market jungle financing and taxesir.refire-online.com/upload/xyz/app_zio_2014_03... ·...

German bricks and mortar is still very attractive to foreign investors. But core is looking pricey, and

smart money is looking at secondary locations.

Edition 3 - 2014

InvestIng In german real estate

market Jungle

Financing and taxesHow to find your way

What to watch out for

sPecialthe decider‘s magazine

immobilienmanager

in cooperation with

Asset Profiler and Immonet– a strong partnershipThe quality leader in the field of closed investment platforms at Immonet.de.

Storing precise search profiles as an investor• Focusedplacementofinvestmentdesires• Profileisonlyshowntosuitablesellers• Successthroughdiscretionandefficiency

Identifying suitable investors as a seller• Confidentialtransactions• Qualifiedmatchingofinvestors• Detailedmatchinganalysis

AZ_Immonet_Investment_A4_hoch_englisch.indd 1 20.02.14 16:52

Christof Hardebuscheditor of immobilienmanager

Charles Kingstoneditor of REFIRE

Berlin . Düsseldorf . Frankfurt

www.pamera.com

Time for core plus and value add investments in Germany.The PAMERA Real Estate Group is a professional local partner for investors focusing on offi ce and retail assets.

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German prime real estate is becoming more and more ex-pensive, with foreign investors finding good value in-

creasingly thin on the ground. This special publication can help to guide you through Germany’s myriad markets, complicated laws and somewhat opaque structures.

This is the sec-ond time that RE-FIRE and immo-bilienmanager have joined forces to lend you a help-ing hand to nego-tiate the German investment land-scape better. “Investing in German Real Estate” is being pub-lished in time for MIPIM 2014 as a print publication, as a PDF being sent out directly to 16,000 international investors and real estate professionals, and as an immobilienmanager app for iPad and iPhone, as well as being downloadable as an eMagazine from www.immobilienmanager.de.

Germany’s real estate markets are still powering

ahead, albeit at different speeds depending on

the particular asset class. But to successfully ride

the individual waves, you need to be very well

informed about what’s really going on.

The German party continues

Pho

to: B

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Pho

to: r

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Charles KingstonChristof Hardebusch

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immobilienmanager · special investment · 3 - 20144

Investing in German Real Estate

Have a look at the opportunities in Germany –

at the Big7-Cities in the premier division and

at the many others in the second tier.

Table of Contents28 Retail

Big selection

31 Financing I How to finance in Germany?

34 Financing II The appearance of new financers leads to a climate change

37 Listed Real Estate The sector is larger than previously thought

40 Investments Click & buy in the internet

42 About this Special/ Legal Notice

INvESTmENT

03 Editorial04 Table of Contents06 Economic Outlook

The German decade – already over?

08 Investment Opportunities in the second division

12 market Parameters Finding your way through the market jungle

16 Real Estate Law The legal perspective

20 Taxes Making the right choice

24 Offices More appetite for risks

AWARD 2014

DANKE!Wir danken allen Sponsoren, Nominierten, Gewinnern

und Gästen für eine tolle Veranstaltung!

AWARD 2014immobilienmanager.

Immobilien Manager Verlag IMV GmbH & Co. KGPostfach 41 09 49 ∙ 50869 Köln

Telefon: 0221-5497-131 ∙ Fax: 0221-5497-6131E-Mail: [email protected]

Netzwerkpartner:Die Partner:

Mit freundlicher Unterstützung von:

5_Anzeige_Danke_140215.indd 1 17.02.2014 11:59:20

It was supposed to be the German decade and it also began accordingly. Germany

had shaped itself into the growth locomotive of Euroland – among other reasons thanks to the reforms introduced as part of the “Agenda 2010”. From 2006 the German economy grew at above average rates, both measured historically and in European comparison. Then came the Lehman crisis and with it dramatic economic collapse. Germany recovered from this very quickly, however, and took up the good economic results

from before. It could have carried on like this if the European debt crisis had not escalated. The Germans currently have to make do with growth rates of less than one per cent again, pos-ing the question of whether the German decade has already ended.

What makes a sports car – the speed it actually drives at on the roads or the technol-ogy that makes a high degree of speed possi-ble? Due to the road conditions, the speed can also be lower sometimes. What is decisive for

The German Decade – Already Over?

EcOnOmic OuTlOOk fOr GErmAny The European debt crisis has

slowed the German economy once again. Two things are required for a return

to dynamic economic development: export prospects have to brighten again

and investment, which has long been sluggish, has to rise again.

By Dr Andreas Scheuerle

Pho

to: B

un

des

Pres

sest

elle


invESTmEnT

The Federal Chancel-

lery: in the past few ye-

ars the reform activity of

German governments

has decreased – there

has to be action in the

upcoming legislative

period.

a sports car, as well as for an economy, is the technical possibility of high performance. The past few years saw several achievements in Germany. German exporters’ lost price competitiveness has been painstakingly won back and new sales markets have been tapped. The product range, which is attractive any-way, rounds off the factors for success on world markets. But this was not all that hap-pened. Thanks to the “Agenda” reforms, which included improving the flexibility of the labour market through temporary em-ployment and working time accounts, it has been possible to continually reduce unem-ployment, which still aimed at new record levels in 2005, to a low for Germany as a whole. This creates both new, additional income and also lowers fear of unemployment. Thus Ger-man citizens not only have more money in their pockets, they also have the necessary confidence to spend it. The fact that low inter-est rates currently provide no incentive to save supports this.

Two things are necessary for a return to dynamic economic development. First, ex-port prospects have to brighten again, which not least depends on corporate expectations about the progress of the debt crisis. Second, investment, which has long been sluggish, has to rise again. The debt crisis plays a key role

here too, because uncertainty about the pro-gress of the debt crisis and thus about sales prospects placed a burden on corporate incli-nations to invest – despite low interest rates. Only when this uncertainty abates – and there are signs of this at the moment – will investment activity in Germany regain mo-mentum. Then the “German economy” sports car will be able to play to its strengths again and bring its horsepower onto the roads.

But every good sports car needs regular maintenance and renewal. In the case of the German economy this means continual ef-forts by companies to retain their competitive lead as well as the continuation of govern-ment reforms and measures to improve Ger-many as a business location. In the past few years the reform activity of German govern-ments has decreased. There is a backlog in structural improvements too. For example, net government investment, primarily con-struction investment, has been negative for some time, i.e. Germany has been living from its reserves. If the German decade is not to remain a one-off thing, action has to be taken in the upcoming legislative period

Dr Andreas Scheuerle is the Head of Eco-nomic Activity Industrial Countries/Sector Analysis at Deka Bank.

2

4

6

8

10

12

14

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Eurozone (17) Deutschland

Agenda reforms pay off: German unemployment rate fallingcomparison of the development of the unemployment rate in Germany and the Eurozone since 1995

Source: Deka Bank

immobilienmanager · special investment · 3 - 2014 7

invESTmEnT

Risk may be not a bad word anymore. But most investors’ need for safety is

at an uninterrupted high and Germany’s property is seen to be a comparatively safe haven. In this connection, national and international investors have limited their commitments either to Germany‘s Top Five

– Berlin, Düsseldorf, Hamburg, Frankfurt/Main, Munich – or at most the Top Seven, i.e. the Top Five plus Cologne and Stuttgart.

The extent of the investment boom in the market for commercial property has

surprised even optimists. 2013 was the best investment year in Germany since 2007 with an increase of investment volume in commercial property of 21 per cent. In indi-vidual deals, the top locations were able to devour almost three quarters of the whole cake; in portfolio deals, this proportion was naturally significantly lower.

But a glance at the map of Germany shows that many locations have fallen by the wayside in this consideration. Germany is a thoroughly federal country and has nu-

Opportunities in the Second Division

INVESTMENT A dependence on safety is driving the prices of core products

in the top cities to ever greater heights. Therefore, it’s worth taking a look at the

secondaries. And Germany has plenty of these. By Christof HardebuschPh

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INVESTMENT

merous strong sub-centres. Medium-sized cities and smaller towns accommodate companies that are among the world mar-ket leaders in their sectors. These towns and cities offer well paid jobs and a high quality of life but are as good as unknown interna-tionally.

Up to now, international investors in particular have ignored these secondaries. There are a whole range of reasons for this. One of these is a lack of transparency. There is a lack of market data everywhere. For ex-ample, a few weeks ago the first office mar-ket report for the Bonn location was pub-lished. And Bonn is a city with very good economic and demographic benchmark figures. Second, the deals realisable in these towns and cities are often too small for the tastes of large investors. Properties weigh-ing in at 20 million euros or more are few and far between in the secondaries, for good reasons. And if they do come up, they are often associated with considerable cluster risks.

The low interest rates and the lack of at-tractive investment alternatives are also in-creasing the readiness to pay high prices. A less welcome result of this run on the A cit-ies is the decline in yields. BNP Paribas Real Estate states the net starting yield in Mu-nich is 4.4 per cent, in Hamburg and Frank-furt/Main this is 4.65 per cent. Even Co-logne has fallen through the five per cent barrier. And prices will rise further. Espe-cially because additional purchasers with

Old Town, modern office blocks and the

Rhine – Bonn has all this but is mostly over-

looked by investors.

high levels of equity are likely to push onto the market. It is generally expected that Chinese government funds and insurance companies will invest more in foreign prop-erty companies in future. “The scramble for the best properties in Europe and the USA will thus become even more intense”, fore-casts Professor Tobias Just, Head of the IREBS Immobilienakademie and holder of the property sector chair at the University of Regensburg. “Even in the most favoura-ble scenario, lower cash flow yields have to be expected,” continues Just.

Apparently for some investors it is enough not to lose any money, if possible. But even this group could face a rude awak-ening. The Investment Property Databank attests a “significant weakness” in the office markets of the A cities Frankfurt and Berlin. Accordingly, Frankfurt office property lost around 3.8 per cent of its value from 2003 to 2012. In Berlin, this was nearly 3.9 per cent.

The safe havens aren’t that safe

Thus the “safe havens” are not that safe. Reason enough to look for secondary loca-tions in A cities and A locations in second-aries before everyone has the same idea. Because a change in sentiment seems to be happening already. In a survey carried out by Union Investment, 50 per cent of inves-tors questioned said they were now also prepared to make commitments in second-aries.

Because it could be worth it. In the IPD Total Return Ranking, the top cities are only in mid-table. Annualised over five


INVESTMENT

years, Nuremberg reaches the best values followed by Karlsruhe. Total returns in these cities range from 4 to 4.75 per cent. As the best of the Top Seven locations, Cologne reaches at least 3.9 per cent, Berlin is only at 1.1, per cent. Office investments in all the ten best secondaries are more profitable than in the German capital.

Experienced German professionals play this card more easily than international in-vestors of course. But their reasons are valid for all investors alike. “The difference in return between non-core investments and core investments is significantly higher than a comparison of the risks would sug-gest. In order to identify these opportuni-ties a deep market and asset understanding is necessary”, says Christoph Wittkop, managing director of Pamera Asset Man-agement. “Selected secondary cities and some secondary locations in prime cities

offer an attractive ratio of available modern space to annual take up that sometimes even beats prime locations.”

But the large number of secondary cities and the poor data situation there makes it quite difficult to invest there. Where retail property is concerned, the map of Germany looks somewhat different in any case. The Top Five also play an important role in this segment, but dominate far less than in the office sector. Numerous cities that are deemed to be secondaries in terms of their office markets offer best conditions for re-tail. Because there are still many a pearl to be discovered. For example, a study by IVG Immobilien AG lists 18 undervalued loca-tions, including Ulm in the South West, Dresden in the South East, Oberhausen in the Ruhr region and Paderborn in the cen-tre of Germany. Even experienced German market players frequently cannot cope with

Office markets Germany (yield-risk profile)

Source: IPD Investment Property Databank

0.0

0.5

1.0

1.5

2.0

2.5

yield

(% p.

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3.0

3.5

4.0

4.5

Bremen

MannheimHanoverBonn

Deutschland

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Düsseldorf

Cologne Stuttgart

Ruhr AreaWiesbaden

Munich

Hamburg

Nuremberg Karlsruhe

Essen Dortmund

Berlin

0,0 1,0 2,0 3,0 4,0 5,0

Frankfurt/M.

Risk (STDEVP)


the large number of potential locations without advice. International investors in-terested in stable and interesting cash flow yields should turn to consultants specialis-ing in the retail sector here.

The demand for German residential portfolios has also greatly increased. Ac-cording to BNP Paribas Real Estate, in this respect, 2013 was the third best investment year for the German market ever. More than 14 billion euros flowed into the invest-ment class “larger residential portfolios”. This figure is, however, shaped by some very large deals.

Investments in German apartments in good locations and of good quality are deemed to be particularly low risk. Experts jokingly talk about a “super core”. Therefore, investor types with the highest need for safety dominate here: insurance companies and pension funds that rely on stable cash flows, and also some family offices hoping to retain residential property value or for increases in value.

Not only German but also international fundraisers have positioned their products for these target groups. Suitable products are becoming increasingly scarce. Thus looking for locations beyond the shiny cities makes sense. A study by Vitus S.a.r.l. und Wüest und Partner, Switzerland, does just that. In addition to the A cities, it investi-gates a further 74 large cities. A whole range of these offer significantly higher yields at the same or even lower risks than, for exam-ple, Hamburg, Munich or Düsseldorf. Ac-cording to the risk consideration, for exam-ple, Bremen in the North and Leipzig in the East are dead level with Frankfurt. In con-trast, the yields achievable are almost two

per cent higher in the two cities named. The specific investment risk is roughly just as high in Hamburg as in Dortmund, but in contrast the average yield is 3.5 per cent lower.

What is also interesting is that the yield spread between the top cities and the sec-ondaries is increasing and not decreasing. On average this is currently 260 basis points. In this connection, some secondaries offer not only a higher per capita income, but also good demographic perspectives. These in-clude, for example, Reutlingen, Paderborn and Münster.

Foreign institutional investors are, how-ever, coming up against certain barriers at such locations. The largest of these is prob-ably deal volume: it is very difficult to find suitable, larger portfolios in secondary cit-ies. Therefore, those who can should per-haps look more for opportunities in the area of commercial real estate instead. Accord-ing to Refire Editor-in-Chief Charles King-ston, Blackstone for example has demon-strated a “good investment nose” in Ger-many in the past. Therefore, perhaps the Americans should be held up as an example:

“Blackstone has been a net seller of German residential and a net buyer of commercial property since 2012 – and it isn’t queuing up in Frankfurt office at four percent“, says Kingston.

im.digitalYou find two charts about B locations and a forecast for German households in our app and our eMagazine.


Regional rankings on the basis of loca-tion-specific indicators are crucial for

protagonists in the real estate sector not only for determining sales and rental prices. A com-parison of possible location options, and the corresponding comparison of risks, is just as valuable. This is on the increase in a country such as Germany that has a polycentric struc-ture with no dominant business centre and in

which there is growing interest and demand from users and investors. Instead, a diverse mix of attractive prime locations characterise Germany’s property strongholds, together with an even higher number of secondary and tertiary markets. Domestic investors may un-derstand the regional diversity of Germany’s urban landscape and be able to find their way through the jungle of more than 70 towns and cities with over 100,000 inhabitants. However, for foreign investors the much-praised advan-tage of geographic diversity can definitely be a barrier to investment. Yet probably even the domestic experts are left somewhat baffled when it comes to the question of nationwide and comparative forecasts of relevant market parameters. They then have to ask themselves the question: where should I invest next?

The real estate industry’s interest in rankings is reinforced by the current dis-cussion about “what comes after Core?” Time and again, this topic prompts discus-sions and analysis of the attractiveness of so-called “secondary locations” in the of-fice, residential and retail sectors. It comes as no surprise that the Big 7 - Berlin, Düs-seldorf, Frankfurt/M., Hamburg, Cologne, Munich and Stuttgart – dominate office market rankings, for example. But other cities can also appear as attractive invest-ment locations, particularly in a ranking of achievable yields. It is all a question of the evaluation and comparative perspectives: does it make sense to compare Munich, which has 20 million sqm of office stock, with a city that perhaps has only a tenth of

Finding your Way through the Market Jungle

Market ParaMeters City

and regional rankings are

increasingly popular, particularly in

the real estate industry. But which

rankings make sense for whom?

By Helge scheunemann

Yes, there is a jungle in Germany – for exam-

ple in the Cologne zoo.

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to: Z

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Kö

ln/R

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Sc

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InvestMent

this volume? This quickly creates a discus-sion about comparing apples with apples and pears with pears, with the dawning realisation that a) absolute reference values often do not help, and b) fixed rankings with “Munich at number one” and “Kassel at number 50” offer no real added value to investors. From the perspective of portfolio optimisation, it is more constructive to choose peer groups in order to compare markets of a similar type, particularly when investors – for whatever reasons – are not interested in Munich or Berlin but are perhaps only interested in towns and cities with a population of between 100,000 and 200,000 inhabitants. A ranking that is based on such principles and also asks the right questions will then look completely different from a standard statistical prod-uct. As is generally known, investors are not always looking for a new investment but sometimes want to reallocate their re-sources or compare the performances and

corresponding risk-return profiles of the markets in which they have invested.

In order to meet this need for a dynamic comparison of locations and markets, Jones Lang LaSalle Research has developed a port-folio and market analysis tool called DREAM – Dynamic Real Estate Analysis Monitor. This tool enables individual analy-ses and scorecards to be produced for Ger-many property markets with maximum flexibility and on a nationwide basis.

With the aid of more than 50 indicators from various thematic clusters, all German towns, cities and districts can be compared among and with each other with regard to their performance on the office, retail and residential markets. In contrast to fixed rankings, indicators and markets can be in-cluded in the ranking on an individual basis and can be weighted depending on market-specific investment volumes, for example. In each case the selection and weighting of indicators are determined by the individual

viewpoint Conservative InvestorSocio-Economic Environment

Office Market Environment

Liquidity/ Market Size

Rental Market

Capital Values

Total Score

Weighting 35% 30% 10% 15% 10% 100%

Benchmark 46,2 46,8 22,3 46,1 41,6 43,5

Rank Weighted Portfolio 50,9 47,9 8,4 39,0 27,9 41,7

1 Osnabrück 73,7 67,3 12,9 35,7 10,8 53,7

2 Heidelberg 43,5 64,7 11,5 44,3 34,3 45,8

3 Wolfsburg 80,7 47,3 6,4 7,0 0,0 44,1

4 Würzburg 60,4 40,2 4,5 41,5 34,6 43,3

5 Mönchengladbach 48,7 53,8 7,7 35,1 35,2 42,7

6 Rostock 39,7 35,7 9,0 67,9 53,9 41,1

7 Koblenz 25,8 44,8 12,6 70,3 62,6 40,6

8 Oldenburg 55,5 44,4 4,0 29,5 18,9 39,5

9 Ulm 41,9 41,2 7,2 29,1 20,4 34,2

10 Ludwigshafen/Rhine 39,2 40,3 7,9 24,6 3,4 30,7Source: Jones Lang LaSalle


InvestMent

requirements of the investor and are tailored according to their investment profile. Op-portunistic investors with a progressive ex-pansion strategy, for example, have different requirements for the selection and weight-ing of indicators from conservative portfolio holders with a buy-and-hold strategy.

Thanks to a comprehensive database, DREAM also enables the integration of his-torical analyses as well as extensive, well-founded and nationwide forecasts on popu-lation figures, economic data and rental or purchase prices into the ranking. This al-lows different time horizons (current situa-tion, historic or future development) to be displayed and combined.

Last but not least, it is also possible to as-sess individual markets or portfolios against specific benchmarks (for example Germany, federal states or portfolios).

The selection and weighting of the mar-kets and indicators as well as the compari-son with the individual benchmarks result in the final scoring. In the scoring, the re-spective best market receives a score of 100 per indicator, and the worst receives a score of zero. In order to smooth out the results, the bottom and top three percent of the scores are capped to eliminate outliners. The final ranking includes the aggregated individual market scorings.

Using the ranking, the market participant is able to see where the performance values for certain indicators are particularly high and where they are below average. High per-formers are therefore compared with low performers. The analysis options of the tool also include a detailed evaluation of the strengths and weaknesses of each analysed market on the basis of the indicators that are

applied. The tool helps investors and portfo-lio holders to reduce the risk of their respec-tive investment or sales decision and also supports users in the development and im-plementation of their expansion strategies.

This market analysis tool helps provide a sound understanding of complex issues while also taking individual perspectives into account:

■ How does the portfolio compare with the individual benchmark?

■ What are the strengths and weaknesses of individual markets?

■ Which markets will experience more dy-namic growth than others in future; are there hidden champions?

■ Which markets have similar characteris-tics? What clusters are there?

■ How should a portfolio be distributed in order to achieve a balanced allocation of Core and potential locations? Two examples serve to illustrate the

broad range of applications for a dynamic ranking tool. Both examples analyse the same markets and indicators. However, both scenarios arrive at different assess-ments through differences in weighting caused by varying perspectives. It is not pos-sible to reproduce these different assess-ments with a conventional fixed ranking.

The first example represents the viewpoint of a conservative investor with a long-term investment horizon, low appetite for risk and good rental income, while the second exam-ple shows a more short-term investment strat-egy targeted at high growth. The same ten German office markets with stocks of be-tween 800,000 and one million squaremeters are used in both examples and are assessed with regard to their overall performance.


In both cases a benchmark consisting of the 68 office markets – the 75 most impor-tant German office markets minus the Big 7

– is used as a reference value. For the later analysis at portfolio level, both the portfolio markets and the markets used for the bench-mark are assigned individual weightings. In the two examples provided, the weightings are determined by the respective office mar-ket stock. However, these can be freely se-lected and could equally be based on annual net rental income of actual investment prop-erties, for example, or on the respective stock at market level.

The selection of the indicators or time horizons is identical for both examples, al-though the weightings of both individual indicators and indicator clusters vary con-siderably at times. Historical and forecast data is used in both scenarios, although the emphasis is mainly on past developments in the conservative scenario and on future de-velopments in the opportunistic scenario.

At the level of indicator clusters, the con-servative scenario focuses on fundamental data such as the economic and demographic environment with indicators for economic

and office employment growth and for the jobs market, as well as on the office environ-ment cluster with indicators such as vacancy rate, office letting in relation to stock and changes in the stock and on the rental price development cluster. In the opportunistic scenario, the first two clusters as well as rental development move into the back-ground in favour of the liquidity/market size clusters, with indicators on market size and the investment market, as well as the capital growth cluster.

Both examples show how the results of the analysis of individual locations – for ex-ample Koblenz, Wolfsburg or Rostock – de-pend on the individual investment strategy.

A market scoring must therefore be un-derstood as a user-defined assessment of a market risk compared to other markets. As well as the distribution of risk factors, the comparative basis – that is, the selection of the markets to be compared and the bench-mark – is of particular importance here.

Helge Scheunemann is National Director/Head of Research Germany at Jones Lang La-Salle GmbH.

viewpoint Opportunistic InvestorSocio-Economic Environment

Office Market Environment

Liquidity/ Market Size

Rental Market

Capital Values

Total Score

Weighting 15% 15% 30% 10% 30% 100%

Benchmark 43,9 46,8 23,3 43,7 41,6 37,4

Rank Weighted Portfolio 49,2 47,9 9,8 40,5 27,9 29,9

1 Koblenz 22,5 44,8 14,5 63,7 62,6 39,6

2 Rostock 36,5 35,7 11,8 61,0 53,9 36,6

3 Heidelberg 41,8 64,7 10,6 44,1 34,3 33,8

4 Osnabrück 71,0 67,3 16,8 42,1 10,8 33,2

5 Mönchengladbach 44,2 53,8 10,1 33,9 35,2 31,7

6 Würzburg 50,3 40,2 5,9 34,0 34,6 29,2

7 Oldenburg 54,4 44,4 5,3 37,4 18,9 25,8

8 Ulm 46,1 41,2 7,1 27,1 20,4 24,1

9 Wolfsburg 86,7 47,3 7,5 4,2 0,0 22,8

10 Ludwigshafen/Rhine 38,3 40,3 7,9 55,4 3,4 20,7Source: Jones Lang LaSalle


Germany’s legal framework is an at-tractive factor, providing investors

with a stable, well regulated and transpar-ent environment that does not impose re-strictions on overseas investors.

Acquisition of Ownership

An asset deal is direct acquisition by the buyer from the owner. All formal re-quirements must be observed, meaning that asset deals must be notarised to be effective.

In most cases the parties are advised by specialist lawyers when drafting the rele-vant documents, negotiating the parties’ agreement, financing the transaction and completing the transfer.

It essential for the buyer to carry out due diligence on all aspects of the prop-erty prior to notarization of a property transfer agreement.

Memorandums of understanding, let-ters of intent, heads of terms and other related documents do not have a binding effect on the transfer of a property under German law unless they are agreed in a notarial deed. However, exclusivity and confidentiality agreements, with provi-

sions for liquidated damages in case of breach, are valid and enforceable and these are widely used.

Typically, the completion of the trans-fer of the property by registration will be secured by a priority notice of conveyance that is registered by the land register. This secures proper transfer of ownership fol-lowing payment.

Whilst the onus is on the buyer to carry out due diligence, the seller is obliged not to withhold important information relat-ing to the property. Under German law the seller must disclose information to pro-spective buyers on any issues that could negatively impact the asset’s value. Failure by the seller to disclose this information overrides any waiver of liability that the purchase agreement may contain and could result in claims for compensation or even rescission of the purchase contract.

Transaction costs for the transfer of property to cover registration fees, notari-zation and so on can be estimated at 1.5 per cent of the purchase price. Real estate transfer tax (RETT) currently varies be-tween 3.5 to 6.5 per cent depending on the German Federal State. This excludes costs for due diligence, legal fees and technical experts.

The Legal Perspective

ReaL esTaTe Law What are the key legal points to consider when

investing in real estate in Germany? By Dr Carsten Loll


InvesTmenT

An alternative way to acquire real es-tate is indirect acquisition, purchasing the legal entity that owns the asset. In Ger-many, such legal entities are often limited partnerships with a limited company as general partner (GmbH & Co. KG).

In order to transfer the shares of the company from the seller to the buyer, the parties have to execute a share purchase and transfer agreement. As for the agreement to transfer an asset, statutory law requires a share purchase agreement for shares in a GmbH to be notarised. The transfer of in-terests of partnerships gen-erally does not need to be notarised.

In Germany it is com-mon for only 94.9 per cent of the shares to be trans-ferred as a transfer of 95 per cent or more would trigger the obligation to pay RETT. The remaining shares may be acquired after five years.

Unlike many other jurisdic-tions, official shareholder regis-ters do not exist in Germany. As such, if shares have been transferred several times, it is important to ascertain that there is an unbroken chain of notarial transfer agreements from the original shareholder to the current shareholder to confirm that the seller actually owns the shares. If the seller does not have good title to the shares there is no protection act in place in favour of the buyer even though they may be pur-chasing in good faith. This is a clear dis-tinction from an asset deal, where the seller

source: s.Geissler/Pixelio.de

will be assumed to be owner of the real es-tate if it is registered and therefore an ac-quisition in good faith is possible.

Furthermore, it is not uncommon for the company’s articles of association to contain certain restrictions regarding the transfer of shares. It is common for any transfer of shares to require the prior ap-proval of a certain majority of existing

shareholders or for existing share-holders to have rights of pre-

emption.Generally, overseas in-

vestors are not subject to any restrictions additional

to those that affect domestic investors. How-

ever, the government does have the power to impose a restriction on the acquisition of prop-

erty in Germany by over-seas corporate investors, requiring them to obtain a public permit in situations

where German companies are subject to similar restric-

tions in the investor’s own country. No such restrictions are

currently in place .

Leases: Duration and Rent

Commercial leases generally have five to ten year fixed terms with tenants usu-ally having rights of renewal. On rare oc-casions leases have longer initial terms of 15 years or more. A lease may not be en-tered into for a period of more than 30


InvesTmenT

years. If a lease continues for longer either party can terminate it at any time after the end of the thirtieth year.

Residential leases may be entered into for an indefinite period of time and nu-merous rules protect tenants. It is rarely possible for a landlord to recover posses-sion from a residential tenant except in limited circumstances (proven necessity for the landlord itself or a family member to use the premises, essential works of renovation and so on).

Generally, commercial rents are ad-justed according to changes of the Con-sumer Price Index (Verbraucherpreisin-dex), although it should be noted that the Consumer Price Index does not necessar-ily move in line with market rents. In-crease in rent will vary between 60 and 100 per cent of the index change and often will only be triggered if the corresponding index changes, for example by ten per cent.

Particular care needs to be taken when drafting indexation clauses as they may be deemed to be invalid by German courts in certain circumstances, for example if the lease agreement does not bind the land-lord for at least ten years, or in the case of a declining index, no decrease in rent may be requested.

Residential leases may be adjusted in line with market rent, however certain limitations apply, for example the rent shall not be increased by more than 20 per cent within three years and so on.

In commercial leases, the tenant is usu-ally obliged to pay all operating expenses that relate to the property, including costs of maintaining common facilities, ground tax and insurance. Lease agreements of-

ten refer to the operating expenses stated in the Ordinance on Operating Costs (Be-triebskostenverordnung). The validity and interpretation of operating expenses clauses is often disputed by landlords and tenants. In residential leases, the landlord may not charge management or adminis-tration costs to the tenant nor the costs of repairs to common parts.

Under German law the landlord has to bear all costs for repair and interior decora-tion works as they are obliged to maintain the premises in such condition as agreed in the lease. In most cases the landlord gener-ally remains responsible for structural and major repairs. The tenant usually carries out internal repairs and maintenance as well as repairs for interior decoration.

Germany has strong consumer protec-tion laws and they apply to standard forms and general conditions. Under case law almost every lease is regarded, wholly or partially, as comprising of general condi-tions and are thus subject to the consumer protection laws that result in a lease not containing any unfair clauses. These laws apply similarly to residential and com-mercial tenants.

Dr Carsten Loll is partner and head of DLA Piper´s German real estate practice.

im.digitalYou find several charts about due diligence, taxes, land/property ownership and market facilitators in our app and our eMagazine.


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Tax considerations play a central role for foreign investors interested in ac-

quiring German real estate. Thus they re-gularly use so-called special purpose vehic-les (SPVs). In view of the public debate on which tax structures are legally permissible and politically desired, the question about the right SPV deserves special attention.

From a tax point of view, the answer to this question has changed over the last few years. It is no longer all about achiev-ing the lowest tax rate. What is at least as important is that the SPV and the struc-ture behind it do not lead to years of dis-cussions with the German tax authorities.

Reducing the tax burden

Nevertheless, it is hardly advisable for any investor to set up a limited liability company (GmbH) based in Germany for this purpose. Initially, when acquiring real estate, Real Estate Transfer Tax is due. Profits from letting the property are

Make the Right Choice

taxes When buying real estate, foreign investors can benefit

from German tax legislation. The pre-conditions are choosing the

right investment vehicle and clever tax structuring.

By Michael Graf and Oliver ehrmann

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subject to Corporate Income Tax (plus a solidarity surcharge) and usually Trade Tax. Rental payments are often subject to Value Added Tax and merely holding real

estate triggers Property Tax. A profit from a later sale of the property is sub-ject to Corporate Income Tax and mostly Trade Tax, and the disposal price is subject to Real Estate Transfer

Tax again. Depending on where the in-vestor is based, the dividends distributed by the GmbH could also be subject to Withholding Tax.

In view of this cornucopia of taxes, it is comforting that the Federal Fiscal

Court is of the opin-ion that a tax-

payer is “free to behave in such a man-ner that the tax burden is

as low as possi-ble”. This also includes select-

ing a suitable SPV.A beneficial tax

structuring option when selecting an SPV relates to Trade Tax, which is only incurred if the SPV main-tains a permanent establishment in Ger-many. The mere acquisition, holding and letting of German real estate do not in themselves constitute a permanent estab-

Selecting the right investment vehicle can

save tax – completely legally.

lishment in Germany. Thus, if investors acquire German real estate through for-eign SPVs, they can completely avoid Trade Tax by choosing the right tax structure. The SPV’s German rental in-come would, however, still be subject to German Corporate Income Tax.

Most important criteria for choosing

a tax residence

Which country the SPV should be resident in essentially depends on three criteria:

■ There should be a double taxation treaty (“DTT”) between this country and Germany that prevents rental in-come from being taxed in both count-ries and thus twice. Since corporati-ons (unlike partnerships) are entitled to benefit from a DTT, this is also the reason why most investors choose a foreign corporation as SPV.

■ The freedom to choose a suitable tax structure meets its limits in misuse of the same. Due to the German general anti-avoidance rules, the SPV has to maintain sufficient substance in the form of staff, business premises and ot-her facilities. Therefore, it can be advisa-ble to set up the SPV in a country where the investor already employs qualified staff. Thanks to the rulings of the ECJ, the substance requirements within the EU are lower than in non-EU countries.


InvestMent

According to the court, only a “wholly artificial arrangement which does not reflect economic reality” can be treated as an abusive practice within the EU.

■ The taxation of distributed dividends mainly depends on whether the coun-try of residence levies Withholding Tax on dividends and whether there is a DTT in place between this country and the investor’s country of residen-ce. For these reasons investors often follow typical investment paths, such as the acquisition of German real esta-te by Israeli investors via Cypriot SPVs. On the one hand, Cyprus is an EU memberstate and has a DTT with Ger-many. On the other hand, in most ca-ses Cyprus does not levy Withholding Tax on dividends distributed by a Cy-priot SPV to an Israeli investor. Never-theless, such considerations should not be applied as a “standard structu-re” without thorough tax review, be-cause their unchecked application al-most certainly leads to issues in case of a tax audit.

Save tax when selling too

At the end of the investment it might be advisable to sell the shares in the SPV instead of the property. If the investor it-self is a corporation, 95 per cent of the capital gain realized by the sale of the shares in an SPV would be exempt from Corporate Income Tax and Trade Tax,

even in a purely German structure. In case of a foreign investor disposing of the shares in a foreign SPV, Germany does not claim any right to tax the re-spective capital gain. Although a DTT provision according to which the sale of companies holding mostly German real property can be taxed in Germany is by now included in many German DTTs, such provision does not have any effect in case of a foreign SPV due to Germany not claiming a right to tax under domestic law.

There are also options to efficiently structure an acquisition and the exit with regard to Real Estate Transfer Tax, even though these options have recently been restricted. During acquisition and dis-posal, Real Estate Transfer Tax can be avoided if, instead of the property, shares in an SPV are transferred. While previ-ously an investor’s economic share in the SPV of almost 100 per cent was possible using so-called “RETT blockers”, now a co-investor holding more than five per cent is required to avoid Real Estate Transfer Tax. This co-investment, how-ever, may be accompanied by quasi-equi-ty investments of the main investor.

The structuring possibilities outlined above are by no means questionable strategies at the limits of legality. German tax law provides a framework for the economy within which it can move freely.

Michael Graf and Oliver Ehrmann are law-yers and certified tax advisors in the tax team of Dentons in Frankfurt/Main and Berlin.


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It is a figure that makes brokers’ hearts beat faster: investors bought German office pro-

perty worth around 14 billion euros last year. Thus the office sector reached a share of almost 50 per cent of total commercial transaction volumes and simultaneously significantly in-creased its turnover on the previous year. Even

if there are differences in the figures of the analyses from individual brokerages, Ignaz Trombello, Head of Investment Germany at consultancy Colliers International, gets to the heart of the predominating impression: “Of-fices are right at the top of most investors’ shopping lists.”

More Appetite for Risk

Offices German office buildings are highly sought-after by domestic

and foreign investors. In this connection, the focus is not just on core

properties: investors now once again believe in the opportunities offered

by property outside the top locations and in properties that need

upgrading. By christian Hunziker

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The main reason for this is “the good and, above all, stable overall economic situ-ation in Germany, particularly in interna-tional comparison,” explains Sven Stricker, Chief Executive Officer and Head of In-vestment at BNP Paribas Real Estate. Ger-man gross domestic product grew by 0.7 per cent in 2013, and this year experts ex-pect growth of 1.7 per cent. The number of people in employment reached a new high of 41.8 million last year and in the service sector alone, which is decisive for the de-mand for offices, the number of jobs in-creased by 227,000. Fabian Klein, Head of Investment at CBRE in Germany, makes the consequences of this clear: “The trust of national and international property inves-tors in the German market is increasingly reinforced thanks to its stability and safety.”

Stable economic situation

This assessment was substantiated by a survey carried out by the consulting firm Ernst & Young Real Estate at the end of 2013 of around one hundred property in-vestors active in Germany. According to this survey, office property has significant-ly gained in importance in comparison with the previous year. While in the previ-ous year only 22 per cent of investors par-ticularly focused on office properties, this is now the case with 42 per cent.

Those interested in core office proper-ties see themselves confronted with in-

Already sold during the project develop-

ment: the Neue Direktion in Cologne.

creasing prices, however. Because as a re-sult of the great demand and limited supply, peak yields have fallen further and are now below five per cent in all leading German office centres. And this development has not yet reached an end: 53 per cent of the investors surveyed by Ernst & Young ex-pect that prices for office property in A1 locations will rise further. “According to our observations, this favourable forecast for price developments is one of the main reasons for the positive investment pros-pects for the German office property mar-ket,” says Christian Schulz-Wulkow, Part-ner at Ernst & Young Real Estate.

Opportunity 1: Sites away from the top locations

The increased prices for the particularly in-demand top properties have also trig-gered a development in the opposite direc-tion, however. Office buildings that are not among the core category have once more come into investors’ sights. “Investors’ ap-petite for risk has significantly increased”, establishes Andreas Wende, Head of In-vestment at Savills Germany. “Because if top objects are not available in sufficient numbers, investors make a switch.”

In this connection, different strategies can be observed. “A range of investors are looking at B locations”, observes Colliers investment boss Trombello. By B locations he means cities such as Hanover, Bremen, Leipzig, Nuremberg and Dortmund, i.e. large cities with around 500,000 inhabit-ants that are not among the group of estab-lished office strongholds. Prices are much


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lower in these cities and yields are corre-spondingly higher. According to Trombello, investors have to be aware, however, that the transparency of these smaller markets is limited.

For Andreas Schulten, board member of the analysis and consultancy firm Bulwien Gesa, another approach is thus at the fore-front. “We believe the cherries to be picked can be found more in the secondary loca-tions of the A cities.” Colliers expert Trom-bello also observes a “clear trend towards the boundary areas of the A cities”. These cities include Munich, Frankfurt/Main, Ham-burg, Berlin and Düsseldorf, and sometimes Cologne and Stuttgart too. This variety of office strongholds is a peculiarity of Ger-many, as Trombello explains. “In contrast to France or the UK, there is not one single of-fice centre in Germany.”

Opportunity 2: Property in need of upgrading

Andreas Schulten from Bulwien Gesa draws attention to a peculiarity of the loca-tions outside the central business districts (CBDs). He detailed that in many cases they are characterised by older office buildings that no longer meet current demands. This offers opportunities to those investors who are prepared to work on those properties in the interest of higher yields and to develop them into attractive modern buildings. There are a variety of benefits, as Christoph Husmann, Speaker of the Management Board of Hochtief Projektentwicklung, de-tails. “In core plus and value add property, investors have to deal with less competition,

they get involved quicker and achieve higher yields.” But Husmann also does not conceal the disadvantages. “Investors then have to be prepared to take a higher risk.” And fi-nally the banks also have to play along.

And this is more and more the case. “If investors have appropriate experience, banks are prepared to finance non-core properties again”, says Ignaz Trombello from Colliers. But then, in his words, they demand a relatively high equity share of 30 to 35 per cent. There is a second constrain-ing factor: the different prices sellers and potential buyers have in mind. 91 per cent of the investors surveyed by Ernst & Young see a barrier in this. Nevertheless, Christian Schulz-Wulkow from Ernst & Young as-sumes “that we will see further transactions in the office property markets of the B and C cities”.

Opportunity 3: Project developments

There is a further possibility for investors in securing top properties early on, i.e. in the project development stage. “For many inves-tors this is the only possibility to get at core properties at all,” says Savills investment expert Andreas Wende. According to his ac-count, this has already become noticeable: in 2013, 19 project developments with a total volume of a good billion euros were sold in the six most important cities alone, equal to an increase of 22 per cent compared to 2012. An additional large deal in this category be-came known at the start of this year. The fund company Commerz Real acquired the Neue Direktion Cologne, which Hochtief


Projektentwicklung is constructing behind the historical façade of the former railway head office until 2016, for 128 million euros.

The Neue Direktion has already been fully let to the European Aviation Safety Agency (EASA). But investors are gradually moving into projects that have no or only a few tenants. “58 per cent of those we sur-veyed forecast an increase in speculative project developments”, reports Christian Schulz-Wulkow from Ernst & Young. “This clearly shows that investors are once again prepared to bear the risk of project develop-ments for new office property, even without corresponding pre-let rates, particularly in the metropolises.”

One example: next to Berlin Main Sta-tion, the Hamburg project development company Becken Development wants to start the construction of an office building this year. Although no tenants have yet been identified for the 17,000 square metres of space, an investor has, namely Hanse-Merkur-Versicherungsgruppe. In the opin-ion of experts, further speculative project developments will follow – with the pleasing effect for investors that the range of in-de-mand core properties will grow again.

Opportunity 4: Portfolio deals

The strong demand for German office property has also been expressed in the re-turn of portfolio transactions. The best ex-ample of this is the Hessen Portfolio (also known as Leo II), consisting of 36 office properties, which CA Immo sold to a con-sortium around the listed property com-pany Patrizia in 2013.

In all these opportunities, the fact that demand from office users in 2013 was by no means exhilarating almost seems to have been missed. According to information from Savills, letting volumes in the six most important office locations fell by nearly ten per cent. “The letting and investment mar-kets operate independently of each other”, comments Ignaz Trombello from Colliers. Christoph Husmann from Hochtief Projek-tentwicklung explains the reason for this:

“Lettings and sales usually develop with a time lag, particularly in multi-tenant build-ings.” Thus because letting turnover was higher in 2012, transaction volumes in-creased in 2013. In addition, it was not hid-den from investors that vacant office rates recently declined slightly despite the lower letting turnover – according to Savills by one percentage point to eight per cent.

Nevertheless, investors should not be too sure of the strengths of the German market, warns Andreas Schulten from Bulwien Gesa. As soon as the crisis-hit South European countries recover, capital will possibly not flow to Germany any more but increasingly to Spain or Italy, in his opinion.

Schulten is largely alone in this scepti-cism, however. “The outline conditions for the German property market remain fa-vourable,” believes Erik Marienfeldt from HIH Hamburgische Immobilien Hand-lung. And Andreas Wende from Savills draws attention to the fact that foreign in-vestors above all have hardly been involved recently due to the strong domestic compe-tition. “Even if Spain does recover”, he is convinced that “you’ll hardly notice it be-cause so much capital is trying to come to Germany”.


Anyone dealing with events in the Ger-man retail sector quickly notices how

complex the issue is. Because, in contrast to some other European countries, the property market works somewhat differently when it comes to retail. Of course, there are also in-demand metropolises in Germany with over a million inhabitants, such as Munich, Berlin, Hamburg or Cologne. But in contrast to so-me other countries, there are also a number of cities offering the best conditions for retai-lers and where expansion is almost just as popular. These include Frankfurt/Main,

Düsseldorf, Bonn, Dortmund, Nuremberg, Stuttgart, Bremen, Hanover and Münster.

Thus Germany not only offers attrac-tive cities with well looked after pedestri-an zones, facilitating a really special shop-ping experience, at the top. Germany’s strength is primarily in its breadth, in the variety of attractive cities. Cities that are just as much in demand, such as Freiburg, Essen, Mainz, Bielefeld, Krefeld, Leipzig and Kiel, also have to be named here.

In order to orient itself better and to show current developments, Lührmann

Big selection

Retail Germany shines with many attractive cities for retailers and

investors. By achim Weitkamp

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surveyed 2,287 retail expansion execu-tives for this year’s trend barometer. The results allow interesting conclusions to be drawn about Germany as a business loca-tion.

Accordingly, the general situation es-sentially looks extremely positive. Thus Germany’s attractiveness as a location for retail expansion is uninterrupted. 94 per cent of those surveyed assessed retail ex-pansion in this country as attractive or very attractive. This goes along with good economic growth, of course. The people’s consumer enthusiasm is high and the many beautiful city centres support the shopping experience. This is why Germa-ny is the most important market in Eu-rope for many international chains. The expansion executives surveyed have also given a positive report for Germany as a business location: while two thirds of those surveyed believe the good key data will also remain at the same level in 2014, a third even expect a positive development in economic growth.

The most attractive expansion destina-tion is and remains Southern Germany. Federal states such as Bavaria and Baden-Württemberg are popular and are as-sessed to be attractive or very attractive by around 97 per cent. But Northern Ger-many also has its appeal with cities such as Hamburg, Bremen or Hanover. Around 86 per cent of the participants see an ex-pansion in Northern Germany as attrac-

Not a metropolis but very interesting for

retail: Münster.

tive or very attractive. East Germany con-tinues to be less in demand. 72 per cent of the participants believe expansion efforts in the former East Germany are only slightly attractive. This is a value that has hardly changed compared to 2013. An im-portant criterion to determine if a city centre is attractive is, without doubt, its size. Therefore the following applies: the larger the city, the more popular it is among expanding retailers. With one ex-ception: cities with a size of between 500,000 and 1,000,000 inhabitants find more favour with expansion executives than metropolises with over one million inhabitants.

This corresponds with the assessment that Germany not only has in-demand cit-ies at the top, but also has a broad founda-tion of attractive cities from the second rank. Nevertheless, the good mid-table of cities that are attractive to investors is lim-ited.

Thus cities with fewer than 100,000 in-habitants continue to lose significance. Cities of under 100,000 inhabitants are

In the North of Germany, Bremen offers itself as a

possible shopping destination – for investors too.

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only slightly attractive for more than half of those surveyed.

In cities the city centre is the undis-puted focus of consumer activity. There-fore, almost 90 per cent of those surveyed believe retail expansion in city centres will either remain the same or even grow. On-ly 75 per cent have the opinion that retail parks will remain the same or grow in terms of retail efforts. Shopping centres achieved even weaker values. Only around 72 per cent believe in the same or growing expansion efforts there.

Rising rents in top locations

Due to the natural shortage of space with simultaneously growing interest, around 54 per cent of the participants ex-pect rising rents in A1 locations. In con-trast, only 24.5 per cent of those surveyed expect rising rents in shopping centres. Only a good fifth of participants have the opinion that rents will rise in retail parks. With the particular variety of strong cities, it is not surprising that expansion in stra-tegically selected individual cities or indi-vidual regions is top priority among retail executives. Around 66 per cent favour this expansion strategy.

While the readiness to pay higher rents has risen by two percentage points, the readiness to make do with other parts of the city than the top location fell mark-edly. Only around 15 per cent of those sur-veyed were able to come to terms with this. The readiness to pay key money has also declined. While in 2013 at least around 15 per cent were still prepared to compensate

a tenant to get the space they wanted, it is only around eleven per cent in 2014.

Among distribution channels in retail, wholesale strategies continue to lose im-portance. This looks different when it comes to mono label stores: their impor-tance for branding purposes remains at a constantly high level. About 82 per cent think they are important. About 67 per cent of the participants believe that more flagship stores will open. In comparison with 2013, the internet is perceived as com-petition to a somewhat lesser extent. Only a good 18 per cent see no or only a slight competition situation here. The reason for this is that the multi-channel approach is more and more seen as a customer loyalty opportunity. Customers often carry out research in the internet first before pur-chasing a product in the shop. Overall, the German A1 location is more and more in demand. So it is no surprise that the great-est expansion efforts are expected to come from financially strong international chains. The historically low interest rates, healthy economy and high purchasing power have made a decisive contribution to many believing Germany has become the most important market in Europe.

Achim Weitkamp is Managing Partner of Lührmann Germany.

im.digitalYou find two charts from the survey „Lührmann Trendbarometer“ in our app and our eMagazine.


Despite transparency initiatives such as the study on the “German Debt

Project” by the International Real Estate Business School (IREBS), which was first published at Expo Real 2013, the market for commercial property financing in Germany

is and remains very heterogeneous. And it is often very difficult to understand for foreign investors who invest and finance less fre-quently in Germany.

The federal and polycentric structure predominating in Germany also contrib-

How to Finance in Germany?

FINANCING I Before entering the German property market, foreign

investors should familiarise themselves with the variety of commercial

property financers. And with the state of the financing market in this

country – which presents itself as more stable than you would think.

By Francesco Fedele

Most banks in Germany have their headquarters in Frankfurt/Main.

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utes to this, as does the banking sector with its three “columns” (private, public and mutual sectors).

In turn, there are several contact points for property finance in each of the three columns:

■ Specialist mortgage banks where the focus of business is property finance and that refinance themselves with Pfandbriefe (German covered bonds);

■ Large universal banks (including the leading banks in the public and mutual sectors) where property finance or the mortgage bank business is one of seve-ral business fields;

■ Regional and special banksIn addition, there are institutional in-

vestors, such as insurance companies and pension funds, which, from a supervisory law viewpoint, are currently better posi-tioned for certain forms of financing than the banking sector. Insurance companies will probably lose this competitive advan-tage under the stricter regulations of Sol-vency II, however, and have also not been able to convert this advantage into any decisive gains in market share to date.

Domestic property finance strengthened despite bank

restructuring

In comparison with previous years, 2013 was characterised by growth and an increased tendency towards new business across all groups of institutions relevant to commercial property financing. After the difficult year for credit in 2012, this con-

cerns a normalisation of circumstances rather than a boom, however.

In a comparison over several years, it can be seen that neither the cessation of new business of the large market partici-pants Eurohypo and Westdeutsche Im-mobilienbank nor the restrictions on other important property financers – pri-marily Deutsche Pfandbriefbank, former-ly Hypo Real Estate, as well as several re-gional state banks – through restructur-ing processes and state aid legal constraints imposed by the EU, have led to a collapse in the financer market. A fundamental shift of the finance market to foreign banks or to alternative financers such as debt funds also has not happened.

On the contrary: as part of the large bank restructuring processes the focus has mostly been on reducing foreign ac-tivities and capital market portfolios (so-called “credit substitution business”). In contrast, the domestic property finance business has been assigned to the core business of the restructuring banks in both the private and commercial area and has thus been somewhat strengthened.

In B or C locations finance is frequent-ly realised through banks with a regional focus, for example from the public or mu-tual sector. In this respect, the public sec-tor is particularly interesting because there is no standard lead institution but several regional state banks. Although each of these banks has a regional focal point, they also compete with each other nationally.

The public sector (savings banks) also has a larger financing capacity than the mutual sector (Volksbanken (people’s


banks)) among the regional institutions. This is because the savings banks are larg-er on average than the people’s banks and because in the savings banks sector in par-ticular there is a great readiness to realise larger finance volumes through consorti-um finance with other savings banks. The spread is significantly greater here for both margins and loan-to-value ratios than in A locations. In our consulting practice, we are currently seeing margins in the non-core area of mostly between 120 to 170 basis points.

According to the type of property, the focus of property financers is on residen-tial, office and retail in particular. The situation in hotels/tourism is much more difficult. Here as well the individual case is decisive and involving regional finance partners mostly makes sense.

Up to now, the capacity of the German banking sector has been sufficient to en-sure international debt funds play a minor role in the German property market as before, especially in the senior area. And in the stretched or junior area as well, debt

funds have only been able to finance very selectively up to now.

Yields in equity area will diverge

In terms of conditions, we expect a stronger divergence according to the risk category in the equity area in the upcom-ing months and years. While strongly un-differentiated yields of 20 per cent and more are frequently still expected at the moment, we assume that in future low-risk and/or highly competitive project finance will also be able to realise a yield of be-tween 10 and 15 per cent. This will be the case in particular if ongoing cash flows (for example, interim rents or rental in-come up to the final letting of the proper-ty) can be collected or if the equity investor can secure preferred access to the finished project (a so-called “forward deal”).

Francesco Fedele is the CEO of BF.direkt AG, Stuttgart.

market share of commercial property finance in Germany

large banks

regional state banks

saving banks

mutual banks

mortage banks

others

5,3 %10,0 %

19,3 %

22,6 %

25,2 %

17,6 %

Source: Deutsche Bundesbank/Verband Deutscher Pfandbriefbanken (vdp)


Even difficult European financing mar-kets, the United Kingdom and the

Netherlands to name two examples, were able to gain momentum in 2013. In doing so, lenders have tended to concentrate on safe portfolio financing and less on project de-velopments. In comparison with Germany, however, these markets continue to demon-strate low financing ratios around 60 per cent loan to value (of the market value).

Significantly higher margins than in Germany have also been observed there. According to the “FAP Barometer for com-mercial property financing”, the average margin in Germany in the first quarter of 2014 was 203 basis points in portfolio fi-

nancing and 224 basis points with a focus on project developments. In comparison, in London, for example, we are tending to see margins around 300 to 450 bp. For this reason, new financers, such as senior loan funds in particular, can do business suc-cessfully in these markets (in contrast to Germany).

Alternative financers raring to go

Many foreign banks have withdrawn from the German market and some Ger-man banks now avoid the property finance

Climate Change

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Alternative property financers raring to go in Germany.

FINANCING II Sentiment on the commercial property finance market

significantly improved in Germany and Europa in 2013. The German

market continues to be in a systemic change process characterised

by the disappearance of old and the entrance of new financers.

By Curth-C. Flatow


INvestmeNt

business or have disappeared from the market as is generally known. But mean-while, some international financers are al-so again looking for new commitments in the German property market. Insurance companies and pension funds for profes-sionals have strengthened their activities due to generally known regulatory incen-tives and are looking for investment alter-natives. Allianz and the Bayerische Versor-gungskammer (BVK) are seen as pioneers here. Cooperation with banks combines the strengths of both groups of lenders: the insurers or pension funds can make large amounts of borrowed capital available par-ticularly for the long term. The banks com-mit themselves with suitable tranches of their own and corresponding expertise and processing platforms. In addition, through their branch networks they can offer easier access to the business.

Non-bank capital prefers low-risk financing

The total market of “new” property fi-nancers is just at the beginning of its de-velopment. Institutional investors are still moving cautiously at the moment and tend to accompany low-risk financing. And for insurers and pension funds as lenders, this still means primarily core properties at the Top 7 locations. B loca-tions, even in a good micro location, are not usually financed. Also supposedly safe office, retail and residential property is predominantly financed. Operator-run properties, such as hotels, care homes or student apartments have not been accom-

panied by the new financers to date. Also management-intensive assets, such as residential portfolios with a raised vacan-cy rate or investment backlogs, are not willingly financed by the new backers.

The fact that the new financers are not yet broadly active is also connected with the financing criteria being similar to the banks’ business that can be used for actu-arial reserve funds. Thus a credit fund can only help out if the required financing can-not be placed at mortgage banks. Because senior loan funds also focus on the same assets, other assets – those less popular among mortgage banks such as operator-run property (hotels or care homes) – are excluded. Credit funds also focus their ac-tivities on financing property portfolios with existing cash flows.

Financing management-intensive prop-erties or project developments is not cov-ered by these or only to a very small extent. There is potential here that is also not cov-ered by the classic side of banking. For the first quarter of 2014, the “FAP Barometer for commercial property financing” shows that office property remains lenders’ dar-ling, followed by apartments and shopping centres. Logistics property, micro-apart-ments/student accommodation, hotels and social property are less popular.

Germany has a unique means of refi-nancing throughout Europe: the interna-tionally recognised Pfandbrief (German covered bond). The Verband deutscher Pfandbriefbanken (vdp, or Association of German Pfandbrief Banks) identified ris-ing new business figures for the third quar-ter of 2013 and pressure on margins due to increased competition. Accordingly, lend-


INvestmeNt

ing for domestic commercial property rose by 29 per cent in 2013 up to then. And there was also a rise of 11 per cent abroad. In the European market, London and Paris were right at the top of German lenders’ agenda followed by markets such as Amsterdam, Brussels, Madrid and Barcelona.

Market for hybrid equity and debt finance has consolidated

The market for hybrid funds in the form of mezzanine, joint venture capital and similar structures has developed further in the past few years in both the financing of portfolio property and project develop-

ments. National and international fund structures, direct lenders such as insurance companies, family offices and others have since created a wide range. Today, capital

“above” classic bank financing can be suc-cessfully procured for the following assets, for example: residential, offices, retail and partly also for hotel and logistics property. This relates to both portfolio financing and project developments. An exit strategy of usually between three and five years for portfolio investments or after completion of project developments has to be derivable for both scenarios. This is because most of these lenders do not see themselves as long-term co-lenders.

Curth-C. Flatow is a Managing Partner of Flatow AdvisoryPartners GmbH (FAP).

FAP Barometer (1st Quarter 2014) – “Which types of property are currently being financed?”

source: Bulwien Gesa AG, Flatow Advisory Partners GmbH

0,0 % 10,0 % 20,0 % 30,0 % stock development

10,3 % 6,5 %hotels

3,8 % 1,3 %parking

6,9 % 5,2 %

social property (e.g. hospitals)

1,1 % 0,0 %

others (entertainment, wellness…)

office property 23,0 % 19,0 %

Explanation: 187 representatives from real estate credit insti-tutions and mortgage banks, Landesbanken (regional state banks), Sparkassen (savings banks), mutual banks, private banks and special banks (business development banks, German building societies) as well as pension funds for professionals, other pension funds, insurance companies and credit fund providers or real estate private equity funds were surveyed for the FAP Barometer. The response rate was 33 per cent.

18,3 %residential property (developer)

19,5 % 17,0 %

residential property (for stock)

shopping centre/ retail property

16,9 % 16,3 %

logistics property 11,5 % 9,2 %

micro apartments/ student accomodation

6,9 % 7,2 %


Listed real estate has long been the un-loved child of the German real estate

market. The sector was tiny both by size of individual companies as well as total sector market cap. At the same time the sector has been plagued by numerous corporate gover-nance issues until very recently. To the latter cynics might reply: “What’s the difference to the direct market?”

Capital Markets in the HouseListed ReaL estate The

sector is much larger than

previously thought. By Peter Barkow

Pho

to: M

aik

a/P

ixel

io.d

e

Germans discover their heart for listed real estate.

But the listed real estate space goes through regular phases of revival and in-creased attention from press, investors and politicians. Interest in the sector last peaked between 2005 and 2007, as intro-duction of G-REITs was being hotly de-bated shortly ahead of the global financial crisis. Expectations were running high and optimistic projections of a G-REIT market potential of up to 127 billion euro were made. With the G-REIT currently having a market capitalization of about 1.2 billion euro there is no way around see-ing its development as a failure or at least massive disappointment. This is still a tremendous burden to the sector and weighs on public perception.

The listed sector, however, reaches beyond Germany’s admittedly tiny REIT-segment.

Listed sector owns 67 billion euro in German assets

Another challenge leading to a mis - guided public perception has long been the lack of data for the sector. Again cynics might say: “What’s the differ-ence to Germany’s direct markets?” His-torically, the listed sector has been meas-ured by market cap, whereas in comparisons to other vehicles the latter were measured in gross asset value terms. The result was a structural under representation of the list-ed space ignoring its capital structure, pre-cisely its debt element.

In a recent study ZIA and Barkow Con-sulting have therefore gathered gross asset


investMent

value data for the listed sector for the first time removing a gap in existing statistics and providing for a level playing field in comparison to other indirect vehicles.

The result came as a surprise to many. German listed real estate companies own 59.1 billion euro of German property. Five large international listed real estate com-panies own an additional 8.5 billion euro in Germany. This makes listed real estate by far the most important indirect invest-ment vehicle for German real estate assets. German open ended funds for example merely own 25 billion euro of German properties.

Besides the sheer size of the listed sec-tor there is, however, another way to meas-ure the importance of capital markets for German properties, namely capital flows.

Combined German real estate capital markets funding volumes almost quadru-pled to 11.6 billion euro in 2013 up from 3.1 billion euro in 2012. In this number the

acquisition of GSW by Deutsche Wohnen is not even included, as this was effective-ly a share exchange not leading to addi-tional fund flows. This remarkable capital markets funding performance was a result of strong Equity Capital Markets activity, a recommencement of CMBS issuance and historic Euro-and-US benchmark bond issuances. This makes 2013 the strongest real estate market funding year since 2006 as well as the second best year ever.

2013 equity capital markets volume more than doubles

In 2013 German equity capital markets volumes increased by 130 per cent to 3.5 billion euro driven by LEG’s 1.2 billion euro IPO and Deutsche Annington’s 575 million euro offering. In total, the two IPOs contributed roughly half of overall ECM issuance, with remaining equity contributions evenly split between accel-erated book builds and share placements by existing shareholders.

Strong equity issuance comes despite the fact that German stocks underper-formed EPRA Europe by almost ten per-centage points during 2013, after outper-forming by almost the same amount dur-ing 2012. German performance began to trend lower in February 2013, roughly at the same time as the LEG IPO came to market.

The 2014 (equity) capital markets vin-tage has had a promising start already. Whitehall has just recently placed shares worth 645 million euro in LEG making it

Gross asset value (in eURbn, German assets)

Source: bsi, Company disclosure, Dt. Bundesbank, ZIA, Barkow Consulting

Open-End Funds – Retail

25,67

Open-End Funds – Institutional

11,63

Closed-End Funds – Retail

43,15

Closed-End Funds – Institutional

3,17

Listed Property Companies

59,08


the largest ever block deal in the German real estate sector. The placement was also the fourth largest German real estate eq-uity capital market transaction in Ger-man history.

2014 likely to be a year of equity placements

It is also interesting to note that with the LEG block deal already more than three billion euro of funds have been channeled from capital markets to private equity owners since 2009. Nevertheless, the combined overhang in the residential space is still estimated at around five bil-lion euro. As all lock ups on these stock held by financial sponsors have expired, it is likely that we will see more block deals in 2014 provided the equity placement window remains open. After ten year lows in the fourth quarters of 2013 market vola-tility has, however, recently increased due

to emerging market jitters. It remains to be seen how the emerging market will react to Fed tapering and how much contagion will spread to developed markets. This is currently the biggest threat for the 2014 equity capital market vintage. We should not forget to mention that Prime Office has already announced a rights issue in 2014, being one of the rare commercial deals in listed German real estate. There is definitely appetite for more and larger listed commercial product in the market.

Debt placements are likely to remain below the record levels of 2013 as there is likely less refinancing need of large debt bullets, which are typically needed for CMBS and benchmark bond transactions. Also Mittelstands bonds will find it tough-er in 2014 after what currently looks like an endless stream of scandals and insolven-cies, which started in recent months.

Peter Barkow is Managing Director at Barkow Consulting.

total capital markets funding (in billion euro)

Source: Akselrod Consulting/Barkow Consulting “Real Estate Capital Markets data base”

11,636

2000 2005 20102001 2006 20112002 2007 20122003 2008 20132004 2009

2.100 2.5194.374

1.2051.000

10.090

3.123

1.117

19.826

2.517516 603302


The digital revolution arrived in the Ger-man property market long ago. Online

portals have dominated market activity when it comes to letting and selling apart-ments and detached houses for years. Let-ting smaller offices also increasingly takes place in these portals.

But also investment products for pro-fessionals or private buyers and sellers al-so handling larger volumes now have their place in the German-speaking part of the net. This includes the platform Commer-cial Networks that belongs to Immobilien-scout 24 and the exchange Investor Finder operated by Bonn estate agent Carsten Kamps. Punctually for this year’s MIPIM, the platform Asset Profiler, which works closely together with the Immonet portal owned by the Springer-Verlag, is launch-ing its new 3.0 version. This will be ini-tially in German and it will also be the first investment platform in Germany to be in English. Later other languages will be implemented to serve the growing number of foreign players on the German market.

immobilienmanager has already been guided through the pages. The system has a modern design and considerably more intuitive and time-saving user guidance. But three important characteristics are not changing in the new version either.

The first of these is the clear separation between buyers and sellers. Both sides are initially summarised on an anonymous basis and can decide themselves over all further steps.

The second is that buyer profiles will continue to be matched with the property features of the real estate on offer using a scoring model, which permits approximate comparisons of different types of properties. Thirdly, subscription fees are due for portal customers but Asset Profiler does not charge transaction fees.

Investors can enter a highly detailed search profile. For example, anyone who would like to buy retail property can spe-cifically search for retail parks with food shops as tenants – or exclude certain ten-ants such as amusement arcades or sex shops. For logistics property, the ceiling height and number of roller shutters can be set as search criteria among others.

Investment styles are differentiated into Core, Core plus, Added Value and Developments. As locations coming into question the investor can simply set Germany s Top Five (Berlin, Düsseldorf, Frankfurt, Hamburg, Munich), the Top Seven (Top Five plus Cologne and Stutt-gart), all cities with more than 100,000 inhabitants in certain Federal states or

Click & BuyINVESTMENT You want to buy German Real Estate, but you don’t

want to go to Germany? Have a look in the internet. By Harald Vormweg


INVESTMENT

urban areas and additional locations or those exclusive-ly selected by hand.

Because sellers have to enter their properties with a post code, it is not possible to cheat with the location. A suburb of a Frankfurt re-mains a suburb and cannot be entered as a district of Frankfurt. The catalogue of criteria includes tenancy agreement terms (or the WALT), of course, the con-dition of the building, price-to-rent ratio, volume, asset- or share deal and similar. Photos, property details and other docu-ments can enhance the offer. Written proof of ownership or the commissioning of sales representatives is also indispensa-ble.

Sellers can only view profiles of those buyers, whose investment criteria match the property offered. And they can com-pare the characteristics of the building they are offering. The scoring shows clear deviations from the profile in red, slight deviations in yellow and matches in green. The further approach and finally the dis-closure of identity are left to the sellers. Their identity as seller and the details of the property will only become visible

pho

to: A

sset

pro

file

r

when they decide to offer their building to a suitable investor. The transaction itself does not take place on the platform.

Now German estate agency law hides a possible motive for misuse. If an agent can prove they were able to communicate an offer, they are entitled to a commission. This also applies if the seller did not in-struct the agent. Legislators have an-nounced that the corresponding legal po-sition will change. However, it is already almost impossible for estate agents to

“capture” offers on the Asset Profiler plat-form. If an estate agent wants to enter a search profile on the buyer side, they have to prove they have been instructed to buy a corresponding property, for example, by a family office they advise.

Sellers have to fill in a property

data sheet for the platform.


INVESTMENT

German bricks and mortar is still very attractive to foreign investors. But core is looking pricey, and

smart money is looking at secondary locations.

Edition 3 - 2014

INVESTING IN GERMAN REAL ESTATE

Market Jungle

Financing and TaxesHow to find your way

What to watch out for

sPeciaLeciaLthe decider‘s magazine

sPeciaimmobilienmanager

in cooperation with

Germany has proven its mettle as a haven of stability in a global economy wracked by major uncertainties.

German real estate is of high interest for investors looking for secure investments. But its property market is acknowledged to be particularly fragmented, which adds to its complexity for professional investors. With this in mind, immobilienmanager and the REFIRE Intelligence Report are jointly publishing our special edition “Investing in German Real Estate”. It delivers plenty information about the markets, current trends, important players and the legal framework.

The 2014 special edition “Investing in German Real Estate” is distributed as a supplement to immobilien manager, the leading magazine for the professional real estate industry in Germany, and REFIRE, the leading international intelligence report about the German markets. It reaches more than 16,000 carefully selected market participants in the USA, UK, Europe and a broad German readership. It is also available in an app version (search for immobilienmanager) or as an eMagazine (www.immobilienmanager.de). The first special edition “Investing in German Real Estate” was published in March 2013.

About this special

LeGaL noticePublisher and provider within the meaning of the German Telemedia Act: Immobilien

Manager Verlag IMV GmbH & Co. KG Stolberg-

er Str. 84, 50933 Cologne / PO Box 41 09 49,

50869 Cologne / Telephone: 0221 5497-131 /

[email protected]

Registered at Cologne District Court under

No. HRA 14753

Chief executive with power to represent: Rudolf M. Bleser

Publishing Manager: Christof Hardebusch,

Daniel Weber

Personally liable partner:Immobilien Manager Verlag IMV

Verwaltung GmbH

Registered at Cologne District Court under

No. HRB 32091, VAT Reg. No. DE 184232376

www.immobilienmanager.de

Editorial board: Christof Hardebusch (Editor-

in-Chief, responsible under press law and sec-

tion 55 (2) of the RStV, Interstate Broadcasting

Treaty), Bianca Diehl (Managing Editor), Roswi-

tha Loibl, Harald Thomeczek

Telephone 0221 5497-131,

Telefax 0221 5497-6134

[email protected]

Customer service: Katharina Müller, telephone 0221 5497-169

[email protected]

Layout, visuals, realisation:Satz+Layout Werkstatt Kluth GmbH, Erftstadt

Cover picture: Dieter Schütz/www.pixelio.de

Subscription prices: Germany: EUR 165 incl. VAT and postage (an-

nual)/Other countries: EUR 170 incl. VAT and

postage (annual), Single issue: EUR 17.50 incl.

VAT and postage (recommended price)

(without engagement)

Publication frequency: 10 issues per year

Head of advertising: Thomas Ceppok, telephone 0221 5497-135

[email protected]

Advertising sales: Jana-Mareike Jässing, telephone 0221 5497-

153; [email protected]

Advertising management:Marion Hahn, telephone 0221 5497-244

Advertising price list No. 23 of 1 January 2014

Marketing: Katja Vogel, telephone 0221 5497-302

[email protected]

Birgit Müller, telephone 0221 5497-155

[email protected]

Printed by: AZ Druck und Datentechnik GmbH

This journal, including all the texts in it, is pro-

tected by copyright. Any use of the content

outside the narrow limits of copyright law

without the publisher‘s consent is prohibited

by law and offenders may be prosecuted. This

applies in particular to reproductions, transla-

tions, microfilming and storage and process-

ing in electronic systems.

ISSN 0940-7987immobilienmanager · special investment · 3 - 201442

InvestmentAsset Profiler and Immonet– a strong partnershipThe quality leader in the field of closed investment platforms at Immonet.de.



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Asset Profiler and Immonet– a strong partnershipThe quality leader in the field of closed investment platforms at Immonet.de.



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