Foreign asset managers and investors have yet to take Berlin, but it may just be a matter of time. The German Logistics Fund, launched by London-based Henderson Global Investors in August 2012, reflects growing interest in the country’s stable real estate market.
Available only to German clients, the €360 million ($487 million) Henderson fund, which is now closed, invests in parcel delivery centers and other distribution points throughout the nation. The fund has already committed about half of its assets. Its targeted 8 percent distribution yield — cash flow divided by net asset value — is positively exciting by German standards.
It’s the right time for a German real estate fund that is less cautious than those investing in the safest office properties, says Stefan Wundrak, director of research for European property at £68 billion ($109 billion) Henderson. “Following the credit crunch, German investors had been really conservative,” Wundrak explains. “Over the last 12 months, they have been prepared to take more risk.”
German investment managers ascribe this boldness to low rates on government bonds — ten-year benchmark Bunds were trading at 1.9 percent in mid-September — and to economic optimism. The International Monetary Fund forecasts that the German economy will grow 1.3 percent in 2014, after expanding 0.3 percent this year.
Domestic institutions such as pension funds and insurers drive much of the appetite for German real estate, but foreign players are keen too. In 2010, J.P. Morgan Asset Management bought Frankfurt’s OpernTurm office tower for a reported €550 million on behalf of an institutional investor said to be Singaporean sovereign wealth fund GIC. That purchase took place at the bottom of the cycle, when there were relatively few committed competitors, says Joe Valente, European head of research and strategy for global real assets at JPMAM in London.
Today such a property would draw “five or six very serious bidders,” Valente contends. In June a consortium of South Korean investors, among them the National Credit Union Federation of Korea, bought the Gallileo office building in Frankfurt; some reports put the price at €250 million.
Average yields on prime office property in Berlin, Frankfurt and other large German cities are between 4.5 and 4.75 percent, according to London-based real estate consulting firm Knight Frank. That’s similar to those in Paris and just below the City of London’s 5 percent average. Why do foreign investors like German real estate?
“German markets tend to be much more stable than either London or Paris,” JPMAM’s Valente says. “They lack those cities’ big rises and falls in capital values.” Income, not capital appreciation, typically drives German real estate returns, Valente adds.
Yields on prime office space in Frankfurt and Munich have stayed within a 100-basis-point band over the past ten years, versus a range of 200 to 250 basis points in London and Paris, Knight Frank reports. Matthew Colbourne, an associate with the firm’s commercial research team, credits this calm partly to the geographic diversity of the German prime office market: It’s spread across several cities rather than concentrated in a dominant capital where demand can reach great heights. German commercial properties’ steady yields make them an attractive alternative to bonds.
Next up for foreign investors may be the German residential market, which also offers value and stability. Using price-to-income ratios as a measure of affordability, the Paris-based Organization for Economic Cooperation and Development recently found that German home prices are undervalued by 20 percent relative to their long-term average. Then there’s the country’s tendency to avoid housing bubbles, a virtue that analysts attribute to the high down payments demanded by mortgage lenders.
Hartmut Leser, head of distribution for Germany and Austria at London-based Aberdeen Asset Management, says his £210 billion firm is thinking about offering a German residential fund to foreign investors. This vehicle would complement Aberdeen’s Städte und Wohnen (Cities and Living) fund, which targets domestic institutions and has attracted €170 million since it launched last year.
Leser admits that the intended distribution yield of 4 percent, based primarily on rental income, “doesn’t sound very sexy when compared with the British residential housing market, where investors target returns of high single digits at least.” But German housing may be sexy enough for investors seeking shelter from volatile property markets elsewhere. • •
