By Saul Goldstein
As 2016 draws to a close the latest transaction data and surveys make Germany the destination of choice for real estate investors in Europe.
What is striking is the defensive tone of the current narrative, which presents Germany as a safe haven in a “risk-off” environment shaped by uncertainty over economic growth, monetary policy and geopolitics. It’s a reductive view of the property markets in the continent’s largest and most populous economy that doesn’t reflect the long-term opportunities that I see in Germany after more than a dozen years of investing there.
While a lot of what we do at ASG focuses on distress and dislocation in real estate markets, highly successful real estate investment also stems from the overarching themes of capturing economic growth and demographic change. The stable and robust health of Germany’s economy has certainly shaped the prevailing perception of its real estate as an investment, however the positives from demographic change appear to have been largely overlooked. Indeed, urbanization and an ageing population are the two megatrends that underpin ASG’s investment strategies in Germany, as I explained in part of my recent interview with the Financial Times.
A housing shortage has existed in the major cities even before Germany accepted the huge influx of migrants and asylum seekers from Syria and the world’s other trouble spots. This combination is creating a huge strain on affordable housing. One of our funds is providing development finance to an investment partner for a facility to accommodate several thousand refugees on a site in Berlin, the city where the nation’s housing shortage is most acute. Another project may follow.
Rising rents are putting pressure on the disposable incomes of Germans, whose high standards of living have been supported for so long by low rental costs. This may be the catalyst to persuade more to take advantage of cheap mortgages and buy their homes, lifting Germany’s curiously depressed levels of home ownership.
The response of some municipalities has been to impose rent controls or to restrict other residential developments, which is an odd way of tackling the problem of housing low income-earners. A holistic approach that addresses the delivery of all types of housing is a better way forward.
When I first started investing in Germany 13 years ago it was to seize the opportunities as local authorities and large corporations sold off their estates of rented housing. Those properties are now in the hands of large listed companies with substantial portfolios – one is a member of Germany’s benchmark stock index. Today, German multi-family housing is the kind of solid and dependable safe haven asset most in favor of risk-averse investors.
This is an example of how longer-term trends can be of interest to investors and at ASG, we think Germany’s housing markets still offer some compelling opportunities to invest.
For a country renowned for its large industrial companies, residential development in Germany is still an unusually local affair. We identified this two years ago, when we acquired formart from Hochtief. We intend to grow the company’s national footprint and establish a substantial pipeline of new-build projects across the country. Last year, we added to it with Leipzig-based GRK, which specializes in refurbishments and redevelopments. The combined entity is the largest residential developer in Germany, according to data compiled by independent research group Bulwiengesa on the number of units delivered annually. If this were the U.K., however, they would not make the top 10 of volume house-builders, a sector dominated by listed companies.
We have also taken the developer route to gain exposure to Germany’s growing demand for care homes for the elderly.
European Union statistics show that 21% of Germany’s population is currently aged 65 or more and this proportion will grow to 28.1% by 2030. This means that the country will need to add 300,000 care home beds to accommodate the ageing population in the same period, according to German government projections.
We are not alone in identifying this as an investment opportunity and the senior housing sector is hotting up as large operators enter the market, lifting pricing for standing assets. We felt that there were plenty of other investment angles in the sector in the absence of large institutional investors or listed companies.
A few months ago we acquired WI Immo, the largest specialist in care home development. It sells units in the facilities that it builds to retail investors as you would a condominium: they receive in return an attractive rental income from the operator running the nursing home on a long-term lease. As real estate investors this is a particularly interesting business model because we avoid operational and reputational risk. There are also a dozen or so care home providers active in Germany and they all need new facilities, so there’s plenty of growth potential.
As a private equity real estate investor Germany’s demographic challenges present opportunities to build development businesses of scale in a fragmented and localized market. Some economies of scale will be achievable, but I see the injection of fresh and inexpensive capital as the main driver of growth. Perhaps these businesses will also be the defensive, safe haven investments that will appeal to investors when they target German real estate in the future.