2001 Winter Conference Country Presentation:
Germany
Claus Thomas, LaSalle Investment
Management
On January 25, 2001 at the AFIRE Winter
Conference in New York, Claus Thomas, national director
of the German LaSalle Investment Management office in Frankfurt,
spoke about German investment abroad, i.e. investment outside
that country by German entities.
Before discussing German investment outside Germany, Thomas
reviewed the current situation in German domestic markets
and what he described as "the environment the German
institutional investor lives in today."
Why do Germans invest
outside Germany?
Thomas described German investors as having a need for improved
returns, which are achievable in markets performing better
than Germany's domestic markets. One reason for weak returns
in Germany are the weak property markets in the major German
cities over the last couple of years, in combination with
the desire -- and sometimes the need -- to invest in real
estate. He also said that, in property, "the world
is getting smaller and smaller every day," a reference
to the trend toward globalization which "did not stop
in front of the doors of the real estate managers."
At least for the big property holders, he said, international
diversified portfolios "are regarded as essential."
He noted that the introduction of a common currency in the
14 countries of the European Union (EU) has removed a distortion
and has encouraged investment outside Germany by removing
one risk factor.
Thomas reported that the relaxation of
legal restrictions changed the environment for the open-ended
funds ("OEFs"), a major segment among real estate
investors. In 1992, they were permitted to invest throughout
the EU as a domestic market. This led to the first investment
in the United Kingdom (UK) in 1993-94.
Market forces, he said, sent another important German capital
source, the closed-ended funds ("CEFs") in search
of new business opportunities. These companies had grown
rapidly in the early 1990s because of tax-driven investment
in the eastern parts of Germany. They found their opportunities
partly through favorable double tax treaties, especially
in the Netherlands and the U.S.
Is there a typical
German property deal?
Thomas described certain characteristics common to what
he called a "typical German investment":
· There is a clear emphasis on secure income at an
interesting yield
· Germans are looking mostly for modern office buildings
in the central business districts (CBD), or at least in
well-established office locations in major cities
· In the interest of income security, Germans prefer
buildings with single (or only few) blue-chip tenants on
long leases -- ten years or more
He noted that one aspect that cannot be characterized as
typical is lot size. Investments vary from $10 million to
investments of well above $100 million. He reported open-ended
funds investing as much as € 250 million in a single
piece of real estate in Europe or closed-ended funds in
the U.S. investing over $300 million. The majority of investments,
he reported, ranges between $20 million to $50 million.
Thomas reported on some recent changes in investors' viewpoints.
"As we Germans tend to be perfectionists, we want to
have full control over our assets. This is why Germans always
want direct, freehold ownership. But we do realize that
we are living in an imperfect world, and the more progressive
among us have learned to accept leasehold ownership or other
structured situations."
Experience has also brought about some changes. "Now
that Germans have been gaining experience for a couple of
years on a larger scale, and with the pressure of tightening
real estate markets almost everywhere, the investment criteria
are now diversifying. Investors do not look for office buildings
only, they are prepared to look at speculative developments,
and other property sectors such as retail and, to a lesser
extent, industrial, hotels or leisure."
Where do German
investors put their money?
As to where Germans invest in such properties, chart 1 <include
his slide # 5> shows that in Europe the clear favorite
is France, destination of three-quarters of German investment
abroad. In all, German investment abroad in the first half
of the year 2000 totaled € 4 billion, mainly in properties
of the kind described above: offices in established locations
in a growing market.
Last year was the first time that France was clearly the
number one investment destination. In previous years emphasis
had been on the UK and the Netherlands. He said that both
of those countries have moved on in the cycle and, in the
case of the UK, the constantly high exchange rate is regarded
as an obstacle. With its cross-border investment in property
exceeding €/$ 40 billion, he said, Germany is the biggest
European capital source, with about 40 percent of all cross-border
deals in Europe.
Thomas put the origins of German foreign
investment in 1993, when German open-ended funds bought
their first office buildings in London. The properties offered
high yields by German standards with extraordinarily long
leases of 25 years, and he characterized them similar to
"concrete bonds." Then, he said, German investors
moved into the Netherlands in 1995 and since have invested
throughout Europe, taking advantage of markets in various
phases in market cycles. He expected record levels for investment
abroad in 2000, above the previous average of around €
3 billion.
Who are the German
investors active abroad?
Thomas described several categories of German investors,
each of which is often influenced "quite substantially"
by their business or legal background. The categories included:
· Open-ended funds
· Closed-ended funds
· Insurance companies
· Pension funds
· Spezialfonds
· Property Companies
· Private Investors
· Banks
Open-ended funds
The biggest category in terms of investment volume, he said,
is the open-ended funds. Although they are just 17 in number,
they have more than €50 billion under management, representing
an average of two-thirds of the German money invested abroad.
The funds are blind pools for small private investors, they
are highly regulated by the law, and they are supervised
by the custodian banks. Thomas said that although investment
in real estate, and open-ended funds in particular, is regarded
in Germany as conservative, secure and long-term, there
is the strong feeling that the 3-6 percent performance of
these funds in the last two years needs improvement. He
said this sentiment, and the need for diversification, account
for the fact that almost 50 percent of the new investments
are made outside Germany. He also noted that the liquidity
of the open-ended funds has declined compared to previous
years, so the pressure to invest has declined. The funds
have taken this opportunity to reshuffle their existing
portfolios, "something they were not able to do for
the last 5 years as they were busy spending the incoming
money." Examples of the open-ended funds most active
abroad are BfG ImmoInvest, DESPA and WestInvest.
Stressing the highly regulated nature of the open-ended
funds, Thomas described some of the requirements "substantially
influencing the overall investment strategies of the funds":
· A maximum of 20 percent can be invested outside
the EU. Some funds have even restricted themselves to domestic
investment (today meaning within the EU). Most funds are
at the upper limit due to recent investments in the U.S.,
Switzerland, Eastern Europe etc.
· Open-ended funds are restricted to a maximum financing
of 50 percent per property, at times making it more difficult
to optimize returns through positive leverage or to optimize
tax structures abroad
· Only direct ownership -no leasehold - is allowed
outside the EU
· Open-ended funds may invest only up to 30 percent
in property companies, which they try to save for special
occasions. This makes them less flexible as it rules out
some deals right from the beginning
· Open-ended funds may hold a maximum of 49 percent
in liquidity. Although this does not sound very dramatic,
it had quite an impact on the German market a couple of
years ago when open-ended funds were flooded with money.
Some were actually forced to buy properties in order to
comply with the limit. This also led to investments in other
European countries, as the amount of product required was
simply not available in the German markets.
Thomas reported that changes to the relevant
law, Kapitlamarktförderungsgesetz, will modify some
of these regulations next year. He gave the example of an
anticipated increase to 40 percent in investments permitted
outside the EU.
Closed-ended funds
US investors may be familiar with a new but important group
of German investors, Thomas said, the closed-ended funds.
He said these are much more difficult to define, as there
is no obligatory structure. They tend to hold one to three
properties, usually the equivalent of a limited partnership,
and their investment size is fixed. A sponsor syndicates
the fund to private investors in shares as small as $25,000.
The intent is to provide the private investors with a relatively
high after-tax return. The Netherlands and the US are favored
destinations for CEFs because of relatively friendly tax
treaties between Germany and these countries. In order to
provide attractive returns and to accommodate their fees,
CEF's need to buy in at cap rates not below 8 percent, Thomas
said. Lot sizes range from as little as $5 million for smaller
club deals to above $300 million in equity. Examples of
active players in the US are Jamestown, Bayernfonds, KanAm
and Rosche.
Insurance companies
Insurance companies are a major institutional sector in
Germany. According to Thomas, they number 2.700, have total
assets of € 691 billion, comprise the third largest
insurance market after the United States and Japan, and
they maintain their reputation for being highly conservative.
The average investment performance is
somewhere around 7.3 percent. This is a function, according
to Thomas, of holding some 70 percent of their investments
in very secure, very conservative and very low- performing
securities, typically bonds or fixed-income securities.
He noted, however, that increased competitive pressure from
deregulation in the European markets is forcing insurance
companies to increase their returns. They have increased
their holdings of equity and stocks, he said, have tried
to limit bonds, and have almost completely avoided real
estate, which represents just 3.6 percent of their assets.
Thomas reported that although insurers want to increase
this ratio, quality properties in Germany are generally
low performers, and the companies often lack the expertise
and manpower for international investment.
German insurance companies are also highly regulated, primarily
by the BAV - Bundesaufsichtsamt für das Versicherungswesen.
Additionally, life insurance companies have a gross fund
status so it is sometimes difficult for high quality foreign
property to compete with domestic investment opportunities.
All this, Thomas said, "does not help to make insurance
companies more flexible."
Thomas predicted that in the short- to medium-term insurance
companies' foreign real estate investments will be mainly
indirect, but that they will pursue higher levels in their
portfolios and higher-performing product. He also noted
the necessity of this approach, as changes are expected
in the German pension system that will bring even more money
into insurance companies. Some examples of the bigger insurance
companies are Allianz, Ergo and Gothaer.
Pension funds
Germany's extensive public pension system means that there
is not a large private pension sector. There are a few exceptions,
but real estate and international holdings are minor, Thomas
said, although this will change as a basic restructuring
of the public system is anticipated. Examples of existing
pension funds are BVV (actually relatively big, as it is
the obligatory pension scheme for banking industry employees),
Siemens, Bayer, and BASF.
Spezialfonds
Thomas mentioned a relatively new investor category, Spezialfonds,
as a separate category because they are "exploding
in size," reaching more than € 5 billion in only
about four years. Following the same regulations for property
investment as do OEFs, Spezialfonds serve as the instrument
through which insurance companies now invest in real estate,
especially internationally, he said. The biggest sponsor
is Oppenheim, with a market share of about 40 percent. Others,
like DESPA, offer this investment opportunity to institutions,
some of which (like MEAG , the investment arm of Munich
Re, and ERGO) establish Spezialfonds on their own.
Property companies
Property companies are relatively new in Germany, having
emerged from old industrial companies, Thomas said, and
they are increasingly regarded as an alternative to direct
investment. They have total market capitalization of about
€ 15 billion, which he said could double within five
years. Examples are IVG, Stodiek, BauVerein.
Private Investors
Thomas said private investors invest mainly in small lot
sizes (up to €10 million per property), and these investments
are also covered by OEFs or CEFs. Such investors seek, he
said, to build personal assets, to pursue tax advantages
or to seek long-term increases in value. Some families and
individuals with high net worth (such as the Mann and Quandt
families) have invested hundreds of millions of dollars
in the US, either directly or through asset management organizations.
Banks
Although they are not large direct investors in real estate,
Thomas said German banks are pursuing growth in this area
and many are offering very competitive financing conditions.
Usually, they do this through subsidiaries that specialize
in real estate financing. Examples are Rheinhyp, as part
of the Commerzbank, DEPFA and AHB. State-owned Landesbanken
such as Helaba, Bayerische Landesbank and WestLB would make
up a special category, he said.
Some observations in respect to the US
· Turning his attention to the US, Thomas noted that
there was a big wave of German investment in 1998 and 1999,
totaling more than $3 billion. Since then, interest has
subsided significantly, which he attributed to several factors
including increased exchange and interest rates, and the
fact that the US markets have moved on in the cycle.
Recap on German
investors
Summing up, Thomas noted several broad developments, including
more German participation in the international market. He
predicted that development in the stock markets will bring
money back into real estate, which may benefit open-ended
funds. He noted a general trend towards indirect investment
in real estate, and he predicted further growth of Spezialfonds
and quoted property companies. He also noted tendencies
toward the sale of big portfolios in Europe, shorter holding
periods, a resurgence of the German domestic market, and
German banks' eagerness to grow their real estate investments.
He predicted that, as large and important as the US market
is, investors of a certain size will always have US portfolios.
Claus Thomas is the National Director of LaSalle Investment
Management's Frankfurt office, where he is responsible for
client services in German-speaking countries (Germany, Austria
and Switzerland). Mr. Thomas worked for Jones Lang Wootton
from 1991-1999, prior to its merger with LaSalle Investment
Management. From 1996-1999 he was a partner and geschäftsführer
responsible for German investment outside Germany; and from
1991-1996 he worked with the domestic team in Munich and
Frankfurt. Prior to joining Jones Lang Wootton, Mr. Thomas
worked for seven years with a Munich-based agency and consulting
firm.
