For real estate investment managers, the German market has long been an alluring proposition from a market valuation perspective, thanks in part to the shadow cast by London’s property market, which for years has become a trophy asset magnet, pushing core property prices into the stratosphere.
But there are some signs that London might be cooling, with some UK value-oriented fund managers, like AEW UK Investment Management, remaining underweight on London, at least for the next couple of years, as it doesn’t presently offer good value. Commercial rents are softening and while there is new stock coming on line, take-up is below the historical average and vacancies are creeping up.
With Brexit in full flow, Germany’s real estate market is certainly shining. It is a very stable, reliable market and the value of investments continues to increase. “This is making the market very attractive to investors but also making it a more competitive one,” comments Gianfranco Maraffio, Managing Director, TMF Group (Germany).
BlackRock’s real estate team cites Berlin, Munich, Frankfurt, Hamburg as offering attractive fundamentals. They purchased an office building in the Niederrad sub-market in Frankfurt in 2016, which had double-digit vacancy rates and a bad reputation amongst office tenants until most of the vacant office stock was converted into residential.
“In some sub-markets, if you find the right location and you can effectively deliver the right product at the right price, then in that context Frankfurt is a very attractive market. But if you look at Frankfurt’s CBD, for example, there’s quite a large supply pipeline, which would suggest rents might not develop as favourably as some people might think,” Thomas Mueller, Managing Director, BlackRock Real Assets and Portfolio Manager for Europe Property Fund IV, told Property Funds World recently.
Selective investing is therefore needed in Germany, as in any European real estate market. This is especially true for a regulated market. Arguably, Germany and France are the two most heavily regulated markets in Europe, requiring asset managers to weigh up the regulatory risks before doing acquisitions.
“It is not always easy for non-EU real estate investment managers to understand why it is so regulated. It is therefore crucial for them to work together with partners who are well established in the German market and can support them the best way possible,” suggests Maraffio.
“Investors are always going to look at the performance numbers but in order to achieve good performance in their funds, managers need strong and stable cooperation partners. Those who are in a position to ensure they are operating in full compliance with regulation, and can also provide reliable information to investors, not just on the accounting side but all information related to the investment vehicle.”
Real estate investment managers certainly shouldn’t be scared off by a regulated country like Germany. After all, all the regulations are clear and well established, such as those applicable under AIFMD, there aren’t constant changes being applied. Working together with the right partner can reduce the complexity of operating in such a regulated market and keep the manager’s in-tray relatively empty so they can concentrate on managing their investments.
From Maraffio’s vantage point, he says that office and commercial are the two main sub-sectors of investment focus but thinks it’ll be interesting to see how the situation with residential real estate plays out as a result of Brexit.
“Residential has been relatively stable in the main German cities whereas in the UK and France their value has been significantly higher. Now, however, residential prices in Germany are starting to increase and could represent some attractive investment opportunities. The biggest price increases have been in Berlin, followed by Hamburg, Frankfurt, Munich, Stuttgart as well as Dusseldorf. Berlin started a lower base so it has seen the biggest price increases,” explains Maraffio.
Asian investors, in particular Singaporean investors, are really jumping into the German RE market across a variety of investments as they seek out commercial as well residential opportunities, according to Maraffio.
He considers 2018 to be a good fundraising environment.
Given the low interest environment in traditional markets, alternative assets are something that German investors continue to view carefully. They are, says Maraffio, happy to consider alternative asset classes such as real estate, because they act as an effective diversifier from traditional bonds and equities.
On the fundraising side, Germany replaced the US as the most popular investment destination with respect to open-ended retail real estate funds, according to Berlin-based Scope Analysis GmbH, part of the Scope Group.
As Scope points out in its latest fund analysis report, high cash inflows and ensuing efforts to prevent excess liquidity build-up drove the 19 German open-ended retail real estate funds evaluated by Scope to increase their investment volumes by 50 per cent between 2016 and 2017, to a total value of EUR9.2 billion, across 66 commercial properties and 324 residential properties.
Part of this is because higher EUR/USD hedging costs made US investments less attractive for Euro-based investors. Consequently, both Germany and the UK overtook the US, with Germany accounting for a quarter of all investments in 2017 (EUR2.3 billion).
For those looking to invest in Germany, Maraffio points out that there are two main options to consider. One option is hold assets in Germany using an SPV located outside of the country; i.e. the Netherlands or Luxembourg, the latter having a double tax treaty in place to protect asset managers from double taxation with respect to taxes on income.
A second, perhaps less popular option, is to use a German SPV to hold German real estate assets. This might be considered if the manager intends to have a substantial presence in Germany and operate funds directly out of the country.
“Often, it will depend on what the end investor is focused on and what their preference is. It could be that the fund manager chooses to use a Luxembourg SPV to hold German assets in addition to other European assets. But I would say German institutional investors tend to be comfortable with either approach,” comments Maraffio.
As for investor trends, Maraffio says that investors in German real estate funds are increasingly asking for information online that they can access immediately. In his view, having someone like TMF Group in place to coordinate all the fund information and who is able to work with the investment advisor, the fund manager, the property manager etc., to deliver accurate information, is a vital cog in the wheel.
“At TMF Group, we put everything together in a way that demonstrates an understanding of the needs of investors and allows the advisor to manage business the way they want, as well as deliver information in the format that investors want. Delays can be disruptive for investors. It’s important to have timely, transparent information for reporting purposes. We support the full package from compliance to regulatory to fund accounting and performance data,” concludes Maraffio.
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