HSH Nordbank AG has released a study on the market prospects of German Real Estate Investment Trusts (REITs). For the first time, a forecast has been issued on the market potential from an investor's perspective and also analyzed by type of use of the real estate through 2010. According to the study, the market capitalization of German REITs is estimated at a total of approx. €30-60 billion through 2010.
German and foreign institutionals will predominate
The study breaks down the potential of German REITs from an investor's perspective by individual investor group. According to the study, the German insurance sector is likely to have invested between about 20 billion and 22 billion by 2010. The potential for foreign institutional investors is projected at between 10 billion and 19 billion, that of private investors in Germany at between 10 billion and 16 billion. "The major group of investors for German REITs is likely to be institutional investors rather than private ones", stated Bernhard Visker, Head of the Real Estate business of HSH Nordbank. The German insurance sector, in particular, is expected to raise the real estate component of its investments from the present level of five percent to approx. 8% by the year 2010. By then, approx. 18 to 20% of real estate investments could be accounted for by REITs. According to the authors of the study, this is subject to German REITs taking account of recent global trends toward less regulated REIT structures. If this is successful, German REITs should in future play an important role as a new real estate vehicle in the asset-allocation decisions of international investors.
German REITs comprised of commercial properties will predominate
Moreover, the study includes for the first time an assessment of the potential of German REITs in the individual segments of Germany's real estate market. REITs made up of office and retail real estate will predominate with market capitalization of between 2 billion and 4 billion each, whereas the potential for residential REITs is estimated at only billion to 1 billion by the year 2010. "We expect several U.K. and U.S. private equity investors that have acquired German real estate portfolios in recent years to be the first to float residential REITs on the stock market. At the same time, however, large sections of Germany's residential real estate sector are unlikely to be ready for the stock market at that point", commented Visker. Based on a minimum market capitalization of, ideally, 500 million, which is key for institutional investors, a portfolio for a residential REIT would have to comprise at least 20,000 dwellings. According to the authors of the study, many residential real estate companies do not at present exceed this minimum level; moreover, they are often not profitable enough to be of interest to capital-market investors. For REITs comprising residential real estate to become feasible, some tax issues would also have to be resolved. These issues relate to the abolition of the non-profit status of formerly non-profit-making residential real estate companies in 1990.
Competition from foreign REITs not to be underestimated
Visker warned that competition from foreign REITs and other listed real estate companies should not be underestimated. "Fortunately, the protectionist provisions of the former Foreign Investment Act have been abolished. This means that German investors are now able to invest in foreign real estate stocks or REITs largely without suffering any disadvantages, such as penalization through taxation. This entails considerable additional competitive pressure for the German real estate investment sector. If the project of a German REIT were to fail, German insurance companies, for example, can be expected to increasingly take advantage of the option to invest in foreign investment vehicles. One finding of this study was that if private investors in Germany were increasingly to turn to such foreign REITs rather than to German REITs, the domestic real estate investment