seek other income producing assets for its clients, while Rockspring is currently fundraising for the sixth in its series of TransEuropean funds. Reid expects the fund to be fully raised in the near future with a spending power of around €1 billion, including 50 percent gearing. For Germany, one city of interest to the firm is Berlin. He says: “It has a lot of inspirational young workers coming there. In 15 years’ to 20 years’ time, it will have the lowest average age of any of the major capitals in Europe, which is rather fascinating in the long term view.”

Unless Europe is subject to an unexpected shock it seems that prosperous, confident Germany will continue to offer a safe haven both for the dispossessed multitudes in search of a better life and the cautious investor looking for a solid return.


Ralf Klann
Head of asset management, Germany
Bilfinger Real Estate
Klann joined international real estate consultancy Bilfinger Real Estate at the beginning of October. The firm manages assets worth € 54 billion in total and Klann leads its 45-strong German asset management team, which provides a full range of services to investor clients including value-increasing management as well as advice on acquisition, development and disposal. He was previously head of risk for Europe and Member of the Executive Committee at the Abu Dhabi Investment Authority’s real estate business and has held senior positions at JP Morgan, Morgan Stanley, Eurohypo and Deutsche Bank in London and Frankfurt.

Stuart Reid
Reid leads the German operation of Rockspring, a privately owned European institutional fund manager, which controls around €8 billion of property assets in Europe, of which €1.75 billion is located in Germany and Switzerland. He is responsible for all transactions and asset management throughout Germany, Switzerland and Austria. He joined the company in 2001 as head of the project group and opened the Berlin office later that year. Prior to joining Rockspring he was managing director at a European development business. He has worked in Germany since 1994 when he established the Berlin office of chartered surveyors Weatherall Green and Smith.

Dirk-Reiner Voss
Head of real estate, Germany
Voss is a partner in the Berlin and Frankfurt offices of Dentons – formerly Salans before its combination with SNR Denton and Fraser Milner Casgrain in 2013 – and head of the law firm’s 20-strong German real estate practice. He provides advice for clients in the real estate sector and finance industry on the structuring of transactions (including related financing issues) and on general corporate matters.

Sascha Wilhelm
Chief executive officer
Corestate Capital AG
Wilhelm is chief executive officer of Corestate Capital AG and a member of its investment committee. Headquartered in Zug, Switzerland, Corestate is a fully integrated real estate investment manager with approximately €1.4 billion of assets under management in Germany and Austria. A lawyer by training, Wilhelm is responsible for the overall strategy of the group, equity raising and client relations, corporate functions such as human resources and corporate legal as well as the real estate management services. Before joining Corestate, he was managing partner at property services provider Seitz Real Estate Group.