News

Source: Financial Times.
Author: Jim Pickard.
Published: October 8th, 2007.
 
German property, once the great no-no of European real estate, is back in the spotlight.

Transactions worth €49.5bn were executed in 2006, an increase of 141 per cent over the previous year, as international investors returned to the market, according to Jones Lang LaSalle, the agents. Another €30bn of deals took place in the first half of this year, according to JLL.

Experts had until recently been predicting that volumes could hit a record this year. Whether that is realised depends on whether the credit crunch blows investors off course and, if so, for how long.

"High turnover reflected a situation where there was a lot more demand than available product," says Marcus Lemli, JLL's head of capital markets. "Current credit conditions within the financial markets mean that conditions are now tightening."

The renewed interest in Germany is based on expectations that rents, which hit rock bottom a couple of years ago, are likely to increase substantially as vacancy levels return to normal.

Among the investors immersed in this market are a handful of newcomers to Aim, London's junior market, including Summit Germany, Speymill Deutsche, Deutsche Land, Develica Deutschland and Dawnay Day Treveria.

About £1 in every £5 raised by the overseas property funds listed in London is targeted at Germany.

Until recently, prices and rental levels were both in the doldrums. In particular the office sector took a beating in the wake of the dotcom crash. Rents in Berlin and Frankfurt are still 30 per cent lower than five years ago.

Retail property has also proved sluggish amid weak consumer spending.

Investors have taken heart from figures suggesting green shoots, for example in the form of rising rents over the past year in some office markets such as Hamburg, Frankfurt, Stuttgart and Cologne. All these are up by more than 5 per cent. Berlin, however, is flat, as are Essen and Dresden, according to Cushman & Wakefield, the agents.

Howard Shore, head of Shore Capital, raised €265m from Aim when he floated Puma Brandenburg in March 2006. The vehicle, which can gear up to four parts debt to one part equity, has so far spent about €600m and plans to invest another €900m. The group targets major cities such as Berlin, Hamburg and Cologne.

"We refrained from ploughing into the market and getting panicked into overpaying. Our strategy was to cherry-pick a portfolio," says Mr Shore. "We are buying assets between €20m to €200m. You can buy bigger portfolios but then you risk getting a mixed bag of the good, the bad and the ugly."

Elsewhere, David Maxwell, the Irish entrepreneur, floated Deutsche Land in April 2006, raising €105m. He returned to the market in February and raised another €105m.

"When we listed it was like a perfect storm with western real estate doing so well... and there was one market that looked mega-cheap - Germany," says Mr Maxwell. "On the other side of the equation, investors were desperate to get into German property and there were no vehicles to do that. The listed German companies were in such bad shape."

He argues that property funds are an ideal way to get access to the recovery of the German domestic economy many expect. "If you think an economy will do well, the simplest way to capture that is in the real estate market."