Strong emerging trends in Germany's property investment market means the country could contribute the greatest share of a potential doubling in the market capitalization of the European listed real estate sector over the next five years, said Philip Charls, Chief Executive of the European Public Real Estate Association (EPRA), at the industry body's annual conference on Thursday (September 1, 2011).
Philip Charls EPRA CEO said: "Germany's listed real estate sector has huge potential for growth as investors increasingly come to realize the attractiveness of the listed model. Real estate stocks offer international investors a liquid and transparent way of accessing German property and are a very competitive alternative to the open-ended property fund model that has served the market in Germany for 50 years."
A recent survey by Schroders among 112 institutional investors in German open-ended property funds (GOEFs) found that 38% of investors are going to stop investing in GOEFs because of the introduction of a minimum two-year holding period. Moreover, a third of respondents plan to withdraw their investments in GOEFs within the next 12 months.
EPRA estimates the total size of the underlying real estate investment market in Germany is more than 1 trillion, making it the largest in Europe, and slightly bigger than the UK. The open-ended property fund sector has assets of around 85 billion with approximately 30% of the market currently closed for redemptions due to the liquidity problems the investment vehicles have experienced in the past few years. German real estate SpezialFonds (institutional investment funds) have estimated assets of between 30-40 billion.
In comparison, the listed real estate sector in Germany is much smaller at between 20-25 billion in market capitalization terms (or approximately 1.5% of the total market). The reasons for this historically low listed exposure appear to be connected to the relatively small proportion of the German population that own equities (estimated at under 10%) compared with other European countries (UK and the Netherlands are between 25-35%); the previous dominance of the open-ended property funds among retail investors due to their bank-tied distribution networks; the relatively recent introduction of the attractive real estate investment trust (REIT) structure during a period of general equity market volatility and the absence of a domestic REIT vehicle for residential investment.
There have already been signs that the momentum of German real estate firms using the stock market to list and raise capital is accelerating with GSW and Prime Office initiating IPOs in the last year and raising over 1 billion in equity capital. In addition, the re-introduction of IVG to the FTSE EPRA/NAREIT Index Series has further bolstered the German options for international investors.
Since EPRA's last annual conference held in Amsterdam in September 2010, Germany's share of the FTSE EPRA/NAREIT Europe Index has risen to 6.0% from 3.5%. This represents a market capitalization increase of over 75%.
EPRA also sees the estimated 120-130 billion held in large private domestic real estate portfolios as a rich potential future source of listed equity capital. On top of the capital sources detailed above, there is additionally the so-called German commercial real estate mortgage-backed securities (CMBS) 'time bomb'. Approximately 9 billion in these debt instruments are falling due in the period 2014-15 and could also boost the domestic market capitalization of REITs, as investors seek an exit route from CMBS commitments.
EPRA estimates that under a 'best-case' scenario the European listed real estate sector as a whole has the potential to double its 300 billion market capitalization over the medium term, as banks look to offload distressed property assets held on their books since the credit crisis and private investors aim to maximize the value of their investments through REITs.
Philip Charls concluded: "The real estate sector in Germany could be in the vangua
