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Dangers and risks
However, the status of a “favourite” among the real estate markets is always jeopardised. Even though these favourites attract record levels of capital, purchase demand could collapse overnight and the vested companies risk sales problems. That is similar in stock and real estate markets. There is, however, one major difference: the rent returns of a building can be calculated long-term and are grossly immune to market fluctuations. Investors that have bought high-return properties at favourable conditions do not feel pressured to sell; they can afford to sit-out the crisis calmly. However, those investors who have taken on high risks, such as vacancies, expiring rental contracts, questionable renter solvency, or hidden fixer-uppers, could be in for some unpleasant surprises.

The potential danger is currently not significant. Nearly all specialists are talking about a record year—except, of course, for the fact that the seller will no longer be able to get any price he asks for. However, demand is still unwaveringly high. Initial returns have fallen from 6.9 to 5.9 percent across Europe over the past six months through increasing prices, according to Cushman & Wakefield. At the same time, the European rental market has made noticeable improvements, and rent volume has grown by an average three percent in the first half of 2006, which has caused the demand for investment properties to flourish even more.

Shift in focus
However, there seems to be a shift in the focus of investments in Europe. Cushman & Wakefield see the share of Germany, France and some Eastern European emerging countries growing in total volume, and thus, the share of Great Britain decreasing from 50 to 40 percent. Here, the strong Euro shines through. More than half of all real estate investments went to office real estate and 28 percent to retail real estate. This year, Germany, with a sudden increase in capital inflow of more than 60 percent, could even surpass Great Britain where capital inflow shrank by roughly 40 percent.

Germany is indeed attractive as an investment country. Thus, according to an Ernst & Young survey among more than 1,000 international companies, 18 percent of all participants rated Germany as “extremely positive”. Thus, Germany takes third place worldwide, behind the USA and China. The good infrastructure, the high quality of research and development, the highly qualified labour, and the attractiveness of the domestic economy were valued the most. Poland follows Germany with 15 percent and Great Britain with 11 percent. Even though China is ranked number two worldwide, it is currently losing attractiveness to international investors. The share of companies that consider China one of the three top locations in the world has sunk from 52 to 41 percent. For Germany, however, 55 percent of the survey participants predicted that it would also lose attractiveness in the coming years.

Changes in the German real estate markets
The large transactions in the real estate markets show, however, that the majority of investors are counting on a sustainable recovery in the German economy. This can be seen in the fact that international investors have purchased nearly one million apartments in Germany; the largest transaction among them amounts to seven billion Euros for the housing company Viterra of the Eon Corporation. Now, the buyer, the Deutsche Annington, a subsidiary of the London-based company Terra Firma, has declared they want to invest another ten billion Euros in residential real estate. Another exciting transaction was the sale of the Karstadt real estate portfolio for 4.5 billion Euros.

With their role as the “investor’s darling”, the German real estate markets have also changed their character. For one, the locations that have so far been seen as second-class within Germany have become the focus of international investors. Thus, the purchase of real estate for specialty stores and supermarkets in smaller cities has increased the acceptance of these locations with other investors. In addition, the activities of large and small investment companies have led to assessments in location qualities in Germany that were unthinkable before.

At the same time, the transparency and the professionalism of the real estate market have noticeably increased and the mostly regional real estate companies in Germany have realized the kind of potential that is hidden in the markets. Through this, a new kind of quality in dealing with real estate investments has developed, and new paths have been forged in investment financing. The financing of real estate investments is meanwhile much more oriented towards the laws of the capital markets. In this respect, the clock will not be turned back.

The Topic at EXPO REAL 2006
Monday, 23 October 2006
EXPO REAL FORUM,
Hall C3
12.00 pm – 12.50 pm

Which international investors are on the German market?

For detailed information click here.

By Jens Friedemann
Jens Friedemann is responsible editor for the Real Estate Division at the Frankfurter Allgemeine Zeitung and Frankfurter Allgemeine Sonntagszeitung.