german-hawk-group
It turns out international investors could be right
Market Letter #1 '07
International investors started to invest in German real estate at an early stage when Germans thought it would never pay off. From the investors point of view German real estate seemed undervalued – cheap. In comparison Germans worried about the high expectations international investors had in the German economy and the property market. They thought the international investors would burn their fingers. Nowadays it looks as if the boot is on the other foot and along with a strong economy, real estate is increasing in value.
After a few years of very modest growth rates, the German GDP rose by a surprising 2.7% in 2006. The football world championship may have played its part, but it appears primarily to be a cyclical recovery.
And prospects for 2007 look quite bright as well. Even though VAT increased from 16 to 19 % at the beginning of 2007, according to analysts at ZEW (centre for European Economic Research), this will probably have only a limited impact in a strong economic environment.
The economy seems quite strong and confidence is returning. According to the IfO – Index (Institute for Economic Research), one of Germany’s most trusted indicators, there is growing optimism in trade and industry, as well as the economy as a whole. This is again reflected in the unemployment figures. Around 760,000 unemployed have been absorbed by the labour market to date, which leaves total unemployment at 4.247 m.
Like a self-fulfilling prophecy, the upturn was partly caused by international investors who invested international money in German real estate as well as in German companies. As a consequence demand has increased enormously and brought yields down.
How to take advantage:
As in every economy, the construction and real estate sectors show a cyclical lag to the overall economy, so there is a real chance of recovery in the years to come. For all those who invested early on, it seems to be turning out very well indeed. And opportunities do still exist, even if bargains continue to be hard to find. Yields have come down, especially in big portfolio transactions, but watch out for the mid-bracket investments of € 2-10 m! These are too small for large opportunity funds. Less competition makes this size of investment more viable than larger ones.