Guest publication: Germany gears up to enjoy "favoured-nation" status
It's just possible we may have nodded off briefly while listening attentively to the chief economist of the European Central Bank telling us at length that "we will be taking it quarter by quarter through 2010." In fact, we're fairly sure we did drift away just for the teeniest of moments, because the next thing we knew we were being addressed by Andreas Quint, the head of Jones Lang LaSalle in Deutschland, holding forth from the same podium.
Quint was telling the assembled throng of real estate professionals at the CIMMIT conference in Frankfurt that investment flows are again concentrating on the largest economies. Germany will profit disproportionately from the interest of foreign investors, he declared. He had our attention. We rubbed our eyes and sat up, sharpish.
This new-found concentration on the strongest economies is a reaction to the crisis in the real estate markets. Smaller markets that rose quickly and subsequently collapsed, such as those in Eastern Europe, will take longer to recover than more developed markets. The most stable markets, like Germany, will benefit sooner from the huge war chests accumulated over the past two years and now waiting on the side lines to enter the market, while prices cooled to more reasonable levels.
Quint is convinced that, after an almost total absence in 2009, we will see many more foreign investors returning to the German market this year, with refined and adapted strategies. His own company is engaged in many new negotiations right now with these investors, he told us. Many are looking for a good hedging option to dollar and sterling exposure, and Germany makes the most sense.
We certainly hope he is right. But who are these people, and what are they looking for? Commercial rents are still slated to fall throughout the year - and we don't see any immediate bottom forming there, particularly in the non-prime segment of the market. Are these the same private equity funds and buccaneers that swept into the 'innocent' German market only four years ago? Or is this a new breed entirely, committed to the long-term and dedicated to 'best of breed' sustainable relationships with their local asset managers and tenants? It seems like we're about to find out.
As if this wasn't enough excitement. Later on the same day, Claus-Jürgen Cohausz, board member responsible for the €3.20bn loan book of commercial property at Westdeutsche Immobilien bank, highlighted again the very real issue of valuations. Despite isolated financing problems, his bank has seen almost no impairment on cash flows of any properties the bank has financed since end-2007. It is a fact, he stated, that no matter where Westimmo has financed property around the world, we now have historically high spreads on property assets compared to 10-year gilts. This is preventing all those war chests that have been amassed from being wheeled into action - there are no transactions, because sellers aren't prepared to sell at these prices.
His solution is for a general reappraisal of appropriate real estate yields, in other words fresh and market-relevant valuations, so that Germany can experience what the UK is experiencing, and get markets moving again. He said it was one reason why his and other banks were often surprisingly relaxed about covenant breaches of loan to-value ratios - because he doesn't see current valuations as being sustainable. Citing an example from Japan, where one of his bank's fully-let office buildings is yielding 5.9%, while the 10- year treasury is paying 0.5%, he asked whether this is sustainable. It's a valid question. Our response would be that, as so often, it might depend on your level of equity capital.
Ah, yes - equity capital. If you've got it, you'll have plenty of opportunity to flaunt it, everybody seems to be agreed. But not quite yet, obviously. Everyone, too, seems to agree that unemployment is going to rise as the industrial sector and exports suffer from weakened neighbours. Nobody doubts (at least publicly) that the low point of the crisis has been reached, the worst is over. The chief economist of the ECB is confident that the pressure by institutions and open-ended funds to invest in office property will hold prices firm, despite rapidly rising vacancy rates.
Can it really be that cash-flow is all that counts? Shouldn't all the above, particularly the little matter of industrial prospects, be pointing to a deflationary environment ahead? We have to admit, we're starting to see a number of projects - funds, mainly - that depend for their success on the willing suspension of the investor's disbelief. If the preservation of capital is subsumed in the rush to worship at the altar of cash-flow, it'll be a bonanza for the promoters and creative artists of the industry, pandering to the ever-shorter time horizons of the yield-seeking community. Spending money is easy. Getting it back fully-intact and well-serviced after ten years is another matter altogether, we submit.
To contact Charles Kingston please email editor@refire-online.com