Managers plan to boost returns from German property
Being a reliable investment was good in the crisis, but investors in German property are now focused on the challenge of increasing returns
In the credit crunch, investors welcomed the reliability of German property as asset prices plunged elsewhere in their portfolio, including those of other European real estate. “Property in Germany was as predictable as you could find,” according to one manager. “In 2008, that was quite a relief.”
Stefan Wundrak, research manager at Henderson Global Investors (pictured), describes German offices as “notoriously expensive, and yields are very low but stable, even in times of crisis. You never lose much value over the bad years, but there are not many buying opportunities to get things cheap.”
However, as global recovery continues and inflation threatens, ‘reliability’ may not be enough for some investors. Accordingly, some managers are looking to boost returns.
Others, by contrast, argue that German real estate is a portfolio’s bedrock that consumes little risk budget, allowing investors to add risk elsewhere. To increase total returns, some managers have bought second-tier property. As prices for ‘prime’ property reached 2007-levels again, and yields neared 4%, some investing became uneconomic. Some managers are finding higher yields in neighbouring countries that benefit from Germany’s economic health.
Managers warn that less lending from stretched Western European banks could force some managers to narrow focus, and investors will need sharp due diligence.
Daniel Piazolo, managing director of Investment Property Databank Deutschland, says: “Germany, as well as Austria and Switzerland, is more stable than other countries in continental Europe. Due to limited economic growth in the past decade, there was no fundamental reason for a boom in the real estate markets as has happened in many other European countries.”
Since 1996, only industrial property’s total returns fell significantly below zero – in 2009 – before rebounding sharply. Piazolo says shorter leases and reduced re-lettings in the crunch were responsible for this fall.
From 1996 to 2010, all German property made total average annual returns of 3.5%, according to IPD. In its worst year, 2005, it rose by 0.7%. It gained 5.5% in 2000, its best. This year to mid-March, total returns were 4.8%. German property broadly resembles the Netherlands and Denmark in returns, not the volatile US or UK.
Generally, managers are optimistic about German property demand. Henning Klöppelt, managing director of €3.7bn investor Warburg-Henderson, says: “We remain focused on the solvent European market, particularly Germany and France, with a preference for core-plus investments. However, where appropriate opportunities arise, we will also invest in the value-add segment in Germany.”
Chris Cooper, managing director of investor DTZ, explains that the company’s “large allocation to Germany” is a reflection of both “Germany’s relative wealth in Western Europe and its expected growth potential”. DTZ’s European fund has its biggest allocation to Germany, in particular to residential.
Ben Habib, chief executive of $587m rival First Property Group, agrees that Germany’s economic horsepower is positive, but prices have soared in the mini-boom and neighbouring Poland is now a better choice.
In Germany, yields, which fall as prices rise, dropped “to such a level where mortgaging properties became a loss-making situation by October and December 2004, after taking borrowing costs into account,” Habib says.
From second-tier to prime
The answer for some managers has been to buy ‘second tier’ properties and refurbish them to become costlier ‘prime’.
Wundrak says: “In general, if you are not happy with a low income of about 4.5% and total return of, say, 5%, you need to develop and refurbish property. Our Warburg funds, for example, are buying secondary offices in prime locations and turning them into prime offices.”