Elsewhere: German Renaissance

Germany's commercial real estate by right is considered the most expensive in Europe. According to the World bank and the European association, the total value of commercial real estate premises in Germany in 2006 was estimated at $1.075 trillion, $36 billion more than in the UK. Moreover the appeal of German commercial real estate is assisted also by the fact that today about 73 percent of commercial real estate premises has been rented long term. For comparison, this figure is 54 percent in the UK.

In one of Jones Lang LaSalle's most recent reports "Direct investments in real estate in Europe, " it is noted that direct investments in real estate in Europe last year reached record levels (24.2 billion euros), increasing in comparison with 2005 by 39 percent. The number of trans country transactions made in 2006, accounted for 2/3 of the total number and had also increased. Among the countries of "old Europe" the most dynamic growth of investments was observed in Germany (141 percent) and France (67 percent). And although the real champion was Russia, where the volume of investments in real estate increased 700 percent in 2006, in money terms this volume is rather modest in comparison with Germany - 3.4 billion euros against 49.5 billion euros.

Germany's real estate market which for a long time has observed stagnation has apparently, burst. According to Jones Lang LaSalle, in 2006 almost 50 billion euros were invested in the German commercial real estate market. The president of American company Atlantic Partners Bradley Olsen characterizes the "German phenomenon" as follows. "Several years ago, when talking about the problems of the real estate market in Germany, we came across the fact that people talked a lot about the country, but nobody wanted to invest there," says Olsen. "Today the situation has considerably changed: participants of the global real estate market simply invest funds in Germany without superfluous words. The country has managed to involve investors."

In turn, member of the board of directors of Hypo Real Estate Holding Frank Lemby explains why the German real estate market burst. "The real estate market in Germany, in my opinion, can be characterized by the following three key factors, first, privatization initiated by the government of the country under the conditions of a budget deficit. Secondly, that German companies began to actively get rid of non profile activities. And thirdly, an increase in construction activities, especially in areas that have a highly concentrated population.

In Lemby's opinion, these factors show that the investment market of Germany can be characterized as "very active". Lemby thinks that a similar situation will remain there for the next 3-5 years. Meanwhile, David Hutchings, an analyst at Cushman & Wakefield thinks that the unprecedented growth of investment activity is down to two factors - the relatively high profitability of all sectors of commercial real estate and the presence of enough good quality premises, suitable for investments. "As profitabilty decreases and the quantity of premises attractive for investment decrease, there is the risk that the growth rates of investments will also decrease," considers Hutchings. "To keep a positive balance, it will be necessary to react especially sensitively to changing demand."

New Trends

Looking at the commercial real estate market in Germany the example of the financial center of the country - Frankfurt - is characteristic. There demand for office premises last year increased 12 percent. In 2006 59,000 sq.m of office space was put Into operation, and the total amount on the market reached 548,000 sq.m. It is possible that the opening of Frankfurt stock exchange building after reconstruction, which took place at the end of February 2007, became a symbol of revival in the city after a long crisis.

Frankfurt is reviving not only as an office center, but also as a financial center: about 36 percent of office areas in the city are rented by financial institutions and investment companies. Frankfurt has also taken a leading position among German cities in the number of large transactions (rent 5,000 sq.m and more).

The appeal of Frankfurt to international consulting companies is also increasing. In spring this year Ernst & Young rented an office in Frankfurt until 2015. The transaction was worth 4.1 million euros a year.

Planed Reforms

At the beginning of this year in Germany, legislation regulating the functioning of closed share real estate investment funds was passed. Long-awaited reforms have not come into force without attention from investors, including foreign. "The law on closed share real estate investment funds essentially expands the opportunities of foreign investors in real estate," Nick Tippel, director of the research department of the European branch of J.P Morgan, says. "A wide spectrum of new means of attracting funds has opened up for them."

This year is also favorable as the eternal problem of a deficit of investment projects that are attractive has receded for some time. In striving to strengthen the balance and get rid of non-profile activities, large European companies get rid of superfluous real estate. For example, German insurance group Allianz has got rid of a property for $4.1 billion. On the list of realized projects considered superfluous are such socially significant premises as the headquarters of the European Central Bank in Frankfurt.

An additional stimulus of closed share real estate investment funds in the sale of property by corporations could be the tax appeal of real estate transactions." The balance cost of the property year by year becomes cheaper," Fabian Hunter, director of investments at the Berlin branch of CB Richard Ellis explains. "Thus, for development closed share real estate investment funds there is a favorable tax climate." At the same time closed share real estate investment funds, are exempt from the payment of profit tax and tax from sales, and should distribute up to 90 percent of shares between shareholders. Any private investor cannot own more than 10 percent of a share fund. In the next few years the activity of German closed share real estate investment funds will concentrate mainly on commercial real estate. The fact is that during acceptance of the law about closed share real estate investment funds representatives of the social democratic coalition of the Bundestag have insisted on excluding from the list of possible premises for investments in closed share real estate investment funds residential real estate constructed before January 1, 2007.

A huge blacklog in the development of the German commercial real estate market is a factor in the increasing volume of trade premises. "Of course, a boom in the construction of shopping centers following the unification of Germany in 1989, is already well and truly over," says chairman of the board of directors at ECE Projekt Development Alexander Otto. "But now we are opening new cities in the West of the country. Today our company is realizing this or that stage of 11 shopping centers in Germany - this is more than in 1989. Redevelopment is also key. Today in Germany more and more shopping centers require reconstruction or expansion.”

The contingent of investors in commercial real estate is international. In January, 2007, a transaction was made by international company GE Real Estate Germany which for 420 million euros bought 100 percent of shares in a German closed share real estate investment fund. The fund portfolio includes 12 office complexes (total area - 150,000 sq.m) in the largest cities of Western Germany: Frankfurt, Munich, Hamburg, D?sseldorf, Stuttgart, Bonn and Karlsruhe. The office complexes all have long-term rental agreements with anchor tenants and were attractive investment objects. The managing director of GE Real Estate Germany Riner Taylor notes that this transaction is a logical continuation of the escalating rate in 2006 German real estate portfolios.

German success is being repeated somewhat by Holland. The economy of small countries generally develops with caution to "the big neighbor," in this case - Germany. The office market in Amsterdam has been rejuvenated. According to Savills, in only the last quarter of 2006 total investments in this sector stood at 904 million euros. In the opinion of investment analysts at Savills, similar growth will promote an increase in rental rates and further growth in the volume of investments. Among the largest transactions in the office market in Amsterdam was the purchase of the Maas Tower by SEB Immobilien. The transaction was worth 150 million euros.