German investors seek to slow US dealings

Real Estate Weekly, Nov 30, 1994 by Wilhelm A. Rosenberg, Kenneth S. Dreifus

Although foreign investments in American real estate have increased during it must be noted that acquisition activities by Europeans have decreased because of the economic conditions on the Continent. Although Mega Invest International, P.A. represents investors throughout Europe, we would like to focus on how German investment activities in the US have been effected by the sweeping changes back home.

The fall of the Berlin Wall in 1989 created a scores of problems. It mandated the commitment of considerable amounts of public and private funds for the rebuilding, of the eastern part of Germany, which had been neglected for over 40 years. The first and biggest problem to be addressed was the privatization of firms and preservation of employment. To date, approximately 12,000 formerly state-owned companies have been returned to private ownership, and nearly 1.4 million jobs have been saved at a cost of more than DM 200 billion ($125 billion American) to the private sector.

Second, about five million properties that had been expropriated by the Nazi and Communist governments had to be returned to their original owners. As one can imagine, the maintenance of accurate public records was not a priority of the former German Democratic Republic. There was an immediate and very costly need to create a highly specialized infrastructure to process approximately two million claims for compensation that have been filed since shortly after the fall of the Wall.

When the US real estate market came to a screeching halt in 1990, Germany was still viewed as the locomotive that pulled the economies of Central Europe, and had the strength to haul along Eastern Europe as well. As rents rose rapidly, it was logical to assume concurrent enhancement of property values. But as the vast sums of domestic capital allocated to the rebuilding of the eastern provinces were not replenished by foreign investors, the German property market was forced to rely upon internal cash flow. Although the German banks have had a reputation for being very conservative, they too had been overcome by the euphoria of reunification and the rush into a new market without appropriate concern for the longterm viability of individual investments. As an unpleasant economic reality emerged during 1993, the banking sector pulled in the reins and business slowed materially.

This credit crunch, coupled with a restricted regulatory environment, has limited the ability of German investors to expand their portfolios. In order to remain in the good graces of their lenders, German landlords, who are reputed to be fixated on the payment of debts in a very timely fashion, have been forced into acts of even greater punctuality. As the business and the personal consequences of a bankruptcy remain draconian in Germany, and since nearly every real estate loan requires personal guarantees, it becomes understandable that most German landlords now have set aside funds to provide for at least 12 months of debt service. The creation of these reserves during 1994 deprived us of a significant amount of money that used to be available for new U.S. investments.

Given the softness of their home market, the German real estate investment community is earmarking a significant portion of its diminished investment pool for selective U. S. real estate transactions. Although the situs of these investment activities have become somewhat more diversified, the primary focus will remain east of the Mississippi, especially in cities such as Atlanta, Boston, Chicago and, of course, New York.

Other geographical areas of interest in 1995 will include:

Albuquerque, NM: There is a growing appetite for multi-family properties, although the availability of water might inhibit future growth.

Austin, TX: It ranks among the best investment opportunities for multi-family properties in the next decade. The 2,500 units currently in the pipeline will not effect this assumption.

Nashville, TN: Its residential vacancy rate is practically nil. With less than 1000 apartments built over the past 3 years, it has a great upside potential for our investors.

Portland, OR. With an overall vacancy rate in the mid single digits and existing shopping center space per capita being below national norm (i.e. 16 square feet per capita), there seems to be a strong need for the creation of new retail space.

Seattle, WA. As in Portland, there is a low amount of shopping center space per capita, although a few large projects, such as the one in Issaquah, are underway.

From a capitalization point of view, our clients continue to regard office buildings as dicey. With the supply of existing space still being far in excess of tenant demand, and net effective rents rising substantially slower than asking rents, buyers still demand double digit returns on office investments. On the other hand, there has been a diminution in cash-on-cash yield expectations on apartment houses, which now ranges from 7 to 9 percent.

Germans understand that the U.S. recovery is ahead of that in most other nations. Their strong purchasing power due to a relatively weak dollar, coupled with the ability to acquire properties below replacement value, makes the acquisition of U.S. real estate assets attractive again to both individual and institutional investors.