What attracts international investors to Germany

Jochen Reith, Managing Director of PATRIZIA Institutional Clients & Advisory GmbH, gives an interview and a general picture of Germany’s attractions for real estate investments.

Today, Germany is an outstanding place for real estate investments, and it’s getting more and more popular, especially among international investors. Why is that?
Germany has long been a hotspot. The economy is doing well, and these days the country is seen as the economic engine driving Europe. Not just subjectively and politically, because the German government has been a vocal supporter of the European idea, but also because the economic figures add up. Other countries in Europe and around the world are experiencing similar trends, but the picture in Germany is especially promising. A stable political system in Europe, good job market performance, a broad-based, growing economy, strong exports: All of these are stable factors and have been that way for the past ten to fifteen years. When you look at Germany, you see the right kind of outline data and, in international terms, still very marketable returns. That’s why Germany is still considered a safe haven.

What are the special features of the German real estate market?
Given the environment I just described, it’s interesting that real estate is not much more expensive here than in other markets. The euro plays a crucial role, too. Of course, Europeans tend to take a somewhat dimmer view of the euro than the international market does, but worldwide it’s one of the major recognised currencies. If a foreign investor thinks about diversification, the euro has to be included in the calculations; and if you then look around within the eurozone, Germany is quite far in the forefront.

“Even Germany’s mid-sized cities are very centralised, they’re attractive, and they have a working real estate market.”

Jochen Reith, Managing Director of PATRIZIA Institutional Clients & Advisory GmbH

In addition, Germany is a very liquid market because of its size. There are a lot of metropolitan areas here with big buildings, and you can make large investments here. Another distinguishing factor is that we’re very decentralised. In France, Paris is practically the only investment base. It’s a similar picture with London in the UK or Madrid and Barcelona in Spain. That’s very typical: almost every real estate market, apart from the USA because of its sheer size, is extremely centralised. But Germany is different. We often speak of the top five or top seven locations – here alone we already have a larger number of attractive markets. And it goes even further: Baden-Württemberg, where global market leaders appear to be out in the sticks, is a good example. Even these mid-sized cities are very centralised, they’re attractive, and they have a working real estate market. That’s an absolute draw for investors who work with Germany. But to investors who are looking for ‘the’ city where ‘everyone’ invests, it’s hard to understand.

What kinds of investors does the German real estate market attract?
Naturally, we have a substantial investor base that comes from within Germany. Other countries have that too, but we also have lots of investors from Australia, Asia, the Middle East, other European countries and the USA. 

What strategies is the German real estate market especially well-suited for?
Like anywhere else, investors here are of course focused on expected return and risk aversion. Many investors are expanding into Europe for currency reasons, and they are extremely risk-averse. For others, the feeling is that if I’m going to cross the pond I want double-digit returns, and I’m willing to take risks accordingly.

But we find that investors with the right partner are willing to accept an extra level of risk. Let’s look at residential property, for example. Three or four years ago, people wouldn’t have been willing to let a project developer hand over a newly constructed residential project with no tenants. Now, for the sake of the return, as an investor you might take on handling the property rental yourself, if you believe in the location. You might get into the project even earlier; or in commercial real estate in a good location, you might be willing to overlook a small shortcoming in the construction, or to accept a shorter lease. Flexibility enters the picture. Obviously, all investors feel the pressure to get a return. But if you have a return of only 2.0 or 2.5 on a very ordinary new building because some market participants will accept that, you’ll begin looking for ways to improve your situation.

We’re seeing several developments in forms of investments. From a certain size up, there’s a tendency to go it alone in pursuing a strategy and eliminate the problems of coordinating with other investors. Many investors find negotiating with sellers and brokers, dealing with timelines and structuring the investment properly a challenge in itself. There are two solutions: there’s the classic individual engagement, but for a reasonable risk diversification a mandate like that has to run in the high triple-digit millions. The other option is to spend money on a discretionary basis, where investment managers define a clear profile for strategy, markets and expected return and make decisions on their own within the agreed bounds. That avoids conflicts among investors. There’s also a tendency to diversify among multiple types of use, countries or regions.

What real estate investments in Germany do you recommend for international investors?
We suggest that when looking for the right investment manager, international investors should look very carefully at the length of the manager’s track record and how well and how broadly positioned they are. We think it’s risky to have an investment manager who focuses on just one segment. Across the broad range where PATRIZIA operates, we can offer diversification across national boundaries, different types of use and different risk classes: ‘Dear customer, you should sell your German shopping centres for the following reasons, because opportunities in hotels in Spain are much better right now.’ Or: ‘Have you given any thought to residential properties in the Nordic countries?’ We clearly recommend working with major operators who have broad expertise in lots of countries and types of use. Find a sparring partner who can advise you objectively about a subject and who’s not overly attached to specific products.

Is growth in the German real estate market sustainable, or are we heading for a bubble?
It’s clear that everything costs more than it did three or five years ago. That’s true of almost any market; we’re in a nearly identical cycle everywhere. People like to mention the penthouses in Munich that sell for 30,000 euros per square metre. Whether that’s a bubble isn’t the relevant question: it’s not an institutional product. Those penthouses don’t set the market standard. We can observe that rents are rising because the economy is doing well. One dominant theme at the moment is changes in interest rates, but the signs of any explosive rise in interest rates are rather slight. The market can handle small interest increases in tiny steps. There may be corrections in some segments, but they will ultimately run their course and the markets will stabilise again. The old saying about “location, location, location” and “quality, quality, quality” still applies. Quality properties will perform a bit better in a crisis – they’ll survive and emerge better afterwards.


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