A sector apart

IFR Germany Special Report 2013
8 min read

With little yield elsewhere for the risk averse investor, German property remains attractive. Total transaction volumes should hit €27bn this year.

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At the beginning of April, an investor consortium led by Patrizia Immobilien paid €2.45bn for BayernLB’s shares in GBW. The listed housing company’s portfolio is made up of more on than 32,000 flats in and around Munich. One of the bigger Germany real estate deals of the year so far, it looks like a canny move. The equity investment is likely to yield between 4% and 4.5%, but some analysts have suggested that yields might be as much as 5.5%. After all, apartment prices in Munich are booming.

According to Immobilien Scout 24, Germany’s largest real estate website, at €12.10 per square metre, domestic rental property in Munich is the most expensive in the country. It was above Frankfurt at €10.41 per square metre and Stuttgart at €9.68 per square metre in the fourth quarter of 2012. According to Jones Lang LaSalle, apartment prices there rose 17% last year with little sign of slowing down.

While much of the rest of European property has struggled with a downturn, Germany is booming. In the first quarter of this year, all six of Germany’s main cities – Berlin, Cologne, Duesseldorf, Frankfurt, Hamburg and Munich – saw significantly increased investment. Volumes of property sales were up 46% year on year to €3.7bn according to Savills. The global real estate services provider said this year should comfortably trounce last year’s total transaction volume of €12.9bn for the six cities.

“A large number of development sales as well as a couple of large volume portfolio transactions ensured an exceptionally strong start of the investment market into the year,” said Marcus Lemli, chief executive of Savills Germany and head of investment Europe. No surprise given that low interest rates and the continuing European debt crisis have given few other outlets for risk wary investors.

Residential strength

Without a doubt, the theme of 2012 was residential property. It accounted for more than a third of all transactions, corresponding to almost €7.7bn of invested capital, according to Deutsche Bank. Half of the top 10 deals last year involved residential portfolios. Top was the €1.4bn LBBW portfolio bought by the investor consortium led by Patrizia Immobilien in April last year. This was followed in May by Deutsche Wohnen’s acquisition of the 23,500-strong €1.2bn BauBeCon portfolio from Barclays.

Residential rents were massively attractive in the wake of the 2008 crash. But that is beginning to change. The fourth quarter of last year saw a number of large commercial transactions. In October, NBIM, the Norwegian sovereign wealth fund, and AXA Real Estate bought property in Berlin and Frankfurt for €784m. Then in late December, property investor Signa Holding bought 17 German department stores, including the country’s largest, the historic KaDeWe department store in Berlin, for €1.1bn from investors that included Goldman Sachs.

This year began well too. The largest individual commercial deal so far has been the sale of the Ko-Bogen development in Duesseldorf to Art-Invest Real Estate Funds for around €400m followed by two acquisitions by IVG Institutional Funds in Frankfurt and Berlin for around €500m. Germany’s total commercial investment volumes in the first quarter reached €6.65bn, a year-on-year rise of 21%.

Stock market action

The activity is being matched in the stock market. Property company LEG Immobilien has comfortably been the largest IPO on the Frankfurt Stock Exchange this year and Europe’s largest listing in the first quarter. At the end of January the Duesseldorf-based real estate group raised more than €1.3bn via Deutsche Bank and Goldman Sachs, and at least two more property IPOs are expected in the not too distant future.

Terra Firma-owned Deutsche Annington, Germany’s largest residential landlord, has appointed JP Morgan and Morgan Stanley to manage its IPO later in the year. And at the beginning of April, Cerberus Capital Management, the private equity firm led by Stephen Feinberg, said that it had appointed Goldman Sachs, JP Morgan and Bank of America to manage the IPO of its German retail property assets. It owns buildings including department stores valued at around €2bn.

Demand for exposure to property in Germany is such that bankers on the LEG Immobilien deal were able to come out with pretty tight price guidance of €41–€47 and within three days there was enough demand to cover the deal. Although shares have slipped slightly since the IPO, other property companies have done particularly well.

Gagfah Group, the largest residential group listed in Germany, has seen its shares rise 45% over the past 12 months; shares in Deutsche Wohnen, Germany’s second-largest residential landlord by market value, are up 24%; and GSW Immobilien, which owns property primarily in Berlin, is up 23%.

“German Bunds are not currently attractive even to the really risk adverse investor. For a relative return investor, prime office buildings in Munich are achieving 4.5% versus 1.7% for German government bonds”

Investors are queueing up and it is easy to see why. German property funds over the past 12 months have outperformed both European-wide and global property funds, according to real estate benchmarking and portfolio analysts IPD. Germany returned 2.3% versus –1.0% for global and –0.3% for European funds. More to the point, investor confidence was highlighted in that the first quarter showed more inflows than outflows from liquidating property funds.

Part of the reason quite simply is the perennial search for yield. As Simon Durkin, head of research, Europe for the real estate investment management business of Deutsche Bank’s Asset Management division, said: “German Bunds are not currently attractive even to the really risk adverse investor. For a relative return investor, prime office buildings in Munich are achieving 4.5% versus 1.7% for German government bonds.”

With a spread of anything between 300bp and 500bp over Bunds for German property, no wonder then that both insurance companies and pension funds are upping their allocation of real estate in their portfolios.

German insurance companies have increased the amount of property they hold from 6.1% in 2010 to 6.7% at the end of last year, according to Ernst & Young, and it is even more marked with pension funds. Those like BVK (German Private Equity and Venture Capital Association) and NAEV (Nordrheinische Aerzteversorgung) plan to invest up to 14% in bricks and mortar. “Investors are increasingly willing to buy properties prior to completion in order to achieve higher initial yields,” said Matthias Pink, head of German research at Savills.

What does this mean for the year? At the beginning of the year there were sceptics. “Occupier market activity and rental movements remain constrained by the expectation that 2013 will be a year of faltering economic recovery,” said Richard Holberton, director of EMEA research at CBRE, the world’s largest commercial real estate services and investment firm.

Nonetheless, it is likely to be a good year for German property, more or less on the same level as last year. Although the dizzy heights of 2007 which saw €65.3bn in transactions, a total transaction volume this year, beating last year’s volumes of €27bn, is expected.

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