A buyer’s market

German commercial property transactions hit a record €54.7bn (£40.8bn) in 2007, with foreign investors making two-thirds of purchases, up from €49.5bn in 2006 and €20.6bn (£15.3bn) in 2005, according to real estate consultancy Jones Lang LaSalle.

“For sellers, 2007 was a wonderful year,” said Klaus Trescher, founder of TMW Property Funds, the European arm of Pramerica Real Estate Investors.

“For buyers, we expect 2008 to be a sparkling wine. There are more than double as many objects for sale now than a year ago,” he said at a panel discussion on the outlook for the sector in 2008.

A 50 basis point rise in rental yields translates into a price fall of seven to 10 percent, Mr Trescher added.
“Prospective sellers are now far less insolent than they were at the start of last year,” Thilo Wagner, head of German property investment at Henderson Global Investors, told the same conference.

Compared with 2007 lows, rental yields have risen by 100 basis points for German real estate such as business parks and big-box format shopping malls in secondary locations, and by 30 basis points for prime office properties in top locations, Mr Wagner said.

Net initial yields on office properties in Germany’s top six cities fell to 4.5 percent last year from well above 5.5 percent at end-2005, Jones Lang LaSalle’s data showed. Property yields move in the opposite direction to prices.
Most people expect prices will fall in 2008 by amounts equalling one or two years’ rental income, said Lutz Aengevelt, head of German real estate firm Aengevelt Immobilien.

Equity is king
The panel consensus was that investors with access to equity financing would replace investors relying heavily on debt and that prospects were bleak for those in the latter category who bought at the peak in late 2006 and early 2007.
Ulrich Hoeller, chief executive of German property company DIC Asset, said some opportunistic investors could face difficulties, and that could also haunt the banks which provided financing for highly leveraged deals.

Some of the investors who gobbled up German property in the past few years had expected real estate investment trusts (REITs) – stock-exchange listed firms enjoying tax breaks as property buyers – to provide profitable exit opportunities.

Laws allowing German REITs were passed last year but an expected boom in the trusts never came, partly due to the credit squeeze sparked by the US sub-prime mortgage crisis.

So far, just two REITS, both small caps, have listed and the pipeline of candidates, which investment bankers said last year was bursting at the seams, has been reduced to a trickle.

Shares in listed property companies – REITs and others – have fallen for nearly a year.

Investors have shunned the sector, which earns its profits from the difference between yields and debt costs, and many companies now trade at steep discounts to the net asset value of their underlying assets.