Germany is Europe’s largest property market, but it is also its worst performing: it’s the only Western property market that has not seen any rise in prices since 1991. Until recently, the country’s economic malaise, as well as an extremely restrictive mortgage system, has kept the market on the ground. And until very recently, a 25-year-old with a steady job and no negative credit history could not get a mortgage without putting down a deposit of at least 30%.
But during the second half of 2005, things began to change. There are few official statistics, but anecdotal evidence suggests that, in some areas, prices for large residential property portfolios have risen by 20%-30%. In addition, innovative finance companies, such as those offering 100% funding, are now coming onto the market. These are the first signs of a market on the move.
The German property market: introduction of Reits
The clearest sign of things to come is the imminent introduction of tax-efficient real estate investment trusts (Reits). After two years of political tug of war, Germany now seems set to introduce Reits by early 2007. At last week’s HSBC German Reit conference in Frankfurt, it became clear that the Grand Coalition now ruling the country are likely to push through the necessary legislation.
Reits will give the country’s property market a huge boost. The lobbying group IFD, which, with the support of the country’s banks and property industry, is the driving force behind the Reit legislation, predicts that by 2010 up to e127bn worth of new money could be invested into German Reits. This would provide a huge boost to property prices. Anticipating such a development, both foreign and local investors have now started to look at listed German property firms. Their plan is to buy existing firms with the intention of turning them into Reits once the legislation is in place. That way, they will be able to make use of existing property-management teams.
The German property market: routes in for investors
If word on the street is to be believed, one such investor active in Germany is UK-based Rotch Group. Controlled by the Tchenguiz family, this private company is said to be one of the biggest and most innovative property groups in the UK, with a portfolio worth around £4bn. I am told that Rotch is the unnamed “Anglo Saxon investor” that has been supporting a fund-raising by property company TAG (TEG, e8.62) over the last year. TAG is run by a German property entrepreneur who, during the 1990s, made a fortune on the back of a portfolio of more than 30,000 residential properties. The group then hit some hard times in the early years of this decade, but the company’s management is still one of the best-connected and most experienced in the German property market. TAG also owns a residential property portfolio company called Bauverein Hamburg. Both companies could be turned into Reits, potentially using some of the innovative financing methods that the Rotch group has already become well known for within the industry.
The current TAG share price of e8.62 largely reflects thevalue of the firm’s existing property holdings, but it doesn’t reflect the potential of a new foreign shareholder injecting interesting new projects into the company. The shares recently saw very heavy trading on the back of rumours about the involvement of Rotch.
A similar backdoor route into property in Germany could lie in buying Sibra. Every foreign property investor active in Germany knows about IVG, one of just a handful of large professionally managed property companies listed on the German market. IVG has a e2.6bn market cap after seeing its share price rise from e6 in early 2003 to today’s e24. But few investors are aware of IVG’s listed shell company subsidiary, Sibra. During a recent Morgan Stanley German property conference in London, IVG’s CEO explicitly mentioned the company as a potential vehicle for launching a Reit. One rumour that has recently emerged is that IVG will buy a e3bn property portfolio from financially distressed retail giant KarstadtQuelle and float it using the Sibra shell. Such a deal could catapult the thinly traded shares to new record levels and make it well worth thinking about buying them now.
By Sven Lorenz, a German-born fund manager