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German real estate is remarkably dominant in Europe. As this week’s Chart Room shows, around 40 per cent of all capital that entered the Eurozone real estate market since 2007 has been invested in Germany. Even during the last two years, as the country has faced economic difficulties as a result of its high dependence on Russian gas, German deals have made up at least a quarter of all transactions completed in the region. This bodes well for the sector as a potential cyclical downturn looms.
Geographically, it makes sense. Germany sits at the heart of Europe, and its extensive network of highspeed roads means the country is well placed as a centre for distribution and logistics.
It is also more polycentric than other European cities, meaning its commercial and industrial activities are not limited to any one city or region, so there is less concentration of risk. Berlin, for example, is home to Germany’s public sector and is the hub of the country’s start-ups, but it is not the economic centre of the country in the same way that Paris is to France, or London is to the UK. The financial industry is in Frankfurt, heavy and high-tech industries can be found around Munich, the largest port is in Hamburg, and there are liquid markets for residential, hotels, life sciences, and healthcare real estate across these and many other primary and secondary cities.
In addition, the market in Germany typically applies the ‘sustainable value’ methodology to real estate, which is based on the long-term characteristics of an asset and excludes speculative elements of cyclical fluctuations. This approach tends to smooth out the capital value peaks and troughs that can emerge from a ‘mark-to-market’ strategy or a chartered surveyor-led assessment, all of which makes German property valuations relatively stable.
The diversity of financing available for German real estate, with its large network of regionally-focused local lenders, adds to the stability. German banks also tend to take a traditional, conservative approach to lending, characterised by moderate loan-to-valuations and solid debt service coverage ratios.
Of the capital that is invested in German real estate, between 50 and 60 per cent comes from domestic investors, much of which is long-term institutional money. Indeed, some of these domestic funds are unable to sell assets below set valuations, which naturally steadies the market. While there has been a downturn in investment activity in Germany during this cycle, international and non-institutional private investors continue to sell assets, and this appetite from domestic investors continues to have a stabilising effect.