Facing an office slump

Sticking with Frankfurt through this sluggish demand patch just might pay off, writes Roxane McMeeken. Frankfurt is nicknamed Mainhattan because of its high rise skyline looming over the river Main. However, Germany’s prime business city is experiencing a severe slump in demand for office space. With more than half a million square metres of new offices poised to come on to the market within two years, Frankfurt looks set to become a ghost town, with nothing but air rattling around in its imposing new monuments. The problem of oversupply and sluggish demand is plaguing the whole of Germany. Yet there are still some who believe the country offers a few worthwhile investment opportunities. Phillip Rose, ABN Amro’s European head of real estate, is not one of them. ABN Amro has absolutely no investments in German real estate. This is largely because, relative to other European markets, Germany’s expected growth is low – around 8 per cent, compared with 9–10 per cent elsewhere. “Germany has been underperforming for the last five years,” says Mr Rose. Even German investors, traditionally heavy backers of domestic real estate, are investing abroad, he says. Industrial hope Germany’s retail sector is particularly unattractive, according to Mr Rose, because it is suffering from a drop in consumer spending. The same problem is affecting the residential market. Offices look little better, with the main centres, Frankfurt and Munich, being hit by their respective reliance on financial and hi-tech industries, resulting in the dissipation of demand. Gunnar Herm, of the German-based property investment joint venture, Warburg-Henderson, says: “Developers responded too late during the last office boom. Most of the speculative projects planned are coming to the market over the next two years.” “Trophy buildings” he says, “will suffer most.” The industrial property sector perhaps offers the most hope. Nick Tyrrell, director at Deutsche Bank Real Estate, says that some opportunities exist in “non-superprime” locations. “Industrial has the advantage of being an area where German investors traditionally fear to tread,” he says. Moreover, industrial real estate is producing yields of 8–8.5 per cent. But there are issues, says Mr Tyrrell. “One problem is finding places to invest in”. Another is that “industrial buildings tend to depreciate. Steel sheds tend to fall down after 30 years”. He adds that the residential sector offers a few limited opportunities in suburban areas. For example, Eschborn and Niederrad, which are satellites of Frankfurt, are attractive. He says that when the population has lots of money, renting out plush complexes in the centre of Frankfurt it easy. However, when salaries are falling and people are being made redundant, cheaper suburban accommodation comes into its own. Do not divest Mr Tyrrell stresses that despite the broadly negative picture of German real estate, divesting is not advisable. “We have investments in all sectors of the German market and will not be getting out. It would be too expensive to do the transactions.” Besides, Mr Tyrrell believes the investments will eventually pay off. He even ventures that now would not be a bad time to enter the German market for the first time – but investors will have to be in it for the long term. Mr Tyrrell expects rents in the country to begin rising in 2005. Joseph Houlihan, managing director, Lend Lease Houlihan Rovers, is also willing to invest in Germany. His firm recently launched a European real estate Sicav fund, the European Estate Securities Fund. Aimed at high net worth and institutional investors, the actively managed vehicle is benchmarked against a European subset of the Citigroup World Equity Property Index. The fund invests in quoted shares of property companies in 16 countries. Germany is represented, according to Mr Houlihan, though the allocation is small, since it represents 2.9 per cent of the index. So it seems that although the prognosis for Germany is not great in the immediate future, the market could well pick up. Even at present it seems possible to make money on German property through an investment with a firm that knows where to find the sparse opportunities. Moreover, Mr Herm, of Warburg-Henderson, stresses that an investment in Germany remains a good diversifier.