By Dr. Ramon Sotelo

Financial considerations are currently ruling the real estate market. However, pure portfolio management that does not focus on the property itself will have no long-term success.

Recently, Germany has increasingly been attracting the interest of international investors. According to Bulwien Gesa AG, they invested in Germany particularly in portfolios roughly 33 billion Euros in 2005 and roughly 44 billion Euros in 2006. In 2001, an initial wave swept through the residential market, whereby most funds went to the North and Eastern parts of Germany, into areas that today would only in exceptional cases be considered a future growth region.

Meanwhile, the sales of public residential portfolios have declined. The meanwhile finalised German Real Estate Investment Trust G-REIT was not opened for existing residential buildings and it has become clear that apartments cannot be leased and sold as easily as some international investors had initially assumed. The necessary maintenance and marketing costs deviate from the original forecasts. Therefore, international investors have increased their focus on commercial properties. They are welcome business partners for some open real estate funds, who use the foreign demand for commercial real estate to reassess and restructure their own portfolios.

These market developments, as well as the debates about introducing REITs in Germany, have increased the importance of financial issues in the real estate industry. This growth in importance is a global trend and can be found in other industries as well. On the other hand, they can also be interpreted as a cyclical event, since, with real estate investments, the property itself is, again, not the focus, but rather secondary aspects.

As a reminder, already with the “Bauherrenmodell”, a scheme where tax relief is obtained on investment in building projects, as well as with the special allowance for depreciation, specific parameters became primary criteria of investment decisions in Germany. These phases ended for some investors in a financial catastrophe. The lesson learned from this is, it is never good when the property itself is not the main decision criteria of a real estate investment, but rather extraneous aspects, such as taxes, portfolio considerations, or inexpensive refinancing possibilities. In other words, the tail wags the dog rather than the dog wagging its tail.

The question is, will the obvious focus on financial issues in today’s real estate investments end negatively? Is there a fundamental conflict between a real estate-oriented and a financially oriented perspective? Do we need to return to a real estate-oriented perspective or even turn away from the financial perspective?