Berlin Property Exit?

From the FT:

Goldman sale signals end of the office party


Goldman Sachs has put two German property portfolios valued at up to €3bn ($4bn) up for sale in the latest sign of international investors exiting the market.

The US investment bank is selling €1.1bn of offices, which it had split off from a €2.6bn portfolio bought in May from fund manager Degi. It is also selling a 51 per cent stake in a €4.5bn portfolio of Karstadt department stores. KarstadtQuelle, the retailer that owns the 49 per cent of the joint venture, has already put its stake on the market.

News of the two deals is likely to raise questions over whether other foreign investors in German property are heading for the door.

The residential market has been a magnet for foreign capital for several years with an estimated 1.3m flats worth €50bn sold since 1999.

That trend may be going into reverse. Only last week it emerged that Cerberus, the US private equity group, is seeking to sell a €1bn portfolio of 20,000 flats it bought three years ago after failing to realise its expected returns. Cerberus considered a flotation but cancelled it amid falling prices for property stocks. A Cerberus exit would follow several other big residential sales.

Fortress, which bought the €3.5bn Gagfah portfolio in 2004, last October spun off 150,000 homes in a Luxembourg real estate investment trust, selling 20 per cent of its holding for €853m. Morgan Stanley, the US investment bank, and Blackstone, the private equity group, have also sold large residential property portfolios.

Such groups had entered the market hoping to sell flats to their tenants and put up the rents for the rest. But many tenants were happy to continue renting while rent rises are constrained in many cities. Christian Ulbrich, chief executive of Jones Lang LaSalle in Germany, said: "Privatising social housing estates costs a lot in upgrading and residents will not pay €5 per square metre when they can pay €3."

Rainer Zitelmann, a consultant and market commentator, said: "Investors are disappointed because their expectations in regard to rent increases and privatisation proceeds were to a certain extent exaggerated."

But the flow of money into the German market meant portfolio prices rose and yields fell, enabling many early entrants to exit at a profit. Those days might have come to an end.

"In recent years you could buy and just sit and wait for the yield compression to happen. The easy money has been made, now it's back to the fundamentals of asset portfolio management," said Mr Ulbrich.

Demand for commercial property has remained strong from international investors who still account for about 75 per cent of purchases. Commercial property tends to move in different cycles to residential property and optimistic investors hope rents will pick up if the German economy strengthens.

Rents in most big cities have risen modestly in the past two years, reversing falls from 2001 to 2003. The average rent for prime office space in Düsseldorf, Frankfurt, Hamburg and Munich rose 3.6-7.3 per cent in the first half of the year from last year, according to data released by Jones Lang LaSalle. Prices did not change in Berlin.

The weight of investor interest has pushed yields on the best assets to below 5 per cent – whether offices or shopping centres.

Evans Randall, a private UK property company, has just bought Deutsche Telekom's Munich offices for €259m on an initial yield of 4.5 per cent. "We consider that is quite a high yield in the market at the moment," said Mike Evans, chairman.

Elsewhere yields are still often higher than debt costs – the reverse of the UK – and investors keep pushing prices for commercial assets ever higher. Many are paying premiums for portfolio deals that offer a swift way to enter the market on a big scale. But as some investors have already found in the residential market, sentiment can turn quickly if growth in the underlying asset lags behind the optimistic projections assumed in many portfolio deals.

Helge Scheunemann, head of research in Germany for JLL, said: "The market is not showing any signs of overheating so far but sale prices have risen to exorbitant heights . . . This holds especially true for portfolios and poses immediate problems for investors who finance transactions through debt capital because the leverage effect has almost disappeared."

Doubts among certain large international investors come at a critical time for the German commercial property market.

Rising interest rates are eating up much of the earnings from modest increases in office rents, raising the stakes for the big portfolio owners. If more decide to pull out of the market while they are ahead, the end of the office party in the German property market may be closer than it appears.

Finfacts Ireland


Goldman Sachs sales of big property portfolios in Germany raises fears that foreign property investors are heading for the exit

US investment banking giant Goldman Sachs has put two German property portfolios valued at up to €3bn ($4bn) on the market in a clear sign of international investors exiting the market.

The Financial Times reports today that Goldman is selling €1.1bn of offices, which it had split off from a €2.6bn portfolio bought in May from fund manager Degi. It is also selling a 51 per cent stake in a €4.5bn portfolio of Karstadt department stores. KarstadtQuelle, the retailer that owns the 49 per cent of the joint venture, has already put its stake on the market.

Irish Investment in Germany

Irish investors have put an estimated €41 billion in commercially property, mainly overseas, since 2001, compared with a €1 billion in venture capital in Irish business. Until the recovery of the German economy, London has been the location of choice. In recent years attention has turned to Germany.

For example, CMC Capital, a unit of a firm of chartered accountants in the seaside town of Clonakilty in West Cork, says that its has invested €500 million on behalf of clients (some of them likely to be farmers who have benefited from the EU's Common Agricultural Policy that has been mainly funded by German taxpayers) since 2004.

“We have experienced an incredibly strong demand for our German commercial property syndicates from the Irish investment community,” said Derry Crowley, Director with CMC Capital in June.

“The Irish investor follows the property market closely and they clearly see that there are considerable returns to be generated from German commercial property.

“We will look to build on the success we have already enjoyed with our other syndicates and continue to target commercial properties with a bias towards the retail and office sectors located in desirable urban locations throughout Germany.

“Another investment criteria we will look to secure is that the properties purchased are pre-let to blue chip tenants and have an average rental yield of 6.5%,” he added.

A recent syndicate that is expected to run for just over seven years, has a projected rate of return on the investment of about 27% simple per annum.

ECB Rate Rise to 4.50% to Pressure Market

The FT says today that news of the two Goldman deals is likely to raise questions over whether other foreign investors in German property are heading for the door.

The residential market has been a magnet for foreign capital for several years with an estimated 1.3m flats worth €50bn sold since 1999.

However, last week it emerged that Cerberus, the US private equity group, which was recently in the news because of its purchase of the US Chyrsler car division from Daimler Benz, is seeking to sell a €1bn portfolio of 20,000 flats it bought three years ago after failing to realise its expected returns. Cerberus considered a flotation but cancelled it amid falling prices for property stocks.

Fortress, which bought the €3.5bn Gagfah portfolio in 2004, last October spun off 150,000 homes in a Luxembourg real estate investment trust, selling 20 per cent of its holding for €853m.

The FT said that such groups had entered the market hoping to sell flats to their tenants and put up the rents for the rest. But many tenants were happy to continue renting while rent rises are constrained in many cities.

Demand for commercial property has remained strong from international investors who still account for about 75 per cent of purchases.

The FT says rents in most big cities have risen modestly in the past two years, reversing falls from 2001 to 2003. The average rent for prime office space in Düsseldorf, Frankfurt, Hamburg and Munich rose 3.6-7.3 per cent in the first half of the year from last year, according to data released by Jones Lang LaSalle. Prices did not change in Berlin.

The expectation that the European Central Bank will raise its key interest rate to 4.50% next Spring will put additional pressure on investors.