Germany to dominate

Despite woes plaguing the property world, Germany’s property funds are predicted to make a comeback in 2008

German open-ended property funds are set for a comeback in Europe this year, with a trio of top players packing an estimated €5bn to spend in London and other markets.

Funds managed by KanAm, Union Investment and Deka Immobilien are being tipped by analysts and brokers to dominate in Europe, where barren credit markets will keep discounted property beyond the grasp of debt-driven competitors.

"We're seeing a lot of German activity right now. Some of the funds are talking about coming back in a big way in 2008... They are definitely going to be ones to watch," said Alastair Hilton, a partner in the investment team at property services firm Cushman & Wakefield.

Reflecting their new-found firepower, KanAm and rival, HansaInvest have been linked with £100m plus bids for properties in London's City financial district, brokers familiar with the deals said.

The brokers said KanAm is frontrunner to buy British Land's Plantation Place South building while HansaInvest is eyeing One London Wall, a development owned by Hammerson and designed by famed architect Norman Foster's firm, Foster & Partners.

"It might be a little early to predict a landmark year for the sector but I'm sure it will be a good one," said Deka Immobilien Managing Director Franz Lucien Moersdorf, his private investor funds collected €100m of equity in a single week when they opened on January 8.

Germany's open-ended funds suffered massive outflows in late 2005 and 2006, as concerns over inflated portfolio values and fund mismanagement shattered investor confidence.

Their resurgence is now being underpinned by fresh cash injections from German retail investors, who are backing a recovery in their own property market, said Frank Billand, a senior board member of Union Investment Real Estate.
"The situation in the German property market is much better than it was two years ago," said Mr Billand. "Confidence continues to come back."

Average ungeared total property returns for last year should triple from the 1.3 percent seen in 2006 when Investment Property Databank publishes its benchmark German data in April, experts said.

Open-ended funds dominate real estate investment in Germany where the creation of real estate investment trusts (REITs) has been far slower than in Australia, Britain or the United States, for example.

For many German retail investors, buying a fund stake represents their first foray into investment. When a fund is issuing new units, investors can buy a return generated by billions of euros of property assets at their local bank or post office.

A lack of capital combined with rocketing property prices largely priced the funds out of the European market until late 2007, but the tide has turned, analysts say.

Lehman Brothers' analyst Peter Barkow said the downtime spared the funds from buying expensive overseas assets close to the peak of the market.

This has helped managers hold portfolio values steady and retain investors' confidence, in contrast to their UK peers who are battling to stem fund exits as tumbling real estate prices spook investors.

"German properties have failed to re-rate on the way up, and therefore offer some protection on the way down," Lehman's Mr Barkow said.

"Fund inflows are still positive despite negative headlines about real estate in general and the funds are sitting on massive liquidity."

Another factor drawing German investors is the volatility in German stocks, according to James Goldsmith, a director at broker Savills.

In contrast, real estate funds offer very specific mandates to buy prime, high-yielding assets with recession-proof characteristics.

Europe's ailing property markets promise to be a happy hunting ground but the funds are also scouring the US and Asia for good quality, well-let properties.

Michael Birnbaum, Senior Board Member at KanAm, said his investors wanted to increase exposure internationally, spurring KanAm to design its first Indian property fund.

Deka's Mr Moersdorf said his fund was about to complete the acquisition of two major office investments in Japan.
"In some corners of these markets we are seeing opportunities to buy discounted assets and our investors appreciate the fact we are diversified," said Mr Moersdorf.

"We have €1bn of equity to invest this year and there will be no asymmetry in our focus," he said.