OPPORTUNITIES IN GERMANY
Domestic funds put up fierce competition as foreign players flock to Germany, writes Jane Roberts
Germany still tops the shopping list for European property investors. The country’s liquid and transparent property market, and its large and relatively stable economy, continue to act as a magnet to capital.
The amount of capital targeting the country is increasing. “Everyone seems to have €1bn to invest and Germany is the first country they mention,” says Frank Nickel, Cushman & Wakefield’s head in Germany.
“I have not seen as much interest in 25 years,” says Savills’ German head Marcus Lemli. Germany’s exceptional economic position is reflected in its investment market and real estate is becoming a more attractive asset class the longer interest rates stay low.”
While investors are coming from every direction, Germany’s own domestic institutions have maintained pole position as the most competitive buyers.
Thomas Hopf, law firm Norton Rose Fulbright’s head of real estate in Germany, says risk-averse institutions, German pension funds, superannuation schemes and insurers are taking in “lots of money that they are hardly able to invest. They want solid assets that retain their value, such as real estate.”
German institutions are highest bidders
Stefan Wundrak, Henderson Global Investors’ European research director, says the highest bidders, especially for offices, “are usually German institutions, pension funds and insurers. They have traditionally invested in bonds, which is a problem in the low interest rate environment, so are happy to take lower returns than other investors.”
Their demand for core and core-plus assets and their low cost of capital have helped drive up prices and deal volumes. Savills’ figures for the first half of 2013 show German pension funds and insurers invested €3.6bn, €1bn directly and €2.6bn via special funds – more than a quarter of the €12.5bn the firm says flowed into commercial property in Germany in the first six months of 2013.
It was the strongest half year since the first half of 2008, when €12.9bn was invested, and 36% higher than the same time last year. Private investors, listed property companies, overseas investors, developers and open- ended funds were also active buyers.
Savills forecasts total 2013 turnover of €30bn, up from €25.3bn in 2012, itself a modest rise on 2011. This excludes trading in Germany’s multi-family housing sector, where turnover was high last year and the firm predicts €10bn of deals in 2013.
German institutions’ big purchases this year include Allianz paying UBS €300m for Frankfurt’s Skyper building, at a 5.6% yield; Art-Invest buying Düsseldorf’s Kö-Bogen retail and office development for two pension funds; and Generali Deutschland buying Berlin’s Lindencorso (see table).
Savills says the weight of money lowered average prime yields by 10 basis points in the first half of 2013 for offices and retail, to 4.7% and 4.2% respectively, in the top six cities: Berlin, Cologne, Düsseldorf, Frankfurt, Hamburg and Munich.
Core properties can cost even more than in London, says Henderson’s Wundrak. Germany’s much-vaunted stability means rents are less volatile than in other desirable safe-havens, such as London offices, so there is less chance to buy for rental growth – yet comparable assets cost 25-50bps more.
This puts off some overseas investors, says C&W’s Nickel: “While Korean investors bought Commerzbank’s Gallileo tower in Frankfurt (in a sale and leaseback), we don’t see Asian investors in Germany as much as we do in the UK.”
Still, foreign buyers including Norges Bank IM and AXA Real Estate, Canadian REIT Dundee International and Qatari Al Faisal have secured core assets in the past year.
Last month, Angolan sovereign wealth fund Plaza Global Real Estate Partners, advised by LaSalle and Quantum Global, secured a first German property: Atrium, 43,000m2 of offices in four buildings on the north west of Munich’s Mittlerer ring road.
David Ironside, LaSalle’s continental Europe head of acquisitions, declines to comment on the yield, thought to be about 6.5%, but says Plaza got a better yield by buying in an area with good transport links just outside the prime central office district.
“It is multi-leased and has proved its attraction to good-quality tenants like Oracle, which we like. We will put in more money to upgrade it further, giving us opportunities to expand the tenants, asset manage and get a higher return without high risk.” The vendor was a fund managed by Hamburgische Immobilien Handlung that is being wound up.
Fierce competition for core property
But demand for core property exceeds supply: “there are not enough opportunities for everyone who wants to buy”, Nickel says. Lemli adds: “There is a lot of competition and it’s hard work and difficult to do deals.”
This means one of biggest opportunities is for value-added and opportunistic investors and developers who can execute the time- honoured strategy of buying non-core assets in good locations and managing to core.
Lemli says even cautious investors are considering taking more risk. “Prime is getting more and more expensive and the yield gap with secondary is widening. There is an opportunity to look outside the core market, where some secondary product is mispriced. Investors are starting to look for secondary product that can be repositioned and produce a strong income stream.”
Bank finance is much more widely available than in the first half of 2012, when the Eurozone’s problems flared up, which is helping facilitate deals.
“German lenders used to be active across Europe but now mainly lend domestically and are prepared to take more risk here instead to expand their business,” Wundrak says. “There are a lot of active lenders and new names; it just gets more difficult if it’s a non- income-producing deal or a development.”
Rather than lack of finance, the main barrier holding back value-added and opportunistic deals is buyers’ and vendors’ differing price expectations, Lemli says. “
Buyers are more likely to meet asking prices for future-proof properties, for example via refurbishment. But owners of assets that lack such prospects will be forced to lower their expectations, possibly following pressure from their lenders.”
While Germany rode out the global financial crisis better than most, parts of its property markets are far more distressed than some local commentators care to admit. There are plenty of potential sources of product, but spotting the point at which such assets are likely to be released is the skill.
This is particularly the case with German banks, which have been unwilling to test the valuations of properties in their bad loan books on a big scale on the open market very often (see pp22-23).
Some patient opportunistic investors, such as Cerberus (see p24) and Lone Star, which bought TLG’s 800 properties from the German government, have picked up big portfolios with correspondingly attractive discounts.
Banks call in the asset managers
However, Bruce Nelson, chief operating officer of debt adviser and servicer Situs, says there is a trend for banks, or special servicers to distressed CMBS loans, to appoint asset managers and sell properties individually or in small groups to maximise value, rather than selling the whole portfolio to private equity buyers to do the same thing and take the profits. Situs has just opened a data room to bidders for 48 stores once owned by retailer Treveria.
“It is not only UK and international banks that are selling; German banks need to sell properties too,” says Norton Rose Fulbright’s Hopf. “But sometimes it is very hard to find out who is selling, because sales go through an asset manager.”
UK banks Lloyds and Royal Bank of Scotland have been more prominent sellers, in Lloyds’ case of loans and assets, in RBS’s, of properties. RBS’s biggest sales have been assets from the Pegasus portfolio, which it has been working through since Morgan Stanley handed back the keys in 2010.
The US bank’s MSREF VI fund paid Union Investment $3bn for 31 assets at the top of the market. Overseas investors AXA Real Estate and Norges Bank IM completed a €784m acquisition of office trophies Die Welle in Frankfurt and Kranzler Eck in Berlin’s Kurfürstendamm Boulevard last December. RBS is selling two more office buildings from Pegasus, in Munich.
Ironside says several big, open-ended funds are buying again, especially Deka’s, Union Investment’s and Deutsche Asset & Wealth Management’s (formerly RREEF). “They have money for Germany and don’t pay tax there or have currency issues.”
But other open-ended funds with liquidity problems are a “major source of product”, says Savills’ Lemli, who estimates that such funds offloaded €1bn of largely domestic property in the first six months of this year. Fourteen of these funds are winding up due to liquidity problems and had more than €20bn of property, €18bn in Europe and 33% of that in Germany, according to DTZ.
One of the two biggest, SEB ImmoInvest, managed by the Swedish banking group’s real estate arm, once had €6.3bn of assets, but was one of Germany’s top three sellers in the first half of 2013. In February, it sold 11 properties, most from ImmoInvest, to Canadian REIT Dundee International, for €420m. In March, it sold the Grand Hyatt and Maritim hotels and a Berlin office building to Al Faisal of Qatar, for €300m. It has paid out €1.7bn to investors since its dissolution was announced last May and, like CS Real, which also managed around €6bn of assets, has until April 2017 to wind up.
Magali Marton, DTZ’s head of CEMEA research, suggests liquidations will peak next year, when four funds – including AXA Immoselect, with €2.2bn of assets, and Degi International, with €1.3bn – will close.
Redefine goes mall shopping in Germany with cash-or-shares deal
The quoted real estate company offered the vendors, a syndicate of Irish investors, the option of cash – for those in need of liquidity – or shares in Redefine, for those wanting to keep an interest in the assets.
The vendor, CMC Capital, sold the corporate vehicles containing the assets on behalf of investors in funds CMC manages.
Stephen Oakenfull, Redefine’s chief operating officer (pictured), says: “Despite the fact that CMC has done a good job, their investors need liquidity after investing heavily in property during the boom. We were able to offer that through cash, or a share option.”
In the event, the sellers took €31.4m of the €47.1m Redefine paid for the equity in cash, at a 4% discount to the equity value for the liquidity, and the remainder in shares. The balance of the deal’s €189m value was cheap stapled debt, with a weighted average interest cost of 3.12% pa.
This, applied to the 5.5% initial yield, produces the high yield on equity.
Oakenfull says the three schemes – Schloss-Strassen shopping centre in Berlin, Bahnhof Altona in Hamburg and City Arkaden in Ingolstadt – have good rental growth potential and asset management angles.
Henderson fund takes leasing risk to score a higher yield
Competition is less cut-throat and yields are higher for core-plus assets with leasing risk.
Henderson Global Investors has targeted this strata for its second spezialfonds, which buys German logistics properties valued at up to €40m for a group of small to mid-sized German insurers and pension funds, plus an Austrian institutional investor.
“The fund takes assets with leasing risk and five to seven year lease terms, which typically will need to be re-let before we sell them,” says Henderson’s Stefan Wundrak. “But we get 8.5-9% returns, which is quite a high yield. Not much investment is needed because they are fairly new buildings and cheap financing is available.”
He adds: “Even one to two years ago we would not have got money so readily from lenders for shorter leases.”
The German Logistics Fund raised around €300m, including 40% gearing, and is managed in partnership with Palmira Capital. It has bought from owner-occupiers, developers, a bank and funds in wind-down.