Safe haven status driving record deal activity

Core investors remain focused on Germany’s prime property, reports Doug Morrison.

Germany is in the middle of another bumper year of deals as equity investors and debt financiers warm to the country’s status as Europe’s safe haven, despite niggling concerns over the pricing of real estate.

The latest forecast by Savills predicts that commercial real estate investment activity will hit a record €60 billion in 2017 – up from €54 billion in 2016 and comfortably outstripping the previous peak of €58 billion in 2015 (see graph, below).

Matthias Pink, Savills’ head of research in Germany, suggests that investors are balancing long-term demographic and economic trends against the prevailing geopolitical uncertainty across Europe and beyond.

“The conditions favouring investment in German real estate are next to perfect,” he argues. “We have growth in population, a growing economy, low interest rates and a very good lending environment, at least for the core and core-plus segments. Germany is more than ever, probably, perceived as a safe haven.”

Marcus Cieleback, head of research at Patrizia Immobilien, the pan-European investment manager, agrees: “Europe looks quite compelling as a market to investors and if you look at the different countries, Germany is the biggest economy, very stable and has seen solid growth over the years. If you’re an investor trying to get stable returns, then you naturally land into Germany.”

Patrizia played a pivotal role in one of the landmark deals of recent times when, last autumn, acting as investment manager on behalf of South Korean investor Samsung SRA Asset Management, it reportedly agreed to pay €730 million for the Commerzbank Tower in Frankfurt.The deal is due to complete this summer with Commerzbank leasing back Germany’s tallest building.

Patrizia played a pivotal role in one of the landmark deals of recent times when, last autumn, acting as investment manager on behalf of South Korean investor Samsung SRA Asset Management, it reportedly agreed to pay €730 million for the Commerzbank Tower in Frankfurt.The deal is due to complete this summer with Commerzbank leasing back Germany’s tallest building.

Such deals involving single trophy assets are rare in Germany but, as Pink says, the market is also benefiting because former safe havens elsewhere continue to lose their lustre, not least the UK, where the recent general election has further sapped confidence among investors already shaken by last year’s Brexit vote.

Even Germany’s own election in September is unlikely to derail the investment band- wagon. The Christian Democratic Union is expected to prevail, with Chancellor Angela Merkel regaining momentum after facing fierce criticism last year over her policy on immigration. As Michael Kröger, head of real estate nance international at German bank Helaba, observes, she is also popular among the investment community. “Every election represents uncertainty but I would say of the German election, it is the least uncertainty you can find in Europe, as from today’s point of view,” he says.

Savills’ research highlights “a very full deal pipeline”, suggesting that investors are looking beyond September’s election what- ever the result. What is more, portfolios accounted for 38 percent of the transaction volume in the 12 months to May. This was the highest proportion for five years, reflecting what many consider Germany’s strength – the spread of activity across the ‘Big Seven’ cities of Berlin, Hamburg, Düsseldorf, Cologne, Munich, Frankfurt and Stuttgart. “You don’t have a dominant city like Paris or London so when it comes to Germany, investors believe they can get a diversified portfolio across the big seven cities,” says Cieleback.

Pink says: “Germany is able to increase its share in worldwide investment activity since investors are still risk-averse and seeking liquidity, secure income streams. Germany o ers a lot of these investment opportunities.The potential for rental growth is very high in most markets, and that attracts money, particularly against the backdrop of investors seeking income.”

The strongest vote of confidence has come from Blackstone, the leading US private equity firm, which has been behind the two biggest portfolio deals over the past year – the €3.3 billion acquisition of Office First Immobilien (see right) and the €974 million purchase of 100 logistics properties from Hansteen Holdings.

It is possible for foreign lenders to follow their equity investor counterparts and finance the bigger acquisitions, although German banks remain the dominant force – especially outside the top seven cities.

A director of one international bank, who declined to be named, observes: “It’s not an easy market for a house like ours because of its competitiveness. There is a wealth of local lenders and sometimes their cost of capital might be lower than our cost of capital. It’s not always possible to compete on plain vanilla deals, which are, at the end of the day, the largest percentage of what’s happening.”

Cieleback comments: “For the really huge portfolios, the international players are always part of the story and they can easily finance €500 million to €800 million through a club, and they are competitive,” he says. “But as the deals get smaller – say €50 million to €100 million, so financing between €25 million and €60 million – then the German banks are very competitive.”

According to Pink, German banks are focusing on core and core-plus assets. “They are still hesitant when it comes to riskier assets and it’s di cult to get financing for value-add and opportunistic transactions,” he says.

Yet, for all of Germany’s safe-haven attrib- utes, there is nonetheless an undercurrent of caution about real estate pricing, particularly

Yield compression

German property yields are expected to come in residential. Savills forecasts that residential investment activity in 2017 will match last year’s €13 billion tally, but amid signs that the number of transactions is falling and price growth is slowing. “This may indicate that investors have reached the limits of what they are willing to pay,” says Pink.

At Helaba, whose loan book is split evenly between Germany and overseas, Kröger believes there is reason to be slightly cautious of commercial property, too. “Prices have grown to a certain level where it’s di cult to add value significantly and make your return, and this also goes for the lending,” he says. “Everybody wants to have exposure here in Germany either as principal or on the debt side but the margins are the lowest in Europe, although yields are still higher than Paris or London.”

Kröger adds: “It depends on how low you can go on your expectations. Price increases cannot go on forever and they have already started slowing down, and the same goes for the debt providers. For instance, [at Helaba] we do several billions of new business every year, but this year we plan a little less than last year – only because to do the same amount or more we’d need to compromise on our returns too much. So we’ve been doing a little more on the international side lately.”

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