International Beat
By Rainer Thaler
Post Credit-Crunch Germany Provides
Investors Value-Oriented Opportunities
AMERICA’S CREDIT CRISIS LAUNCHED A SHOCK
wave around the world, disrupting financial markets in
many developed countries. Germany’s real estate sector
suffered, but fortunately its economy is somewhat decoupled from America’s. Due to regulatory reforms, the underlying sustainability of the real estate market and broad confidence in the economy, Germany overcame the financial
sturm und drang and is now positioned for selected
growth opportunities in the future.
The German economy, Europe’s largest, experienced
the same trends as the broader market. Several banks suffered severe financial consequences from investing in
mortgage-backed securities, and nearly all banks reduced
commercial real estate lending as they tackled problem
loans on their balance sheets. The tightening debt market
When the credit crisis hit, the German
market outperformed, while other
European markets dropped sharply.
caused highly leveraged hedge funds to pull back, especially foreign funds.
Performance in other major European markets,
notably the UK and France, had previously been
stronger. The German market had produced lower, but
more sustainable, returns in the 7% to 8% range.
Consequently, when the credit crisis hit, the German
market outperformed, experiencing a gentle decline
while other European markets dropped sharply. Other
than a slight yield correction and a repositioning of
investors’ expectations, the German commercial market
has not been significantly affected. By the end of 2007,
the total transaction volume was € 61 billion, a 27%
increase over 2006.
Moreover, tax, labor and business reforms that have
helped the broader economy have also been a boon to
commercial real estate, making the country more attractive to businesses, institutional investors and workers
alike. These reforms helped by increasing temporary
work, making wage agreements more flexible and tightening unemployment benefits. Construction, which had
lagged for years, began to pick up.
Consequently, growing confidence in the economy
changed the mood of the country. Corporate earnings have
grown sharply in the past two years. And by the end of
2007, the unemployment rate had dropped to about 8.4%
from 12% three years ago. Consumer spending increased
considerably as financial angst lessened.
Today the German market appears healthy and presents several unique investment opportunities. Looking
forward, there is cautious optimism about liquidity, especially if the high rate of cross-border investment continues; last year nearly two-thirds of total transaction volume came from foreign investors. Higher capital costs
favor cash buyers with more prudent levels of leverage.
The inflow of funds will continue and is likely to further
compress yields and lower cap rates. Of course, a deep
recession in America could alter the outlook.
Many experts see investment potential in specific
areas of real estate that are benefiting from business and
economic reforms. Big-box retail properties, the hypermarkets popular with price-conscious German consumers, could profit from rising employment and
increased consumer spending. Office properties might
also gain due to positive net absorption in the major
markets and negligible new supply. The consensus is for
a slight decline in office yields of about 20 basis points
in primary markets and as much as 50 basis points in
secondary locations.
Meanwhile, the credit crisis itself has spawned opportunities for value-oriented investors: G-REITs and listed real
estate companies have been trading at discounts of up to
50% from the value of their underlying properties, and loan
portfolios of banks seeking to reduce real estate debt on
their balance sheets are being offered at attractive prices in
the weak environment for asset-backed securities.
Germany seems to be navigating the choppy waters of
the financial markets. The commercial real estate sector-should benefit as the country continues to build on the
growth experienced over the last few years. ◆
The views expressed in this article are those of the
author and not Real Estate Media or its publications.
Rainer Thaler is managing director of GE Real Estate Germany
in Frankfurt. He may be contacted at rainer.thaler@ge.com.
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