It feels almost too good to be true. The mood at the recent MIPIM and at the Real Estate Capital Germany Forum 2015 which we attended point to a German real estate industry in robust good shape, a market still seen as offering plenty of growth potential – indeed, perhaps even more now, given Germany’s relative strength compared to its European neighbours.
Commentators, bankers, brokers and investors are all unanimous in decrying any notion of a bubble in German real estate. Capital is so plentiful that the German banks are falling over themselves to warn that their lending will be curtailed this year as investors break ranks and seek funding for ever-riskier propositions. Listed companies can seemingly raise capital at will, prompting a rash of new planned IPOs and debt-fuelled mergers – with some unlikely-looking candidates jumping out of the cupboard and announcing that their imminent listing is a mere few days away.
And then – hey presto! – they’re trading on the Entry Standard of the Frankfurt Stock Exchange and issuing press releases about discounts to NAV and the like. This sort of capital market preamble used to take months. Now it’s weeks, or even days. Breathtaking stuff.
Of course, it’s a virtuous circle, of sorts. Germany profits massively from the fixed exchange rate nature of the euro straitjacket, trading with its neighbours in a (for Germany) undervalued currency and with a sizeable cost and efficiency advantage. Externally, the weak (and weakening) euro makes German products even more attractive on a world stage, boosting the country’s trade balance with the rest of the world and leading to domestic demand for offices, business parks, logistics properties and more housing. All of which is further supported by the demand from new immigrants from Germany’s southern neighbours, jumping ship from their own uncompetitive countries to join in the German party.
Meanwhile, Europe’s most reluctant homeowners (bar the Swiss) are cottoning on that, at super-low interest rates which they can fix for ten or fifteen years, and with banks scrambling to lend to any reasonably solvent borrower, it’s time to join the ranks of the mortgaged classes. What’s not to like, for now?
And more good news. Chinese and other Asian investors are burying their reticence about Germany, which until a few years ago they didn’t really understand. After investing more in London last year than all European investors combined, Germany is now very much on their radar, and German brokers are licking their chops in anticipation of the new buying groups arriving on these shores.
Chinese project developers and insurers have been to the fore in London, freed up by their government to actively expand abroad - and these are now regular visitors to Frankfurt, Munich, Berlin and Hamburg. They invested €700m in Germany two years ago, then €2.3bn last year. And that’s not counting the thousands of individual residential deals that, certainly anecdotally, can make up a third of all new sales in new German housing developments such as the Europaviertel in Frankfurt.
Price levels in London and Paris are driving these Asian investors to Germany, where lower prices and the commitment to stable pricing are increasingly viewed as a competitive advantage. If the Koreans have been most active in Germany so far, the Chinese and Singaporeans are not far behind, and are now frequently in the mix in Germany bidding wars for assets in the €100m-plus category.
They’ve mostly been losing in these bidding processes so far, in part because their expectations of 5%-6% yield are somewhat unrealistic on the core properties which attract the most competitors. But they’re beefing up their expertise with local partners, while for German banks offering low-margin loans these new arrivals represent a new source of blue-chip partner, often backed implicitly by the government of the world’s second superpower.
As always, the best time to borrow money is when you don’t need it – and the resources of the big Chinese insurers are so mighty that German banks will rush to embrace their new Asian friends. When a decent Beijing or Shanghai office lease agreement has a three or five-year duration at most, a German ten-year agreement with a solid anchor tenant and yielding maybe 5% starts to look very attractive indeed. Big broker groups in Germany, such as CBRE and Catella, report that average bank borrowing by Chinese has risen from 15% to 25%. The trend is clear.
The key drivers are diversification, stability, and a hedge against inflation, which has kept Chinese focused on core properties so far, but with experience this will broaden to include several other asset categories. We’re already seeing a bottom-up move into hotels and other facilities likely to benefit from rising numbers of travellers, with such deals being sourced frequently from within offshore Asian networks.
Given the notoriously secretive nature of Chinese negotiation, we’d have thought that most failed Chinese bids in Germany would be quickly bustled out of sight behind bamboo curtains. But lo! Now it seems that two giant Chinese investors, privately-owned conglomerate Fosun and insurer Ping An, are engaged in a bitter battle with each other to secure 18 prized office assets on Berlin’s Potsdamer Platz, part of the liquidating SEB Asset Management’s fund holdings.
The price is €1.5bn, and the winner can claim responsibility for Germany’s biggest transaction of its type since the heady days of 2007. Sadly for the loser, blaming local German knowledge for being pipped at the post won’t cut it this time. A new era is being ushered in.
