The Irony of Fate

This week it was the fate of two apparently unrelated events to become a metaphor for the times we live in. On Tuesday 27 September the Prime Minister of Greece addressed the BDI, the German employers’ federation, in Berlin and spoke eloquently and persuasively in favour of Germany’s EUR 211 billion additional contribution the euro stabilisation fund, the EFSF. Greece would pay the money back, he promised. He guaranteed it. On the same day, the Bundesgerichtshof, the Federal Court of Justice in Karlsruhe, which has supreme appellate jurisdiction in civil cases, overturned a decision of the High Court in Hamburg, and ruled that an elderly couple who lost their savings when Lehmann Bros. went bust were not entitled to compensation from the Hamburger Sparkasse (savings bank), which had sold them ProtectExpress bearer bonds guaranteed by Lehmann. Apparently they should have known there is no such thing as a guarantee when it comes to dodgy investments. What fate holds in store for German tax payers, many of whom are wondering if they will ever see their EUR 211 billion again, only time will tell. Ironically, they will have no recourse to the Court, which recently ruled that cash for the euro bail-out fund was constitutional, providing it was approved by a parliamentary committee.

It is, of course, trite economics to say that the more credit is taken out of the system by the state, the less remains for the private sector, unless monetary stimulus fills the gap. The European Central Bank’s reluctance to take its foot off the brake has wrought havoc in the southern European countries, and it is starting to cause distress for its principal shareholder, Germany. German retailers are feeling the pinch. Metro AG, based in Düsseldorf and the world’s fourth largest after WalMart, Carrefour and Tesco, is struggling to make money in three of its core businesses. At home, the Kaufhof department store chain is for sale, after it failed to merge with its rival Karstadt, which was rescued from bankruptcy by Nicolas Berggruen. The electronics and household appliances division, MediaMarkt and Saturn, is re-focusing away from physical stores to e-business. And Real, the supermarket brand, still digesting the take-over of WalMart’s German operation, faces relentless competition from the so-called discounters, Aldi and Lidl. Metro has this week announced a EUR 300 million sale and lease back of half its Italian estate to W P Carey. Metro Italia’s obligations are, of course, guaranteed by the parent company.

“The Irony of Fate, or Enjoy Your Bath!” is the title of a classic Soviet film Ironiya sudby, ili S lyogkim parom! made in 1975 and directed by Eldar Ryazanov.

Michael Champion is the Editor of German Real Estate Review

A green and pleasant land

As European politicians fiddle while Athens burns, and European banks face exclusion from the dollar interbank market, the rating agencies have finally stated the obvious: imprudent and unsecured lending during a credit boom leads to disaster for all concerned. European banking stocks have led the nose dive on the world’s stock markets this week. US Treasury Secretary Geithner’s words to his European colleagues, urging unlimited monetary support for the weaker members of the euro zone have gone unheeded. The old deutsche mark bloc is calling for unprecedented budget cuts and payment in full from the Club Med countries, stifling demand and growth for years to come. Instead of a bail-out fund, we have a scuttle-the-ship commando.

Where does this leave the real estate market in Germany? A few warm and sunny autumn days, the elections to the Senate in Berlin, and the visit of Pope Benedict XVI have distracted attention from world affairs to the national and local level, where Germany is at its best. A federal country of seven large cities (none of which is as a large as, say, Barcelona or Milan) and 82 small ones, from Aachen to Würzburg, offers occupiers and investors an exceptionally wide choice of location. The two big conurbations, Rhine-Ruhr (12.2 million) and Rhine-Main (4.1 million) form part of the European industrial-financial crescent stretching from Greater London through the Low Countries and the Ile de France to the Po valley. Here are to be found the workshops and businesses which, supported by excellent logistics and a common currency, cause Germany to be Europe’s export champion. Elsewhere, the autobahns run for thousands of kilometres through forests and rich agricultural land, providing spectacular views of castles, cathedrals, lakes and mountains.

How does this variety of choice compare with the attraction of other countries? Several recent surveys have tried to make international comparisons, which tend to suggest that Germany’s advantages are not widely recognised. The Economist Intelligence Unit, for example, has published the latest edition of its “Liveability Ranking”, showing only two European cities, Vienna and Helsinki, in the top ten (the other eight are in New Zealand, Australia and Canada), and none in the bottom ten (which include Teheran and Karachi). Savills has published its “World Class Index” of premier global residential locations, where “new world” cities like Shanghai and Mumbai have replaced “old world” cities like Amsterdam and Geneva. Only London and Paris are in the top ten (Hong Kong is number one).

By contrast IVG’s “Market Tracker” for August shows prime rents in Frankfurt’s central business district (Germany’s highest) at EUR 420 psm, well below the European average, and Jones Lang Lasalle’s research team has recently shown that service charges in the seven large German cities on average remained unchanged in the last twelve months.

So what does this show us? International investors in real estate in Germany have wide choice, competitive values, one of the highest qualities of life in the world, and yes – not many other people seem to know about it yet!

Michael Champion is the Editor of German Real Estate Review

German real estate remains attractive, as the euro crisis deepens

Looking back on a week in which world financial markets came close to falling off the cliff, investors will be asking themselves once again if alternative asset classes such as real estate offer protection against inflation, devaluation, “hair cuts” and stock market risk.

The real estate market in Germany has traditionally been viewed by Anglo-Saxon and other foreign investors as a sleeping giant, stable but inefficient, lacking professionalism and transparency. The listed real estate market is small and illiquid in comparison with other developed countries. Many of the companies which are listed are dominated by majority shareholders, with small free floats, and the REITs market is in its infancy. The usual source of capital for development has been the banks. The unlisted market is dominated by the German open-ended funds, which have traditionally offered private investors an exposure to property in a country where home ownership is uncommon. A want of asset management skills and proper accountability led to many of these funds producing low or no returns in the past.

During the asset bubble which popped with Lehmann Bros., many highly-leveraged foreign investors assumed that German real estate was under-valued, and bought widely, especially in the residential (multi-family) sector, where cash-strapped cities and communes disposed of their rented estates. The result? Some, like Oaktree, got out in time. Others, like Goldman Sachs, are stuck with the problem, while yet others, like Dawnay, Day disappeared altogether. Ill-judged asset stripping of long established going concerns like the department store group Karstadt Quelle left shareholders penniless, and brought to an end the independence of Germany’s oldest private bank, Sal. Oppenheim. The wheel turned, and distressed real estate assets have been acquired by astute investors such as Nicolas Berggruen.

Now, as German banks with heavy exposure to Greek sovereign debt are writing down these assets by 21%, and margin calls are likely due to falling share prices at a time when capital requirements are rising, the banks will find themselves once again with unwanted real estate portfolios.

For foreign investors who have been re-building their balance sheets since 2008, and are sitting on a pile of cash which is losing its value, German real estate looks attractive again.

Michael Champion is Editor of German Real Estate Review