Last week Activum founder Saul Goldstein spoke at the Property EU German Breakfast Briefing kindly sponsored by Henderson´s Global Investors. Other panellists included Union Investment, Prime Office, Corpus Sireo, and Henderson´s.
Our top 10 takeaways were as follows:
- Vacancy rates for office in most major German cities will remain relatively unchanged for next few years; Prime office yields range from 4.5% – 6.5%
- Secondary market remains small; only 10% of investment volume in Germany goes toward secondary; Average yields 170 bps above prime yields
- Retail, resi & logistics are “hotter” markets with retail yields at 5.5% – 6.5%; medical offices promising niche
- No. of foreign investors in Germany still low at 29% vs UK at 50%
- Investors starved for yield so starting to look at secondary locations
- Financing available for A and B locations but beyond that it dries up; small local savings and private banks for “C” locations
- Days of “relationship” lending still strong, but lenders will spend more time on “real estate,” i.e. focus on the underlying asset rather than distribution channel
- Germany is not market where you go for rental growth so if looking for high yields, you need to create the value yourself
- Defaulted securitizations increasingly becoming a source of product, but it´s a slow process to unwind and unlock value
- Despite slowing German economy, Germany seeing first wage growth in 20 years
It´s this last takeaway and the “first wage growth in 20 years” that I focused on in another post titled “A Crisis of Wage Disparity: Germany vs the Eurozone.”
To sum up the PropertyEU event:
Germany is a decent economy where high quality underlying real estate is dominated by domestic investors. Foreign ownership is relatively low. Moreover, there aren’t spikes in rent and value increase (unless a flurry of foreign investment drives up pricing like in 2006-2007). So, It is THE place to find decent risk adjusted returns.
The Activum view?
Not just decent, but great risk adjusted returns! With only 29% foreign investment, it is still a place we see as being under-valued overall. Case in point: we sold two buildings this year at 7% NOI yields. These are two fully stabilized, high quality buildings in “prime” cities but in “secondary” locations. By “stabilized” we mean nearly fully occupied with solid underlying tenants with average lease lengths of 6 years. An investor should be able to finance the yield spread at 3% (which is the current low rate German banks are offering) for a 60% LTV. This equates to approximately a 13% yield on equity for 6 years.
Where else in a low growth, low interest rate environment can you find that sort of return? Perhaps a 10-year Spanish bond returning 7% looks attractive—it is government risk after-all. So this may be more liquid investments than real estate and this maybe perceived to be less risky from a liquidity perspective, but there is negative growth, 25% unemployment (and 50% under 25!), where people are marching on the streets in protests and there is little sign of real progress. The spreadsheet analysis is different from the reality. Certainly there are nuggets to find in Spain, but the overall volatility is huge.
Back to the title of the article…
German real estate may not be a “hot” emerging market or one of the “volatile” PIGS, but it is stable and offers increasingly attractive yield spreads. So, it is more than just a safe haven. It offers fundamentally solid risk-adjusted returns. As the yield spread gap narrows and we see signs of increasing interest rates, we’ll update our view.