While the global credit crisis is showing little sign of abating, there are indications that Germany, Europe's largest economy, is weathering the storm better than many of its neighbours.
While the global credit crisis is showing little sign of abating, there are indications that Germany, Europe's largest economy, is weathering the storm better than many of its neighbours.
'We don't have the real estate crisis here that we see elsewhere in Europe,' according to Roy Frydling, managing director of Savills in Germany. 'Germany's real estate market remains healthy, big deals are being transacted and the demand for properties is strong,' he said.
Commercial property deals in Germany in the first quarter of 2008 totaled EUR 7.5bn, down from around EUR 11bn in the same period last year, according to CB Richard Ellis. This compares with EUR 10bn in the UK, EUR 4bn in France and EUR 3bn in Spain in the same period.
While the deal volume in many European markets has slumped by at least 40% this year - largely due to investor uncertainty over prices and tighter lending conditions - Germany's fall in deals can be largely attributed to the end of a cycle of large portfolio sales on the part of its open-ended funds over the past two years, Frydling said.
As such, the German market is better placed than many other European markets to deal with changing market conditions, said Frank Billand, a member of the management board at German fund manager Union Investment, formerly known as Difa.
'The property market here in Germany is more stable than in the UK, for example. Prices never rose to the same degree, so we’ve never had 3% yields for prime property. That means that Germany is better equipped to weather the global downturn,' he said.
Germany's residential sector is still on the radar for many investors, who believe it offers better value for money that many other Western European markets. Earlier this month, Germany’s largest state, North Rhine-Westphalia, sold its residential property company Landesentwicklungsgesellschaft NRW (LEG) to Goldman Sachs' Whitehall Funds for EUR 3.4bn, including debt, marking Germany's largest deal since the credit crunch erupted last summer. The transaction includes 93,000 apartments in cities such as Bonn and Cologne. Whitehall Funds declined to comment.
Since 2004, Goldman Sachs has invested around EUR 15bn in Germany's residential sector and in corporate sale-and-leasebacks, including its acquisition of a 51% stake in Arcandor, owner of Germany's biggest department-store chain KarstadtQuelle.
North Rhine-Westphalia's sale is part of an ongoing drive over the past four years on the part of cash-strapped federal states to boost their coffers to the tune of billions of euros by selling off sizeable residential portfolios, such as the Gagfah and Viterra portfolios.
Corporate sale-and-leasebacks, which have been prevalent in the past two years, are likely to continue, albeit it in smaller lot sizes, said Michael Haddock, head of EMEA research at CB Richard Ellis in London: 'We're unlikely to see large corporate portfolio sales valued at around EUR 2bn or EUR 3bn in the current climate. I think that companies are more likely to sell off two to three buildings at a time, which is a more sensible approach,' he said.
Metro Group has been mulling the sale-and-leaseback of its Galeria Kaufhof department store chain: 'We consider Kaufhof a non-strategic part of our portfolio and we will check all possible options to create the most value for the shareholders of Metro Group,' said spokesman Moritz Zumpfort. 'However, we are not currently talking to potential buyers,' he added.
Germany's office sector continues to attract both domestic and international investors because prime yields have only moved out by around 25 basis points since last summer, to around 4.75%, said Billand. One investor keen to up its exposure to German offices is RREEF, the asset management arm of Deutsche Bank.
'We have made three acquisitions in Germany this year, including an office and a mixed-use scheme, with a total value of around EUR 200mln,' said Holger Naumann, head of RREEF in Germany. 'We'd like to up the weighting of German assets in our grundbesitz-europa fund from 14% to around 25%, which means we could invest between EUR 200mln and EUR 300mln this year, if we find the right opportunities. We’re also interested in shopping centers in well-located cities in Germany as well as prime offices.'
There are some interesting offices up for grabs. Eurocastle Investment Limited, the Guernsey-based affiliate of US asset management firm Fortress Investment Group, is believed to be in the process of selling a number of the offices that it acquired as part of a bigger EUR 2bn German property portfolio from Dresdner Bank in December 2005. The portfolio comprised around 300 properties throughout Germany, totaling 845,516 m2. This included offices in cities such as Frankfurt, Hamburg, Berlin and Munich, most of which are occupied by Dresdner Bank. Eurocastle declined to comment.
In Hamburg, private equity firm Caryle is expected to sell around four office developments with a combined value of around EUR 350 mln, according to market sources. The Caryle Group could not be reached for comment.
Retail properties are also worth targeting, said CB Richard Ellis' Haddock, because Germany suffers an undersupply compared with other major European markets. It has just 146.9 m2 of shopping space per 1,000 inhabitants, according to Cushman & Wakefield. This is sharply lower than Norway, with 632.5 m2, the UK with 240.2 m2 and Spain with 235.8 m2. Prime retail yields have also only moved out by about 25 basis points to 5.25% since last summer, suggesting that the market remains stable.
One investor homing in on retail is Union Investment. Earlier this month, the fund manager acquired a 94.9% stake - valued at EUR 213mln - in the Rhein-Galerie shopping centre project in Ludwigshafen from Hamburg-based developer ECE. ECE retains a 5.1% stake in the 43, 056 m2 center, which is due to open in 2010.
'We're very interested in German retail, particular shopping centres in medium-sized cities with a large catchments area. Shopping centres are attractive at the moment because vacancy rates are typically low - around 2% in our portfolio - and they provide secure and steady cash flow,' said Union Investment's Dr. Billand.
There have already been some major retail deals this year. In February, Sony Corp. sold its namesake business and entertainment complex in Berlin's Potsdamer Platz to property funds managed by Morgan Stanley, German asset manager Corpus Sireo and an affiliate of Chicago-based property company John Buck Co., for an undisclosed sum, likely to be in the region of EUR 650mln to EUR 700mln. The retail and entertainment center will retain the Sony Center name for the foreseeable future and all Sony Group companies with offices at the eight-building site will remain as tenants, Sony said.
The deal is the second sale of a building at Berlin's increasingly trendy Potsdamer Platz in the past six months. In December, German car manufacturer Daimler sold its Daimler City mixed-use centre to Sweden's SEB Asset Management for EUR 1.5bn.