BusinessWeek Online
NEWS ANALYSIS
By Jack Ewing

A Property Market on Ice
How Deutsche Bank has chilled German real estate funds amid a four-year slump in the country's commercial-property market

For risk-averse German retail investors, real estate funds once seemed like the perfect way to avoid the stomach-churning ups and downs of the stock market. The funds invest in bricks and mortar, such as office buildings, and are designed to pay a modest but steady return of 4% to 6% a year. Investors can redeem their shares at any time for a price based on the estimated value of fund holdings, but the shares aren't traded on any open market, and big price movements are rare.

Little wonder that, in the wake of the tech-stock meltdown, Germans poured billions into property funds, making them No.3 in popularity as a vehicle for retail investors -- after stocks and bonds. "I was always told it was an absolutely secure investment," says Ingrid Naab, a Frankfurt schoolteacher who bought shares in a fund sold by Deutsche Bank's (DB) DB Real Estate unit.

Now these brick-and-mortar investments aren't looking so solid after all. On Dec. 13, Frankfurt's Deutsche Bank shocked the German banking world by freezing the $7.2 billion fund. The bank made its unprecedented move after investors were spooked by Deutsche Bank's announcement that it would conduct an unscheduled revaluation of the fund.

DOMINO EFFECT? Since that could only mean a sharp markdown of the underlying assets, investors crowded bank branches to redeem their shares. Freezing the fund amounts to the equivalent of a bank closing its doors to a mob of frantic depositors, and the result has been alarm in the German banking community about the reliability of the country's $105 billion property-fund industry.

Yet Deutsche Bank's decision to revalue its real estate funds was the result of a long-simmering problem. Germany's commercial-property market has been in a four-year slump, with rising vacancy rates and falling rents. Now the German banking world is waiting anxiously for the results of the independent valuation commissioned by Deutsche Bank of its frozen fund. The assessment is due in early February.

German bankers fear a major write-down may shatter fragile investor confidence, creating a domino effect. Other real estate funds heavily invested in property might also be forced to close and liquidate their assets, probably with big losses. Legally, investors carry all the risk, but in practice, German banks won't be able to avoid covering some of the loss from investments they often sold as "mündelsicher" -- good as gold.

The funds were sold almost exclusively to ordinary Germans, rather than institutional investors. "If a second one closes, then there could be a run," says Alexandra Merz, managing director of Scope Analysis, a Berlin firm that rates investment products.

HUGE WITHDRAWALS. Fearful of just such a panic, regulators at Germany's Federal Financial Supervisory Authority have ordered real estate fund managers to supply figures daily on outflows. So far, regulators say, investors have trusted the assurances from fund providers and haven't lost their nerve. Edgar Meister, a member of the executive board of the Bundesbank, Germany's central bank, sought to calm markets by telling the business daily Handelsblatt, in an interview published on Dec. 27, that he thinks the nation's banks are strong enough to absorb any shock in real estate funds.

The big flaw with the funds is that they promise investors liquidity but are themselves tied up in illiquid assets, such as shopping centers or industrial parks. If too many investors demand their money back, fund managers have trouble raising enough cash. The most troubled funds are generally those most exposed to the German real estate market.

The Deutsche Bank fund currently on ice has some 65% of its capital tied up in German property, such as the Focus Teleport, a Berlin office building that counts DaimlerChrysler (DCX ) among its tenants. Declining rental income had already pushed the fund's annual return below 3%, prompting investors to withdraw more than $1 billion in the year before the fund was closed.

Deutsche Bank's fund is hardly the first to get into trouble. Other funds have also seen huge withdrawals. Commerzbank's (CRZBY ) hausInvest europa fund, the biggest German property fund, suffered an outflow through November, 2005, of $1.6 billion, leaving fund volume at $10.7 billion. But so far, the institutions behind the funds have always used their resources to prevent a panic. For example, Allianz Group (AZ ) bought buildings worth $2.1 billion from a fund operated by its Dresdner Bank subsidiary, avoiding a fire sale of properties to raise cash.

THE REIT MOVE. Deutsche's rivals are privately seething that the bank, Germany's largest, didn't take similar steps, especially since there are signs that commercial real estate is improving. "We think the low point has been reached," says Peter Birchinger, an associate partner at real estate consultant Cushman & Wakefield Healey & Baker in Frankfurt.

Instead, Deutsche promised only to provide "fair" compensation to people who have bought shares during the past two years. That, however, "doesn't conform to the traditional way of doing banking in Germany," says Reinhard H. Schmidt, a professor of international banking at the University of Frankfurt. Perhaps the bank's un-German move shouldn't come as a surprise, though, considering that DB Real Estate answers to Kevin Parker, Deutsche Bank's head of asset management, who is based in New York.

In fact, Deutsche Bank, which has increasingly focused on investment banking, might not be sorry to see real estate funds die out. The bank has led the drive to win government approval to create real estate investment trusts, the exchange-traded instruments popular in the U.S. and other countries. But a switch to REITs wouldn't help investors who have already sunk savings into traditional property funds. "I wanted something for retirement. I'm not a speculator," says Naab, the Frankfurt schoolteacher. Once again, Germans are discovering that risk is part of any investment

Eurocastle Acquires EUR2 Billion German Real Estate Portfolio from Dresdner Bank

Transformational Acquisition Making Eurocastle the Largest Publicly Traded Company Focused on German Commercial Real Estate

LONDON, December 22 /PRNewswire/ --

Eurocastle Investment Limited (Euronext Amsterdam: ECT), which is managed by Fortress Investment Group LLC, today announced that it has signed a definitive agreement with Dresdner BankAG to acquire 100% of an open-end fund which owns a portfolio of 303 ommercial properties for approximately EUR2 billion. The properties consist primarily of office buildings and are largely occupied by Dresdner. The bank ill continue to occupy their current space which represents approximately 80% of rental income on the portfolio. Dresdner's average remaining lease term is 9 years, while the average remaining lease term of the entire
portfolio is approximately 8 years. Approximately 15% of the portfolio is currently vacant.

The properties, totaling approximately 9 million square feet (845,516 square meters) of leasable space, are located throughout Germany, with concentrations in Frankfurt, Hamburg, Munich, Dusseldorf and Berlin. The assets are generally in major metropolitan areas and Eurocastle believes that the properties are among the best-located and highest quality assets in their
respective markets. The purchase reflects an unleveraged initial yield of approximately 5%. "This transaction provided a unique opportunity for Eurocastle to acquirea large scale portfolio that combines prime assets with a high quality core
tenant under long-term leases," commented Robert Kauffman, head of Fortress'sEuropean investment operations. "We look forward to a strong partnership with Dresdner and the Allianz Group."

Eurocastle expects to fund the purchase with equity and debt financing. The debt has been committed to by various banks and the equity will be raised through a public offering of common stock combined with an investment from a private equity fund managed by Fortress Investment Group. The closing of this transaction is expected to occur in the beginning of 2006.
Today, Eurocastle's investment portfolio is made up of approximately 50%in credit leased real estate and 50% real estate debt and securities (based on invested equity). Upon the closing of this transaction, credit leased real estate will increase to at least 75% of Eurocastle's portfolio, and will include over 17 million square feet (1.6 million square meters) of leasable European commercial real estate, with German assets making up 93% of Eurocastle's direct real estate investments.
Following the acquisition, Eurocastle will own approximately EUR2.7 billion of commercial real estate assets, together with EUR1.6 billion of real estate securities and other real estate related loans. With respect to the transaction, Eurocastle director, Wesley Edens said, "The acquisition of the Dresdner portfolio provides Eurocastle with an attractive opportunity to accelerate our stated strategy and interest in Germany. This transaction will mark a significant transformation for Eurocastle, making us one of the largest owners of commercial real estate in Germany. We now own one of the best office portfolios in Germany and expect
the Dresdner assets to provide a valuable new source of income growth and platform for other strategic acquisitions."

The transaction, together with existing assets, gives Eurocastle a distinctive leadership position in the commercial property sector in Germany. Attractive features of the investment include:
- High quality assets - The Dresdner portfolio is among the highest quality commercial portfolios in Germany, and provides a unique opportunity to increase Eurocastle's exposure to the recovering German commercial real estate sector on a large scale. The portfolio consists of primarily Class A office space in the major metropolitan areas in Germany, as well as smaller
assets spread throughout Germany but situated primarily in prime locations within those jurisdictions.
- Stable cash flows - The leases with Dresdner, a AA3/AA- rated credit, represent 80% of current income on the portfolio with an average lease term
of approximately 9 years. The portfolio provides a stable 5% initial yield with upside potential as the properties are fully leased.
- Improving real estate fundamentals - Germany's commercial property markets, which have been severely affected by overbuilding and five years of sluggish economic growth, appear to have bottomed out. With little new construction taking place, the Dresdner portfolio is well positioned to benefit from positive net space absorption in its major markets.
- We also believe that with this acquisition, the Company will be in a strong position to take advantage of growing investor demand for exposure to the sector. Pending adoption of REIT legislation in Germany, improving real estate fundamentals and distress among German open end funds are expected to provide strong growth prospects for Eurocastle.

About Eurocastle
Eurocastle Investment Limited is a Euro denominated Guernsey closed-ended investment company that invests in and manages a diverse portfolio consisting primarily of European credit leased real estate and real estate related debt. Eurocastle is managed by Fortress Investment Group, a global alternative investment and asset management firm with approximately $16 billion in equity capital currently under management.

Berlin: The new property hotspot

Sunday Business Post, November 13, 2005 - By Diarmaid Condon

From the building of the infamous Berlin Wall in 1961, West Berlin was essentially an enclave within East Germany. This was a position it continued to occupy until the decline of the USSR led to the end of the Cold War, symbolised by the removal of the wall on November 9, 1989, prompting German reunification in 1990.

The fall of the wall was followed quickly by a huge rush of investment into the former East Berlin.

Unfortunately, and unusually for the Germans, it was badly planned and constituted a knee-jerk reaction to the years when development in the east languished in the wake of its more affluent western neighbour. The city could not maintain the pace and rate of growth that ensued, particularly as Germany slipped into recession on the back of having to absorb the huge infrastructural development needed in the east. The property boom quickly turned to a freefall in the late 1990s leading to a massively debt ridden city which is technically bankrupt to this day.

There have been signs, however, over the last year or so, that the tide may be starting to turn. Germany may well be showing the first signs of shaking off the suffocating shackles of recession and foreigners are now turning to the Berlin property market in significant numbers. The principal reason for Irish investor interest in this market is rental return to pay down mortgages. This has proven to be the single most elusive entity in purchasing property overseas for Irish investors and Berlin has offered an option as it has a strong rental tradition and currently offers prices that look undervalued by international standards.

There is also the fact that the World Cup Finals of 2006 will be held in Germany with the final itself being played in the Olympic Stadium, host to the infamous 1936 Olympics. The hosting an event of this magnitude is generally the precursor to a significant buying splurge in the areas in question.

Nowadays, Berlin is best known for its vibrant nightlife, many cafes, clubs and bars, and the large selection of museums, palaces and other historic sites. It is a city to live in with its substantial population efficiently organised into a selection of residential centres which are wonderfully tree lined, generally low rise and offer a surprisingly green urban environment.

Those living there say that it is a cultural centre rather than an industrial or financial one, which has meant that it is far more endearing to foreigners than, say, Munich or Frankfurt. As you would expect, public transport is second to none although the airport at Schonefeld, which is not befitting of a major European capital, is due a massive expansion in the near future.

As Berlin was more or less kept out of the business loop during its days of isolation there is a distinct lack of a true financial or industrial centre here, consequently most external investment is being funnelled into residential blocks rather than commercial properties. The overseas investment community has been a lot faster to spot potential in the market than local Germans who seem very reticent to venture back into a market that holds such bad memories.

There is also very high unemployment; at 14 per cent it is at least 3 per cent above the German average, and the German population in general is quite old, meaning a heavy pension burden.

Esther Lamers, an independent property consultant with 13 years experience in the Berlin market, said that it is very important that potential investors check out the market and the areas within it very closely before deciding to purchase there. As with any other city, certain areas would be considered far better than others and there would appear to be a lot of poor product on offer at inflated prices simply because the market has become very heated over the past six months.

Lamers said that it can be very misleading to take headline rental rates as the only barometer when comparing properties, and that while some blocks will offer impressive initial rental returns, they may not offer much in terms of capital appreciation or may have high ongoing maintenance and management costs.

Remember that the rentals quoted are almost always gross so you will need to calculate your net return after all expenses to get a proper picture of your ability to pay down loans.

Maintenance expenses may be written off against rental income but not management costs, so it will also be important to find out what these charges come to. Typical maintenance fees on a block in reasonable condition range from e0.20 to e0.50 per square metre with typical management fees of around €20 per unit per month.

These are, however, very general figures and subject to change depending on the state of repair of the property and the area in which it is located.

Dr Esfandiar Khorrami, a solicitor with local firm Herrmann & Knobbe, stated that it is very important to check out items such as the ground-book (Grundbruch), which will identify ownership of the property, and any restrictions which may be placed on the title.

He said that as much as 10 to 15 per cent of the city's housing stock is still subject to Jewish claims or simply suffers from unclear ownership structures, and that a full due diligence can be carried out in as little as a few days so there is no excuse for buying without being properly informed.

Mortgaging is not particularly difficult when looking to invest in apartment blocks, but appears to be a different story if you want to invest in a single lower value property. Banks have not yet come around to providing a flexible customer focused service so you will not find investor based interest-only options nor will you usually be quoted for variable rate loans.

The normal financing methods are fixed rate repayment mortgages for up to ten years at rates from 4.1 to 4.4 per cent up to a loan-to-value (LTV) of 80 per cent. Extra costs on purchase will normally reach about 12 per cent, including a quite steep 6 per cent agent's fee which is entirely payable by the purchaser.

According to Derek Doyle of German Property Investments, purchasing in Berlin will bring you into a very tenant focused legal environment because Germans tend to rent, rather than purchase, property. You are more likely to encounter problems removing tenants than finding them. You will also find that rents are very often regulated and cannot be increased beyond certain limits, normally no more than 20 per cent over three years, but this can vary.

Buyers should also be very aware that Germany is not a speculator's market. All income and capital gains are taxed at the appropriate rate of income tax, banded from 24 per cent to 56 per cent, and up to year ten there is an anti-speculation tax of 25 per cent of the capital gain which means the market should only be considered by those capable of taking a long term view. There is a double taxation treaty with Ireland so you will be allowed for your payment here.

Lamers said that the most popular areas at the moment are those of the former East Berlin located closest to the centre, namely Mitte (literally ‘Middle'), at rates of €2,500 to €3,500 per square metre and the immensely popular Prenslauer Berg, particularly around Kollwitzplatz where prices range around €2,000 to €3,000 per square metre. It is unusual to see gross rents of more than 7 per cent quoted in either of these areas.

Doyle said that it is also worth considering areas to the southwest such as Zehlenforf, Dahlem and Grunewald where you will find detached properties in high quality residential areas which are the equivalent of Dublin's Foxrock.

Some other popular areas include parts of Friedrichshain, Kreuzberg and areas along the main thoroughfare of the Kurfurstendam such as Charlottenburg and Wilmersdorf. You can find property in Berlin from €400 per square metre but would generally expect to pay more than €1,200 per square metre for quality.

What's on offer:

German Property Investments currently have an apartment block in the high-end suburb of Zehlendorf to the south-west of the city.

Built in 1985 the six apartments cover an area of 641 square metre.

The yield on this block is 8.62 per cent, based on an asking price of €615,000.The company also has a block on offer in the Wilhelmstrasse region of Kruezberg, located centrally in west Berlin, which costs €800,000 and gives an annual yield of 7.12 per cent.

For further information contact 01-6690592 or visit www.germanpropertyinvestments.com

Lamers'company,Uranus Consult, is currently offering an apartment block at Christburger Strasse in Prenzlauer Berg. This is a 2,658-square-metre newly refurbished residential block of 52 apartments in one of the most sought after parts of the city. The price on this block is €3.1 million with a current yield in the region of 6.1 per cent. There is also an offering on Warschauer Strasse in up and coming Friedrichshain.

This block consists of 15 residential units and a size of 1,120 square metres. It is on sale for €1.1 million, offering a yield in the region of 8.3 per cent. For further information contact 0049-1729848488 or e-mail This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

Both Lamers and Dr Khorrami will attend a seminar on Berlin property investment in the Burlington Hotel on November 26.To book a seminar place contact 01-4978670 or visit www.berlininvest.ie

Diarmaid Condon is an independent overseas property consultant with significant agency experience. He can be contacted through his website at www.diarmaidcondon.com

Irish spend over €5bn on property overseas in 2005
Irish Times

Overseas Review: Bumper spending by Irish investors overseas is predicted to continue in 2006, writes Gretchen Friemann

Irish investors have poured €6.8 billion into international and domestic property in 2005 and experts predict the bumper spending spree will continue at similar levels next year despite rising short-term interest rates.

The figures, which are compiled by CB Richard Ellis Gunne, show the UK has once again attracted the bulk of the money, but there are signs that many Irish investors are being squeezed out of this market due to intensifying competition and diminishing yields.

Some €3.2 billion was spent on UK commercial property in 2005 compared to €3.3 billion in 2004. It's a marginal drop but one that is expected to deepen as international money flowing into the UK increases. But the growing global demand for property appears to have had little impact on Irish investors' ability to win large-scale transactions.
According to a recent survey by Jones Lang LaSalle, the UK ranks as one of the largest property markets in the world and attracts, alongside the US and France, the majority of international investor capital. And yet the landmark British property deal for 2005 was the €740 million sale of the Knightsbridge estate to the former Dublin tax inspector, Derek Quinlan.

The Irish have gained an equally formidable reputation in western Europe with investors splashing out €1 billion this year, largely in the key markets of Paris, Amsterdam and Brussels.

To put this tide of Irish money into perspective, the €6.8 billion spent on property in the domestic and international markets in 2005 accounts for nearly 1.5 per cent of the predicted annual global spend in the commercial sector.

Such has been the strength of international demand for property that Jones Lang LaSalle last month predicted total global direct real estate investment will surge to an all-time record of $550 billion (€469 billion) in 2005. That's a 20 per cent increase on 2004 levels.

But there is little surprise among industry pundits at Ireland's sizeable chunk of the global property pie.
According to HOK's associate director of investments, Mike Doyle, "returns in the UK have been excellent this year", and he claims those that entered the market early reaped the greatest rewards.

The International Property Database predicts total returns for the UK market will exceed 17 per cent this year while analysts at CB Richard Ellis in London expect the final tally to reach 18.5 per cent.
Compared to the 15.1 per cent growth so far this year on the FTSE 100 or the 11.7 per cent uplift for the year to date on the ISEQ, this is a phenomenal performance.

However, the Irish influence on the UK property market may be on the wane. Last year, entrepreneurs like Derek Quinlan and Alfie Buller led an Irish assault on Britain's prime retail and office space across most of the major cities.
It was a similar story this year with Dublin lawyer Brian O'Donnell and his wife, Mary Patricia, snapping up large swathes of London's Canary Wharf while Quinlan bagged the valuable 3.2-acre Knightsbridge estate. But Lisney's Duncan Lyster warns that the deal clinching is set to get tougher as more and more international heavyweights flood the UK market.

He points to the failure of developer David Arnold to win the bidding war for 33 Cavendish Square as a case in point. The block, which houses BHS's flagship Oxford Street store and the London College of Fashion, was sold to the Abu Dhabi royal family for €625 million (£425 million) last month after they bid €160.5 million (£110 million) above the asking price.
Mr Lyster predicts that wealthy international players will continue to squeeze out Irish investors next year forcing a wall of money into the potentially riskier markets of Germany and central and eastern Europe.

According to Marie Hunt, head of research at CB Richard Ellis Gunne, increasing numbers of Irish investors are travelling to Germany to eye up potential deals, although she claims the number of actual transactions there are relatively low.

But volumes are expected to shoot up next year as investors chase higher yields at lower capital values. Michael Moriarty, managing director of HOK Investors, cautions against over-excitement at German property values. "There is a belief that the worst of the economic problems are over and that the only way property values are heading is up but I think that's a dangerous view. There are still serious problems with the economy and many areas are over-supplied with office space. If you're getting a 7 per cent yield on a property, there is a reason for that and investors should be aware of the risk factors. In fact, the well located, well-let property in Germany is selling for yields similar to most other major European locations so I don't think there are too many bargains on offer."
According to Ms Hunt, "yields are converging across Europe" due to the unprecedented level of demand for property and she said that the search for value will become harder throughout 2006.
So is the property boom nearing its peak? Short-term interest rates in Europe are now set on an upward curve and it's unclear how high the European Central Bank is prepared to raise the bar over the next 12 months.
But property experts insist that the levels of investment will remain broadly similar throughout 2006, driven by improving leasing conditions and robust capital growth. Mr Doyle says that the higher UK interest rates had little affect on Irish investors this year and the weakening interest rate cycle there will improve market conditions.
"The retail traders have really suffered in the last 12 months from the Bank Of England's attempts to take the steam out of the housing market. They did that successfully but it's generally agreed the rises were too steep and I think we can expect rates to come down further."
Ms Hunt agrees that higher interest rates will not dampen investor enthusiasm. She predicts the Irish will shell-out another €6 billion-plus next year on property but claims there will be a "shake-up" in the division of that money.

Like London, Berlin is a collection of communities rather than a single entity — and matters are complicated further by almost 30 years of division. Although only a few vestiges of the Wall are left, there are still big differences between east and west.

International Investments in Germany

Strength in numbers

The Topic at EXPO REAL 2005
Monday, 10 October 2005

International Investments in Germany: Will They Provide a New Upswing for the Market?

By Andreas Schiller
http://www.exporeal.net/id/45603/CMEntries_ID/100475

Internationally operating opportunistic investors are buying entire residential portfolios or residential corporations.The HypoVereinsbank adorned itself with the takeover of the Bank Austria Creditanstalt several years ago, and now, it and its Austrian subsidiary have been taken over by the Italian Unicredito. The Dywidag Systems, which used to belong to the currently insolvent Walter-Bau AG, was bought for 168 million Euros by Industri Kapital, a European financial investor with Scandinavian roots. In the historically primarily German landscape of open funds, we now — after Credit Suisse Asset Management — also have the pleasure of getting used to the name Morgan Stanley as a new initiator. Through the Morgan Stanley Real Estate Fund MSREF, Morgan Stanley also owns a 25.1 percent share in the Frankfurter Deutsche Immobilien Chance DIC, which currently manages real estate assets valued at roughly 700 million Euros. International commitment in the German market is growing. This, however, is not exactly new as a look back into recent history confirms.

The American, French, Scandinavian and British investors were already making their way into Germany in the Eighties and Nineties. A well-known example is the Messeturm in Frankfurt am Main: it began in 1985 when the Frankfurter Messe GmbH tendered out a competition, which was won by the architect office Murphy/Jahn from Chicago. Tishman Speyer Properties as project developer came from the USA, too. Together with the Citibank, Tishman Speyer Properties also acted as international investors, before the Messeturm was sold with a majority share to the Japanese Kajima Corporation in 1991. Jerry Speyer and his team impressively demonstrated to the Germans how — from an American perspective — to successfully manage the project development of the then highest building in Europe. In 2002, a European investor consortium bought a controlling interest of 85 percent. The transaction was structured and completed by the real estate company GLL Real Estate Partners, a cooperation of Lend Lease Continental Holding and Assicurazioni Generali and WestWind Capital Partners. The Japanese building company Kajima kept 15 percent.

The German Real Estate Market

There are many reasons for the attractiveness of the German real estate market for international investors: Germany remains one of the leading real estate markets in Europe, and it is the leading market in terms of market value. The evaluated replacement value of the net fixed assets covers a total of 6.5 trillion Euros, according to the study “The Economic Relevance of the Real Estate Industry”, which was presented by the ifo Institute for Economic Research in spring 2005. A total of 5.3 trillion Euros of this gigantic volume goes to buildings. If land values are included, the sum becomes 7.2 trillion Euros. Another point is the currently low prices. “High-quality properties rented over the long term in firstclass locations can be acquired and financed at internationally unrivaled low prices. The yield gap, being the positive difference between gross yields and financing costs, is higher in Germany than almost anywhere else”, explains Dr. Frank Billand, Member of the Board of DIFA Deutsche Immobilien Fonds AG. It is no surprise that the share of international investors is growing. “In just the first six months, over five billion Euros were invested in Germany, including portfolio sales. Residential package deals and non-performing loans are not even included in this. Clearly more than one-third of the total sales was made by foreign investors”, says Peter Rösler, Chairman of the Board for Atisreal Deutschland. An alarming signal came from the Deutsche Immobilien Index DIX figures presented early this year. In this index, the DID Deutsche Immobilien Datenbank — the German subsidiary of the IPD International Property Database, located in London — determines the annual yields of the real estate of key portfolio holders, based on the surplus revenue and value growth. The average yields in 2004 were at 1.3 percent and, thus, below the inflation rate of 1.6 percent. In 2002 and 2003, the yields were 4.1 and 3.2 percent, respectively. Hence, Germany was at the bottom of the international yields ranking. Comparably, Switzerland earns yields of 4.4 percent, the Netherlands achieves 7.7 percent, Canada earns 12.9 percent and the United Kingdom reaches 18.3 percent. South Africa leads the ranking with an average real estate yield of 23.4 percent. The two values that make up the 1.3 percent for rented buildings are also alarming: the still comparatively good net cash flow yields of 4.77 percent are balanced out by the value change yields of minus 3.36 percent.

The German Market from an International Perspective

Dr. Paul Kennedy, Head of European Research and Strategies at Invesco Real Estate in London, can take pleasure in the good aspects of the development. “In the commercial property marke, values in Germany have fallen over the last twelve months, contrary to the trend in most other European markets, making German real estate relatively more attractive. This trend is supported by a reduction in the domestic activities of somer German open funds.” Rodney Bysh, Director of Property Business Development Europe at Henderson Global Investors, believes the negative trend is going on: “The German real estate market is also expected to be characterized by underperformance relative to the total European real estate market in the next five years.” To explain the thus far high share of international investors, he says, “The interest of foreign investors in the German market, which could be observed for some time now, is less market oriented and more financially oriented. Various factors play a role here: attractive financing options, coupled with a disinvestment strategy of public residential real estate holdings, as well as an expected evolution in residential ownership. In the German residential market, a system change is taking place, whose opportunities have been recognized more by foreigners than by residents of Germany.” In any case, the opportunities that foreigners have recognized so far cover investment volumes in the double-digit billion Euros range.

Investments of Different Magnitudes

The buyouts of different large residential real estate corporations through internationally operating opportunistic investors are spectacular. A consortium between Cerberus and Goldman Sachs took over 65,000 apartments from the Berlin-based residential real estate corporation GSW for two billion Euros in 2004. The Deutsche Annington, a subsidiary of the British Terra Firma, bought the properties of the E.ON subsidiary Viterra for seven billion Euros. With its 152,000 apartments, Viterra is Germany’s largest residential portfolio holder. The Deutsche Annington already previously took over 64,000 apartments owned by the German railway and lastly 4,500 apartments owned by the RWE Corporation. Together with Corpus, Morgan Stanley bought 48,000 companyowned apartments from ThyssenKrupp for 2.1 billion Euros. The Blackstone Group purchased 31,000 apartments with a transaction volume of 1.4 billion Euros from WCM. The Fortress Investment Group as a US-originated company, which mainly invests American and European pension funds, bought Gagfah from Bundesversicherungsanstalt für Angestellte BfA, with 78,000 apartments. After deducting the accounts payables valued at roughly 1.4 billion Euros, the sales revenue for the BfA was 2.1 billion Euros. Fortress purchased the NILEG Immobilien Holding for 1.5 billion Euros from the NordLB. The NILEG belongs to the largest real estate companies in Northern Germany with total assets of 1.35 billion Euros and 28,500 apartments. Fortress wants to buy more residential real estate corporations in Germany and put them on the stock exchange under the umbrella of a holding as a real estate corporation. The potential exists, since many cities and municipalities are openly considering selling their residential properties, and some states, such as North-Rhine Westphalia, are thinking about their regional development corporations as well.

Smaller Investments That Sum Up

However, next to these spectacular deals, there are also many smaller investments. Individually, these are hardly worth mentioning; yet, in their sum, however, they make up an impressive volume. For example, the Austrian Immofinanz Immobilien AG bought the Berlin-based residential real estate corporation Tempelhofer Feld AG Tefag including 1,400 apartments in the capital. Combined with two smaller deals, the investment volume of the Immofinanz AG in Berlin’s residential portfolio makes up 80 million Euros. Furthermore, based in Vienna is the Signa Property Funds Holding AG of the Immofina Gruppe, which already bought roughly 200 residential units for about 20 million Euros. Others are supposed to follow for the first special fund for Germany, “Signa Real Estate Capital Partners Berlin 01”, which covers a total volume of around 75 million Euros. The US-American Lincoln Equities Group bought 118 residential and retail units in Berlin-Wilmersdorf for around 5.5 billion Euros, too. The Jus AG, which belongs to the TAG AG, together with the Kondor-Wessels-Gruppe from the Netherlands, also bought the Superior Court of Justice on the Lietzensee in Berlin for the portfolio of a foreign private investor. The listed property will be renovated into a high-quality residential property. Too, the Scandinavians are there: a Danish fund initiator bought a completely rented-out business building in the city center of Brandenburg. The Deutsche Ärzteversicherung AG sold a package of several residential buildings in Berlin’s Charlottenburg, Schöneberg and Wilmersdorf districts to a Swedish investor. And sometimes the property falls back into German hands: at the beginning of this year, the aik-APO Immobilien Kapitalanlagegesellschaft mbH in Berlin bought the “Kurfürstendamm 28” building for one of their special funds from the Blackstone Group. The property belonged to the large Deutsche Bank Portfolio, which was purchased by Blackstone in 2003. However, we are no longer just dealing with office real estate or residential properties. For example, the British investor, Capital & Regional Partner, who is focused on retail and recreational real estate, bought a portfolio of extensive retail property for roughly 150 million Euros from the Hahn Consortium, based in Bergisch Gladbach. Together with the Hahn Consortium, the London-quoted company, Capital & Regional Partner, which manages a volume of around 4.3 billion Euros, is planning to buy other retail properties. In general, investment does not merely include just the classical segments of retail, hotels and logistics. International investors are increasingly interested in niche products that promise high yield – such as parking garages and parking lots.

Is the German Market Changing?

International investments have a clear influence on the German market. Some buildings would not even exist if international investors had not developed, bought or rented them out upfront. Thus, international investors have also contributed to the current market reports of agents and consulting companies, which predict an increase in office space absorption, and thus, an eventual decline in the current double-digit vacancy rates in the major real estate cities. “The downward trend in the German office real estate market has stopped”, Thomas Beyerle, Head of Research of the DEGI clearly states. And the research company, Bulwien- Gesa AG, expects top rents to increase even more over the next four years, at least in the major real estate cities and the office sector. However, the other changes international investments are bringing about are just as important. They have contributed greatly to the growing professionalism in the German real estate market. And there is another aspect to consider: International engagements also fuel the bravery of local players. For example, an offer was made to the state government by a regional building company for the North-Rhine Westphalian LEG. With roughly 110,000 apartments, it is one of the largest real estate companies in Germany. In addition, certain fields and business models that were previously unknown or overlooked in Germany can now be integrated. In this respect, international investments are helping the German market in many ways. One example of this is the Stuttgart-based DeWAG Deutsche Wohnanlage GmbH. The company is planning to invest roughly 350 million Euros in the German residential real estate market over the next three years — with international support. The recapitalization of 25 million through the chief partner, German Residential Investment Holdings SCA with headquarters in Luxemburg, will be provided by a Belgium investment bank and a Dutch pension fund. The investment was brokered by Pramerica Real Estate Investors Ltd., London, which is the European subsidiary of the US-American real estate investment and consulting group of Prudential Financial Inc.

Sunday Times
Boom time for Berlin?

Peter Conradi finds keen buyers in the German capital, where just 12% of people are homeowners, and flats cost less than in Prague

The words “Germany”, “property” and “buying opportunity” have not often been uttered in the same breath in recent years. While property prices around the world have been surging, Germany has been a picture of unremitting gloom. But could things be about to change — especially if today’s general election brings a new government, with Angela Merkel, the conservative opposition leader, ousting Chancellor Gerhard Schröder?

A number of British investors seem to think so, and while other fly-to-let devotees have been piling into the “tiger economies” of eastern Europe, they have been discreetly snapping up undervalued property in Berlin instead. After years of steady falls, prices in some parts of the city are as low as £500 a square metre — probably the lowest of any western European capital and appreciably less than the equivalent in Prague or Warsaw. Add in low borrowing costs and a long- entrenched renting culture among the locals, a mere 12% of whom are owner-occupiers, and it is clear that Berlin has far more to offer than beer and bratwurst. “Prices in eastern Europe are largely based on expectations,” says Norbert Klink, a former banker who worked for several years in London before returning to set up a property company in his native city last year. “Berlin’s different,” he claims. “Even if everything stays as it is now, you will get a good return on your investment.”

Klink’s company, Norenva, specialises in selling not just flats but whole apartment blocks. Daunting? Not necessarily. You could pick up a small block for as little as £400,000 — and with German banks prepared to put up 80-90%, the amount of capital required is not as great as you may think. The immediate attraction is the yields. Typically, you will take on a block already fully tenanted, giving a return of 7-10% — compared with mortgage rates of as little as 3-4%.

Chris Lockley, 39, a pilot from the West Midlands, is one of the growing band of would-be Berliners. This spring he bought a block of 12 flats in Wedding, in the former west, for a mere £216,000 — which pays him an impressive £25,700 a year. “With yields like that, it’s like somebody’s giving you money,” said Lockley, who is planning to add another 16-flat block to his portfolio. Individual flats can be attractive investments, too, with studios for as little as £20,000 and one-bedroom flats for £30,000 — although yields may be a percentage point or two lower.

The real surprise, perhaps, is quite how few Berliners have themselves taken the plunge and bought. But old habits die hard: housing in the east was owned by the state during the communist years, and after the Wall came down in 1989, blocks of flats were largely sold en masse to big corporations rather than to the tenants who lived in them. West Berliners, too, were traditionally reluctant to buy — rents were heavily subsidised, while the prospect of Russian tanks rolling in made the city seem anything but a safe investment. Home ownership was also rejected as “petit bourgeois” by students and other denizens of Berlin’s thriving hippie scene. “There was no economic urge to buy property,” said Klink. “It was not like Britain, where people sit around dinner tables discussing how much their property has gone up.”

There are signs that attitudes are slowly changing — not least because the old rent subsidies and controls have largely fallen away — but in the meantime the city remains very much a buyers’ market. Whether you opt for a single flat or whole block, though, choosing where to buy can require some careful research.

It's overseas exhibition time again – Germany Feature

Sunday Business Post, September 04, 2005 - By Diarmaid Condon

Having bottomed out last year, property in Germany is showing real signs of a recovery, as evidenced in economic reviews over the past six months or so.

Since reunification, the federal government in Berlin has been battling to rebuild the city as the political and cultural capital of the new Germany.

The transfer of political capital from Bonn to Berlin has led to an influx of foreign embassies, with a range of new buildings completed to accommodate the intake of government workers. Germany has not been afraid to invest in infrastructure, recognising that this was one of the keys to its future economic development, and who would bet against it paying off?

Property prices in Berlin are depressed even by German standards, and by Irish standards they are bargain basement, now at a five-year low. With no currency fluctuations and free availability of loans, it is no wonder Irish investors are starting to take note of the city.

Springs International Properties, with offices in Dublin and Cork, are soon to launch a major block of apartments specifically to Irish investors.

The seller is Home Center KFT, which has offices in Tel Aviv, Berlin and Budapest. One of the main attractions of these apartments is the fact that they are 100 per cent rented to tenants. Prices will be from €72,000 including a full management service.

These apartments will be launched in the Burlington Hotel in Dublin on September 10 and 11 from 11am to 7pm, and in Moran's Silver Springs Hotel in Cork on September 17 and 18. For further information, contact 01-8741401 or e-mail This e-mail address is being protected from spam bots, you need JavaScript enabled to view it Other multi-agency highlights in the autumn show season include the Investment Property Exhibition in the CityWest Convention Centre from September 30 to October 2 and the Househunters in the Sun show at the RDS from October 7-9.

The Sunday Business Post Property Expo 2005 makes its western debut at Leisureland in Galway on October 7-8.

For a full up-to-date listing of current and upcoming shows countrywide visit the exhibition section of www.overseaslist.com

Where to put your money in Germany
by Jack Dyson

At least three quarters of German houses have been built since World War II, but there are still traditional village homes available in rural areas such as the Rhine and Mosel valleys. Property in former east German states is generally cheaper than in more affluent areas of the country and a keen eye should find plenty to modernise, particularly as various states in Germany offer grants of up to e250,000 as an incentive for buyers to rebuild/renovate historic properties. But overall, the most sought-after rental homes are “‘Zinshaeuser” (which have eight to 20 flats) – especially modernised “Altbau”. These were built between 80 and 120 years ago, have high ceilings and lots of character. They are virtually impossible to get in Frankfurt, but there is still a market in Dusseldorf, Hanover and Berlin. The return rate, according to www.invest-in-germany.de, ranges from 6%-8% a year.

German Property Investors (www.germanpropertyinvestors.com) can help investors with e600,000 or more to invest to get into the market. The firm finds properties, helps investors through the German business process, and guides them through legal and bureaucratic processes. It can also help with financing. More information for those with any amount to invest directly can be found at www.bundesregierung.de and www.invest-in-germany.de. Those seeking exposure to the market via equities might look at Berlin-listed Eurocastle Investment Limited (EZG.GR), an investment firm with a diverse portfolio of real-estate assets, including substantial amounts of recently purchased German property. The shares are on a p/e of around 13 times and offer a yield of 7.6%. And those with delusions of grandeur can buy a castle in east Germany. After the fall of the Berlin Wall, the state found itself in possession of hundreds of them and is now keen to flog them off at any
price to private investors rich enough to renovate and maintain them.
See www.poshjourneys.com for more information.

Kilduff seeks investors for €50m Berlin property fund
Sunday, July 31, 2005 - By Simon Carswell

Elgin Capital, the investment company controlled by Dublin entrepreneur Tony Kilduff, is seeking private equity for a new €50 million fund that will invest in residential properties in Berlin.

Elgin and Merrion Capital plan to raise €5-10 million from Irish investors for a German limited liability partnership they have set up and to borrow the rest of the fund to buy the properties. Investors are being asked for a minimum of €100,000 each for a long-term investment. Members of the Kilduff family are investing €500,000 in the partnership.

The fund is the brainchild of Ronan Kilduff, Tony's son, who with Merrion has organised the partnership. Elgin plans to purchase and manage for their investors between 350 and 1,000 apartments across Berlin.

“It is something new,” said Ronan Kilduff. “It's an untouched market and it looks as if the Irish are only starting to break into this market. Berlin is one of the major capital cities in Europe.

“For us it is a value proposition. The city has the cheapest real estate in the industrialised world.”

A two-bedroom apartment costs between €50,000 and €60,000 in Berlin and the partnership is expecting a rental yield of 7.5-10 per cent on the properties. The Merrion Berlin Property Partnership is expected to raise the equity by the end of September. It will buy apartment buildings in prime areas of the city and also refurbish properties it acquires.

Small amounts of retail properties will also be purchased on ground floors of apartment blocks acquired by the partnership. Some high-quality properties in the city, built in the 1890s, are being targeted.

Elgin has hired two local property scouts to source suitable apartment buildings. The apartments range in value from €40-€120 per square foot.

Berlin, which has a population of 3.4 million, has one of the highest number of rental properties of any European capital; just 12 per cent of the city's population own properties.

Following the collapse of the Berlin Wall, the city enjoyed a building boom which led to a massive increase in the number of new homes in the city's suburbs. Property prices in Berlin now stand at a five-year low.

The level of building has dropped in recent years, creating a more stable market. Given that the level of home ownership in Berlin is lower than in other major German cities, Elgin and Merrion believe there will be an adjustment in the property market with significant capital gains for their investors over the coming years.

The partnership plans to borrow up to 80 per cent of the property fund from a number of German banks. Deutsche Bank, HSH Nordbank and Hypo Bank have all been approached for finance by Elgin. The city's inexpensive properties have drawn Irish investors to the city in recent years, but the Elgin-Merrion partnership is one of the first Irish investment vehicles to buy property in Berlin on a large scale.

Founded in 1994, Elgin has organised property investments in Irish residential and British commercial properties. Tony Kilduff was one of Ireland's first tech millionaires when he sold Kindle Banking Systems in 1991. Since then, Kilduff has invested in the e-learning, software, aviation and childcare industries.

Cheval Properties, which is also controlled by Kilduff, manages the Belfry Funds, a British commercial property portfolio which has been heavily backed by private clients of AIB. Cheval manages properties in Britain worth more than stg£650 million (€940 million).

ImmobilienScout24: Germany’s largest medium for real estate

ImmobilienScout24 is the leading real estate marketplace in the German-language Internet. Based in Berlin, the company has been offering comprehensive services for all aspects of residential property nationwide since September of 1999. The market leader’s real estate site is the one most visited in Germany, with more than 270 million page impressions.

The service provider’s database contains more than 570.000 real estate offers to choose from - including property from auctions and furnished apartments. Searches are free. The offers are posted both by private providers and real estate agents, residential property management firms, housing associations, and building project organizers. The large number of users speaks for the quality of the services: each month, users view more than 45 million online property exposés. Approximately two million unique users visit the site each per month.

These statistics show that ImmobilienScout24 has become Germany’s largest medium for real estate and an important partner for the real estate market in just five years. The potential of the Internet is immense: half of all German households are already online, and three fourths of everyone interested in moving uses the Internet to look for an apartment. In the meantime, the Internet has even become a sales channel for real estate. Nevertheless, only around 30 % of real estate providers use it today. And yet, they could lower the costs for their real estate greatly by using online ads rather than conventional media. ImmobilienScout24 is tapping the demand potential for the real estate sector.

But marketing via the ImmobilienScout24 database offers providers even more advantages: the ImmobilienScout24 software aligns the searches with the property offered in the database and ensures that offers are only forwarded to interested parties. Commercial real estate providers are thus able to target specific groups with greater accuracy, which in turn increases their market opportunities. The unique "search by area” function allows visitors to enter a wish address as a starting point for the property search; the offers are then displayed with an indication of the distance from that address.
Providers not only avoid the wasted effort that nonselective advertising entails, but also benefit from the contact to additional interested parties that the efficient distributive channel of the Internet provides. New customers can be gained regardless of time and place.

ImmobilienScout24 is a professional partner for all real estate providers, be they real estate agents, housing associations, residential property management firms, project developers, building project organizers, or private parties. The marketing time is shortened and the work involved reduced by entering the detailed information for the real estate and the surrounding area, thus creating space for consulting and the conclusion of the contract. Providers do not have to spend time writing up exposés and shipping them. They also benefit from the comprehensive service offer at ImmobilienScout24. For example, they can take advantage of useful checklists, tools for cost calculations, sample texts, and a great variety of information on money and tax issues, the situation of the market, and legal matters.

Providers are charged a flat rate for inclusion in the database - including their individual corporate logo, photos, or city maps. Residential and commercial property, undeveloped land, investment property, vacation cottages, property for auction, complete projects, and furnished apartments for set periods can all be offered. The price is then based on the desired appearance of the exposé, the number of items advertised, and the duration selected. ImmobilienScout24 offers each provider a customized package for marketing around the clock: any provider can advertise a piece of real estate for just 14.95 euros a month. Ads for up to 20 properties can be placed for as little as 139 euro a month, with the option of having a direct link from www.ImmobilienScout24.de to the provider’s own homepage. The price for up to 50 properties starts at 199 euros per month and for the same period of time, up to 80 properties can be advertised for 299 euros.

Of course, providers can also enter and administer their inventory of real estate easily and directly at our web site www.immobilienscout24.de/de/anbieten/. The ScoutManager was especially developed for this purpose.

In the meantime, more than 12,000 commercial and over 40,000 private providers of real estate use the services of the market leader. Our customers from the real estate sector include Bayrische Hausbau GmbH & Co., GAGFAH AG, TLG, Viterra Wohnpartner AG, Deutsche Annington, Thyssen Krupp Immobilien, and Allianz Immobilien GmbH. Other key customers are HVB Projekt, Zapf Wohnen, Aufina/ERA, Baywobau GmbH and HOWOGE, the franchise group RE/MAX, the Real Estate Exchange of Saxony, WIB24, ALLWO AG, GSW (Gemeinnütziges Siedlungswerk) and Deutsche Bank AG (Berlin).

Simple data transfer with a mouse click
Providers benefit from the ease of transferring real estate data with a mouse click: ImmobilienScout24 has data interfaces for all of the common administrative programs used in the real estate sector. With a mouse click, data about property can be transmitted online to ImmobilienScout24. Providers can make a prior selection of which properties they want to market. The software merges the old and the new data. The following administrative programs have an interface to ImmobilienScout24: Ametanet, Ammon, GES, Wohndata, Mareon, Expose-Agent, eMakersoft, Immostar, argos, Flowfact, X-pect, PNET, Maklon, ServiceOnline, MAKLER 2000, Lagler, Exposé, onOffice smart 2.0, GG-Makler Office, Immosolve, UNIWOP/GAP, NOVALIS ImmoWeb XP, SAP-RE, immosuccess, WISO-Hausverwalter, PC-Hausverwalter and ImmoXpress.

Transparency for the real estate market
In addition to the efficient online marketing of inventories, ImmobilienScout24 opens up new prospects in terms of market data and research for real estate providers. By merging supply and demand on one online real estate marketplace, ImmobilienScout24 also generates a plethora of valuable information about the real estate market each month. Direct contact between providers and users and the large number of visitors allow ImmobilienScout24 to query opinions and trends online in a very short time, thus providing a representative overview of the conduct and interests (such as purchasing intentions) of certain customer groups.
These market data can be used for a broad spectrum of analyses:
A historic view of developments
A real-time view of current market activities
The continuation of time series and early detection of trends
The properties in the database have additional information on the local infrastructure so that those looking for real estate are very well informed. ImmobilienScout24 thus provides transparency and benefits to all market participants.

Expansion of cooperative deals

ImmobilienScout24 is expanding its market position in numerous cooperative deals with important associations and companies in the real estate sector. ImmobilienScout24 operates a joint apartment exchange in the Internet along with the Federal Association of German Residential Companies (GdW), the largest umbrella organization for apartments in the real estate sector with 7 million apartments. At www.gutundsicherwohnen.de, GdW allows its member companies to place their offers in the apartment exchange and select some for additional placement in the online marketplace of ImmobilienScout24. The presentation of the GdW apartment exchange with the functions of ImmobilienScout24 was created according to the layout specifications of GdW.

There are other cooperative deals with the Association of German Real Estate Agents (VDM), which recently began handling the column "Focus on Real Estate” at the ImmobilienScout24 site, Bundesverband Freier Wohnungsunternehmen (BFW), RE/MAX Deutschland, Aufina/ERA and various RE state associations.

Numerous advertising partners such as HUK24, the Postbank, Debeka building society, Quelle building society, LBS-Ost, Intodo, Hamburg-Mannheimer, numerous other partners from the construction industry such as Bien-Zenker and YTONG, and content partners such as the specialist journal Immobilien Vermieten and Deutscher Mieterbund make the service offer at ImmobilienScout24 even more attractive.

ImmobilienScout24 is the real estate channel of leading Internet portals such as T-Online, Freenet, Lycos, Capital, Börse-Online, Impulse and MeineStadt.de as well as some 2,000 other partner sites.

ImmobilienScout24 has established itself as the largest medium for real estate in Germany with its wide range of services, offers, and the largest demand by far. Only four years after being founded, the company reached the break-even in 2002 and posted its first positive operative result.

A representative survey conducted in February 2003 by the renowned market research institute TNS Emnid showed that ImmobilienScout24 is the leading real estate portal in the Internet. Commercial real estate providers who use the Internet as a marketing tool were most satisfied with the portal based in Berlin, which also got the highest marks for resonance, the best marketing success, and frequency of use of any Internet marketplace. Hence, ImmobilienScout24 is the largest marketing platform for real estate in the German Internet. More than half of all commercial providers use ImmobilienScout24 to market their properties. According to Emnid, ImmobilienScout24 has the highest response rates with the highest quality. When asked "Which marketplace generates the highest-quality consumer contacts?” 45.1 percent of the providers named ImmobilienScout24. 98.8 percent of all ImmobilienScout24 customers recommend ImmobilienScout24.
The question of name recognition produced even clearer results: 80.2 percent of those surveyed spontaneously recognized ImmobilienScout24, while only 30 percent of those surveyed were familiar with the marketplace that came in second.

The company based in Berlin was taken up in Morgan Stanley Dean Witter’s list of the European Top 50 Web Sites for e-commerce offers as early as in the summer of 1999 for successfully establishing the largest German marketplace for real estate. In November of 1999, ImmobilienScout24 was awarded the First Prize in the Innovation Competition of the specialist journal Immobilien Manager and the newspaper Frankfurter Allgemeine in the category of managing real estate. The leading specialist and online media also found the offer at ImmobilienScout24 to be excellent: not only Wirtschaftwoche and Immobilienzeitung, but also Focus, Capital, Cash, Online Today, Geld Idee, com!-Online, Tomorrow and the two consumer portals dooyoo and ciao.com declared ImmobilienScout24 to be the winner of their real estate exchange tests.

Deutsche Annington Acquires Viterra from E.ON for approx. 7 bn Euros

• Deutsche Annington pays approx. 7 bn euros including debt and provisions
• DAIG and Viterra now have a combined portfolio of about 230.000 flats

Dusseldorf, 17th May 2005 – DAIG Group acquires Viterra from E.ON AG for approx. 7 bn euros. Viterra is a leading private housing company with a portfolio of about 150,000 flats. The transaction is subject to clearance from antitrust authorities as well as approval by the E.ON supervisory board.

"Viterra and DAIG will become a leading company in Germany with respect to size, sector experience and performance. We are very well positioned to further strengthen that position", says Dr Volker Riebel, Chairman of the Management Board of DAIG. "We are committed to safeguarding tenants’ rights which have always been central to our business approach."

DAIG is owned by Terra Firma, the European private equity firm. In addition, Citigroup Property Investors (CPI) has made a significant minority investment in DAIG and will support the growth of the combined business together with Terra Firma. Terra Firma Managing Director, David Pascall, adds: "Viterra is an excellent company. Terra Firma and CPI are experienced long-term investors and we see great potential for growth for the new Group in the coming years."

DAIG and CPI plan to grow the company through investments and will continue to offer tenants the opportunity to buy their flats at attractive prices. Since 2002, DAIG has sold more than 10,000 flats primarily to tenants. This tenant privatisation programme is the most successful of its kind in Germany and will continue to be a key feature of the new Group.

DAIG has acknowledged the "Voluntary Self-Undertaking" ("Freiwillige Selbstverpflichtung") of Viterra to ensure that unit-by-unit sales of flats are conducted in a socially-acceptable manner, so that Viterra can continue current practice under new ownership. The rights of the Viterra employees, especially with regard to all employment-related rights and entitlements, and all prevailing works council agreements remain fully intact without limitations.

www.deutsche-annington.com
About DAIG, Terra Firma, and Citigroup Property Investors
Deutsche Annington Immobilien Gruppe (Düsseldorf) employs some 450 staff and is a leading German housing company. The nationwide portfolio has about 80,000 flats and is based on the acquisition of 64,000 railway flats in 2001. In September 2003, DAIG acquired a majority stake in HEIMBAU AG and its 10,000 flats in Kiel. In addition, 4,500 former RWE company flats were acquired in December 2004.
Terra Firma is a European private equity firm. The current fund has concluded the acquisitions of Waste Recycling Group Limited, the landfill sites of Shanks plc, Odeon Cinemas Group (all UK) and UCI Cinemas (Europe), and of the motorway service provider Tank & Rast (Germany).
Citigroup Property Investors ("CPI") is the real estate investment management business of Citigroup, the leading global financial services company. A unit of Citigroup Alternative Investments, CPI offers institutional and individual investors the opportunity to invest with it in a series of private and public market real estate investment strategies. With more than 75 professionals, CPI manages $7 billion in real estate capital commitments through our New York, Los Angeles, London and Hong Kong offices.

yen, silver, berlin property, jim mellon, Regent Pacific

A professional investor tells MoneyWeek where he’d put his money now. This week:Jim Mellon,chairman of Regent Pacific

When I first wrote for this magazine a few years ago, I suggested selling US dollars and buying euros. At the time, one euro was fetching only about 85 US cents. A great deal has changed since then, not least that the euro has appreciated by about 50% against the US currency. I mention this simply to highlight the importance for all investors of getting so-called macro - or big - decisions right. Don’t just focus on the micro decisions on which stocks to buy, sell and so on - there are many ways to make money elsewhere.
Macro decisions include what currencies to hold or sell, and such things as whether or not house prices are going up or down. Quite often, investors ignore macro decisions and focus only on the micro, which, in my opinion, is a mistake. For example, the dollar/euro trade would have produced a far better return than an investment in any of the major stockmarket indices over the period - and thus by implication most of the blue-chip stocks that compose those indices. Here’s where I’m placing my bets now.
A very important macro decision for people living in the UK and the US is whether or not to buy, sell or hold onto real property. MoneyWeek editor Merryn Somerset Webb has made a convincing case for selling, particularly in the UK, and I absolutely agree with her. All the pointers are towards much lower house prices, catalysed by higher interest rates, oversupply and excessive prices - the latter the result of decades of bull-market house-price moves. This halcyon period has come, or is shortly coming, to an end. The factors conspiring to produce this new bear market in real-estate prices are those that will also constrain equity market prices.

Higher interest rates, slowing economic growth, monumental levels of debt and fairly rich pricing will lead UK and US equities to underperform for some considerable time. I have been a stockmarket bear for a while, and I see no reason to change my mind. A downturn in China’s economic growth rate - and it is coming - will also be bad for commodity prices, and may provide a temporary fillip for the US dollar. The greenback will tend to rise in value against most currencies in coming months. Among freely tradeable currencies, the exception to this forecast will be the Japanese yen, which will continue to rise in value against the dollar.

The only commodities I favour as a medium-term investment are silver and uranium, which will certainly benefit from a renewed emphasis on nuclear power. I believe stockmarkets in the UK and US will fall, perhaps by a quarter or so, over the next few years. In those circumstances, you should avoid most shares, though I am still attracted to the online-gaming sector. One of my recommendationsin the past has been Sporting Bet, but I feel it’s risen enough (about 10 times in two years) and would be best replaced by another Aim-listed firm, BetOnSports (BSS). This is much more cheaply valued and could, I think, rise two or three times from its present level.

Lastly, I like Berlin real estate and have bought about 500 apartments there. The net yield is about 10% and the cost of borrowing less than 4%. And the price you pay per square metre is about a tenth of what you’d pay in London. It’s one for the retirement pot!

Berlin yields can be surprisingly high
Sunday, April 17, 2005 - By Derek Doyle

It is hard to imagine a city more famous or infamous for its role in history than Berlin.

During the post-World War II years, when it was for decades divided in two, west Berlin thrived and the east fell far behind. Since the fall of the wall in 1989 and subsequent German reunification everything has changed, and Berlin finds itself again at the epicentre not just of a German revival but also of the unfolding European project.

Since reunification, the federal government in Berlin has been at pains to recreate this great city as the political and cultural capital of the new Germany. Everywhere there is evidence of the huge sums of money being invested in the city.

From the point of view of infrastructure, the city, as you would expect of a German city, works. It does not suffer from traffic problems or at least nothing comparable to the problems of London or Dublin. Public transport is second to none.

Trains and trams run everywhere and on time, both over land and underground.

On the whole you get the impression that the city is well capable of carrying far more people. This, of course, is in the nature of German planning. The city planners have both the present and the future in mind. The recently opened Hamburg Berlin Express is now the fastest overland train in Europe, bringing Germany's two biggest cities within less than two hours of each other.

For a big European city Berlin lacks an international airport worthy of its size and standing. After the war, the allies created Frankfurt as the financial centre and it developed as an international centre with its famous airport. Plans are afoot however to redevelop Schoenefeld, one of Berlin's three airports, to compete with the big Europeans.

For Irish travellers, Aer Lingus flies direct to Schoenefeld, which is a two-hour flight from Dublin and 20 minutes from Berlin city centre. Ryanair flies from London Stansted to Schoenefeld.

While property prices in Berlin are depressed even by German standards, by Irish standards it is quite inexpensive. It is ironic to note that the availability of credit in Ireland which fuels property inflation here, is directly related to low interest rates, which themselves are due to the depressed German economy.

In fact, the funds used by the Irish to purchase property are to a great extent gathered in Germany, where the population currently saves and will not spend. It is notable that the German banks will not lend to Germans but will lend to foreigners.

What is really remarkable is that despite the low prices, yields are on average at least twice what you could expect in Ireland or Britain.

Take a property in Simon-Dach Strasse, recently sold to Irish buyers. Simon-Dach Strasse is in Friedrichshain, a trendy and popular district just off Frankfurter Allee.

Built in 1900, the property offered 20 apartments, all let, together with three business premises, two of which were let.

All the units had been renovated within the last decade and there was room for further development. At an asking price of €1.35 million for the lot, the current net rent is €106,000, a yield of about 8 per cent. Higher up the market there is a house comprising 28 apartments and five business premises on the market for 14 times the annual net rent. This property at Uhland Strasse is close to the Ku'damm, west Berlin's trendy shopping area, is a stunning example of early 20th century Berlin architecture and is in pristine condition.

There are also deals on offer for the more modest investor. Take the area known as Mitte, meaning the middle, which encompasses the Federal government and consequently includes the embassy belt, various ministries and associated government operations.

A property on Hannoversche Strasse near the famous Charité Hospital is on the market for €299,000. The property, a two-bedroom apartment measuring 146 square metres, was built in 1998 and would be expected to yield about 8 per cent. The area known as Charlottenburg was the premier area in old west Berlin. A one-bedroom apartment there on Knesebeck Strasse, measuring 73 square metres, is on the market for €149,000.

A new build in Prenzlauer Berg, a fashionable suburb and the area with the highest birth rate in Europe, is on the market for between €129,000 for a 50 square metre property and €499,000 for a 200 square metre unit.

Moving up the scale, there are also a number of apartment complexes available.

Built at the turn of the last century, these building are known as houses and comprise anything from ten to fifty apartments together with business premises on the ground floor. A property on Niederbarnim Strasse comprising ten apartment and two business premises is on the market asking €425,000. Measuring 824 square metres it is completely let and its current net rent is €40,000.

A property on Bochumer Strasse in Tiergarten comprising 33 apartments and two business premises and measuring 1,658 square meters is asking €970,000 and has a current net rent of €100,000. Currently there are three apartments not let.

Also available in Berlin are distressed properties, which are the subject of repossession by the banks. The main reason for the current availability of distressed property goes back to reunification itself. After the wall came down, the Germans uncharacteristically got carried away on a wave of euphoria.

Prices went through the roof as investors clambered to buy property in Berlin.

Now the party is over and the banks find themselves overloaded with debt.

For them the answer is to off-load and since 2002 that is exactly what they have done. German banks offloaded bad loans with a face value of $16 billion last year.

The American fund Loan Star was the biggest buyer, purchasing up to two thirds of the loans. Returns are estimated at 22 per cent and are attracting other major world players.

It is possible for smaller investors to benefit from the purchase of distressed properties from the German banks, but knowledge of German law will be vital if this is a road you intend to go down.

Generally speaking a foreigner can raise up to 80 per cent of the purchase price of a property from the German banks, and even higher on bigger purchases. The tax, our equivalent to stamp duty, is 3.5 per cent, notary costs come to about 1 per cent and then there is the commission to the agent. They usually ask in the region of 6 per cent plus Vat but that is generally negotiable leaving soft costs of around 10 per cent. Property management companies would look for between 3 and 5 per cent of net rent for management services.

Rental income would be subject to income tax at 45 per cent but all costs can be offset against the figure. Berlin has all sorts of tax breaks in certain areas so tax can be reduced further.

Ireland enjoys a double tax agreement with Germany and for those willing to hold the property for ten years or more there is no German capital gains tax at all.

If there is a hitch then it is that the Berlin market cannot promise double-digit capital appreciation as Warsaw and Budapest claim to do.

However, it should be noted that Germany is an economy in recession.

Inevitably that will change and the property market will reflect this. Many observers believe that 2004 was the low point for Berlin property.

Derek Doyle is an Irish architect who has been based in Berlin for 12 years. He is managing director of German Property Investments, a company set up to introduce Irish and British investors to the German market. He is at 00-49-1-7623630719.

Germany, Europe, buying, prices. The best property market in Europe

Which is the best property market to invest in now? It isn’t Spain, it isn’t France and it certainly isn’t Bulgaria or Hungary, says Merryn Somerset Webb. It’s Germany...

For years now the UK property market has been making investors vast fortunes. Prices have risen some 500% since 1992, meaning that those able to leverage themselves up and keep buying and selling have been able to multiply their capital many times over. But this just doesn’t work here any more. Last year, property prices stopped rising in the UK, making trading in houses pointless – particularly given how high the costs of doing so have risen, thanks to Gordon Brown’s fiddling with stamp-duty rates. So where should experienced property investors take their skills today? This is a tricky one. Britain isn’t the only European country seeing house price rises level off.

In Spain, prices rose over 15% last year (and many UK investors have made significant amounts of money by flipping properties). But oversupply – particularly along the Costas – and falling demand mean the number of transactions and prices are slowing considerably. It’s the same all over Europe, says Cheryl Taylor in The Business. In Finland, house price growth is down from 8% last year to more like 3% in the first part of this year. In Greece, prices have levelled off as infrastructure projects (many of them the legacy of the Olympics) have made new areas accessible and “softened the impact of rising demand”. And in Italy, the demand for housing loans in the first quarter was lower than expected, which “is expected to translate into lower prices”, says Taylor. Mortgage market growth is also slowing in Spain and Ireland.

Be wary of Eastern Europe
No wonder, then, that investors are turning towards the markets of eastern Europe, such as those in Bulgaria and Hungary, where prices look relatively cheap and sales people boast of the fabulous yields – 10% plus is on offer for brave buyers. But this may not be the place for those used to Western markets. The pricing systems can be opaque, there is often no established infrastructure, legal or otherwise, and there is often title risk too – how do you know and how can you prove you own a house you think you’ve paid for? The risk element is hard to quantify in emerging markets of any kind, and that is why prices are low and yields high – to compensate for the risk. These houses are cheap for a reason and they may well just stay that way.

But start buying Germany
The good news is that you can get almost the same kind of property yields as you can in Bulgaria in one of western Europe’s biggest economies – Germany. Germany, as analysts at Merrill Lynch point out, “has conspicuously failed to join in the global housing boom of the last ten years”, thanks to the dismal state of the German economy. Today, it’s one of the most depressed housing markets in the world. Germany has the lowest level of home ownership – 44%, according to Merrill Lynch – in the industrialised world and prices have stagnated or fallen for the last decade (in the year to the end of the first quarter of 2005, they fell 1.3%). The result is that they have fallen sharply relative to rents and incomes – since 1980, German housing affordability has improved more than in any other industrialised country.

Today, says Ilya Spitalnik of German Property Investors, you can buy property in Germany’s major cities and get a yield of 8% and sometimes 10% – at a time when borrowing costs in Europe are around 4%. German property is not just cheap relative to property elsewhere in Europe, it is also cheap in absolute terms.

Spitalnik is not the only person to think so. Much of Germany’s housing stock has long been owned by corporations and regional and central government. But faced with pressure to cut their costs, these groups have started to sell down their holdings. And guess who’s been buying. Not the occupants, but large-scale foreign investors “attracted by low prices and respectable yields”, says Merrill Lynch. In 2001, Nomura bought 64,000 homes from Deutsche Bahn, the German railway firm. Last year, a US private-equity firm, Fortress, bought 80,000 flats from the state pensions administrator and Morgan Stanley picked up 48,000 flats from industrial group ThyssenKrupp. In May, UK private-equity firm Terra Firma got in on the game with a e7bn purchase of 150,000 flats from German utility firm Eon. And MoneyWeek Roundtable member and Isle of Man-based investor Jim Mellon has bought 500 apartments in Berlin. The smart money from all over the world appears to be heading for Germany.

Will prices rise?
However, accepting that prices are low is one thing – finding a reason why they might rise is another altogether. What catalysts could possibly get prices moving? There are three, says Merrill Lynch. First is the passing of large amounts of the German housing stock into private institutional hands. These groups are likely to be agents of change as they try to realise the value of their portfolios by encouraging wider home ownership – Terra Firma is already linking up with mortgage providers to finance and sell properties to tenants, for example. And the tenants are willing to buy because, with interest rates this low, their mortgage payments are no lower – and sometimes higher – than their rent payments. Second is the possibility that German banks will become more focused on mortgage lending as a real single market in financial products spreads across the EU. Right now, they offer far fewer mortgage products and across a narrower range of incomes than banks in most other European countries. They also like to lend only 10% of the purchase price of a house and to see a track record of monthly savings for up to six years before they hand the cash over. Finally, and most vitally, a rise in house prices is going to need “some sort of wider recovery” in Germany’s economy.

This may well be on its way, says Sven Lorenz in The Zurich Club Communiqué. Remember Britain in the 1970s? It was mired in high unemployment, falling property prices and political gridlock, and was lagging far behind other European economies. Then along came Margaret Thatcher to generate an economic revival “that no one would have ever deemed possible”. Central London houses that could have been picked up for a mere £10,000 in the 1980s now go for £1m plus. The same could be about to happen in Germany: after 12 years of “continued economic crisis”, Germans are worn out. Their per capita income is below that of the UK and the European Union average and 11% of the population is on the dole – a rate last seen in the 1930s. They know something has to change and that’s why, at the next election (coming up in September, see box, page 20), they may vote not for Chancellor Gerhard Schröder and his Social Democrats, but for the opposition, the more free market Christian Democratic Union party (CDU), led by Angela Merkel.

This would put Germany in a very interesting position. Right now, the lower house of the Bundestag is controlled by the Social Democrats and the upper house by the CDU, with the result that the two spend most of their time blocking each other’s decisions and creating a kind of administrative gridlock. If Merkel were to win in September, this would put both houses in the hands of the CDU, which could allow them to implement “a strong dose of reform”, something that could, in turn, kick off a German economic revival.

Spitalnik, who says he is seeing a huge amount of interest in German property from both UK and Irish investors, is convinced that the property market in Germany has bottomed and will soon be turning up. After all these years of falling prices, he says, there are few people left to sell their houses, so prices are unlikely to fall further. Come in now, he says, and you’ll catch the bottom. You could make the same amount of money in the German market as you would have made if you’d started investing in UK property back in 1992/1993. It is “a major turnaround play”.

Which cities are the best bets?
Spitalnik’s favourite investment city is Berlin, which is not only creative (it’s well known that artists, musicians and designers priced out of London, Paris, Rome and Barcelona have been flocking to Berlin to live), but is at the centre of the reunification effort. As such, it offers a huge variety of investment opportunities and such high yields that investors should make their costs back and a reasonable profit even without the expected capital appreciation coming through. Other cities, such as Frankfurt, Stuttgart and Hamburg, also look good. Rents and prices are currently stable, but the number of new properties being built has been decreasing over the last seven years and supply is restricted, suggesting that a small rise in demand could push prices up disproportionately.

None of this is to say that the German market comes without problems. It is, points out Spitalnik, immature. As the volumes of transactions are low compared with markets such as those in the UK, pricing can be erratic, with similar properties selling for wildly different prices and brokerage fees very high. They range between 3% and 6% and are usually 6% in Berlin, although these are ordinarily split between the buyer and the seller. This makes the costs of buying pretty high: once you’ve added up the brokerage fees, stamp duty of 3.5%, notary fees at 1.5% (you must use a notary in Germany) and legal fees, you can expect to pay a minimum of 7% and usually a great deal more (the average is 10%-12%) of the value of a property just to get into the market.

This should change as money floods into the market and volumes push brokerage prices down to more reasonable levels, but for now it can look offputting. On the plus side, there appears to be a reasonably favourable tax regime in place for non-resident investors. If you hold a property for ten years, for example, it can be sold free of capital gains tax, and rental income is not subject to a withholding tax.

But if the bulls are right and the current German property market is akin to that in the UK in 1992, the amount you’ve paid out in fees and the level of taxation you’re hit with will fade into irrelevance next to the profits to be made in the market. It won’t happen over night, says Lorenz, but “the odds are that in five years investors will look back on those pre-election days of September 2005 and wish they’d had more faith in Germany”.

Where is the Sophisticated Property Investor Putting his Money?
By Bruce Stronge The Traditional Favourites

Over the last five to ten years, UK investors buying property abroad have generally stuck to the traditional favourites Spain, France and Italy. With prices a fraction of those in the UK and a guarantee of more sunshine, these markets offered plenty of scope for capital appreciation, rental return and holiday home use. However as prices have steadily risen in these countries, yields have hardened in response and an eventual over-supply particularly in parts of Spain has occurred. In today’s environment property investors are looking further east for yield and capital appreciation opportunities.

Emerging Markets - A year ago ten more countries joined the EU, expanding not only the Union, but the hunting ground of the international property investor. Most investors have come to the conclusion that the market cycle here in the UK is at it’s peak, and the more sophisticated investor has already started moving his money into the new EU countries. Many astute investors started buying there a year or two before EU accession, particularly in more developed cities like Prague and Budapest where the real estate markets were relatively more mature. So prices in these cities had already increased by up to 25% in the year up to May 2004, however there is still a long way to go especially in the other capitals of this region.

It’s Just Economics!
Putting your money into an emerging market surely has to be profitable because by the very definition of ‘emerging’, you should assume growth, and therefore return. EU accession is a massive catalyst to the growth of an economy as the EU is committed to backing these countries in a bid to creating comparable economies to those of it’s current members. Government incentives, new political regimes and tax reforms are creating an ideal climate for foreign direct investment, higher employment and GDP growth, which all directly affect the property market.

The relative attractiveness of the older EU capitals from a corporate location point of view is changing according to a DTZ report on the Emerging EU economies. The report concludes that Bratislava, Berlin, Prague and Budapest will be the main beneficiaries in this new economic geography mainly due to their location and catchment areas, the associated low costs especially labour, skills base and the economic growth prospects of these four cities. In less than a year since the ten countries joined the union this is already evident, particularly in Bratislava as Slovakia wins some of the biggest foreign investment contracts in the region..

Going Forward in 2005
I think most would agree that for long term steady growth complemented by relatively few risks investing in bricks and mortar at home in the UK cannot be beaten for a good solid pension plan. Over the last 10 years the more adventurous have strayed off the beaten path to Spain, Italy and France in search of holiday homes and to diversify their portfolio. There is now however a new and far more exciting playground for us property investors which is sponsored by the European Union, has the most diverse culture in the world, it’s experiencing unrivalled GDP growth and it’s property market is urrently way undervalued.

Not only has the UK property market levelled out, it looks to stay that way for the next couple of years and the traditional overseas investment spots seem to have lost momentum and have been overshadowed by something bigger. The pioneers have cleared the stones from the road to Eastern Europe and 2005 is a great time to arrive at the party!

Bruce Stronge is one of the founding partners of Slovak Investments, a company offering investors the complete real estate solution including research, investment property deals, property advice, tax consultancy, legal and mortgage contacts through to after sales care and property management..
Slovak Investments was set up in order to fulfil the needs of a large number of property investors who might not have the time, experience or contacts to profit from the current EU and in particular the Slovakian real estate boom. See our website for more information Slovak Investments - where you can subscribe to our free Slovak property newsletter and receive alerts when new property deals are about to be released.

Businessweek Online
Will Germany Give REITs A Chance?

They could boost a moribund property market -- if lawmakers give the go-ahead

The real estate investment trust has long been an established feature of the property market in the U.S. REITs, which usually manage commercial and residential properties, are traded like any other stock. That's a nice idea -- but unfortunately not one many Europeans can benefit from. Advertisement

REITs have been pretty scarce in Europe because of a lack of enabling legislation. German investors, for example, instead have $118 billion tied up in open real estate funds. Open funds are not traded like stocks. Investors who want out receive a fixed price based on the assessed value of the portfolio. That arrangement is fine if the fund is spinning profits. But if the underlying properties are struggling and investors are exiting en masse, then the fund managers may have to sell off assets at a loss to cover the fund's obligations. "There's always a discount on an emergency sale," says an executive at a major real estate company in Germany who asks not to be named.

The flaw in these open funds is becoming glaringly obvious as some real estate ventures feel the negative effects of Germany's dismal property market. And that's helping fuel efforts to launch REITs as soon as 2006. If the drive is successful, real estate holdings could be packaged as publicly traded companies that would pay dividends from rent proceeds and property sales. And the increased liquidity and transparency of being listed on a stock exchange would likely bring more investors -- and properties -- to the market.

What about the existing property funds? Confidence in them suffered badly in December. That's when Frankfurt-based DekaBank, which is owned by Germany's public banks, disclosed that outside auditors valued the holdings of one of its main funds at more than $900 million less than did the panel of experts used by the bank. As investors fled the fund, DekaBank was forced to sell buildings, including Lloyd's headquarters in London, and pump in $2.6 billion in cash. DekaBank also fired the fund's top managers. Deka, which says the valuation gap is not as grave as outside auditors maintain, has announced a plan to stabilize the fund, including a promise to buy out any investors who want to sell their stakes.

UNSHACKLING VALUE
Deka's problems are casting a shadow on other real estate funds, which have been marketed as low-risk, steady-return investments. Last year net new investment in Germany's open funds plunged to $4 billion, from $18 billion in 2003, as investors reacted to negative headlines generated by DekaBank. So far, no other funds have disclosed problems on the same scale as Deka. But overall returns of German open funds are at a 25-year low of 3.3%. That compares to an average return of 4.65% in the last decade. And even healthy funds could face serious problems if investors panic and head for the doors. Critics say funds have been too slow to open their books and reassure investors everything is in order. "The only way to restore trust is with absolute openness," says Stefan Loipfinger, publisher of fondstelegramm, an investor newsletter.

That's why real estate specialists are looking for new ways to unshackle the property market with an investment vehicle that's more attractive to investors. REITs would be more liquid than open funds because they trade daily on stock exchanges. And the funds would also be subject to stock exchange rules, which would force them to disclose more information about their holdings to investors. "The stock exchange has the fundamental advantages of transparency, equal access to information, and fair pricing," says Philipp Härle, an attorney in the Berlin law firm Tilp who frequently represents people who believe they have been ripped off by banks.

What's more, REITs would allow German companies to spin off their often substantial real estate holdings without paying prohibitive capital-gains taxes. In fact, proponents of REITs argue that Germany would get a new investment product and create thousands of jobs in the financial-services industry. Given that Germany's property market is valued at an estimated $9.5 trillion, the potential market is huge. That would be a boon for Germany's financial center, Frankfurt. Fans of REITs are keen to launch them as soon as possible to make the city a trading center before London, its archrival in Europe, gets into the business. Britain does not yet have REITs, but market watchers expect the country's parliament to pass a law permitting them to be set up as early as next year.

REITs would give corporations another sales channel for offloading assets, freeing up capital for their core businesses. And that could be good for the whole German economy. Last month, Dusseldorf-based ThyssenKrupp sold some 48,000 apartments, left over from the days when the steelmaker provided housing for workers, to investors including Morgan Stanley (MWD ) for $2.8 billion. More companies would unload property if they had the option of using REITs, and investors would gladly snap up these assets. "It would be fantastic for the market to also have this instrument," says Norbert Müller, head of German capital markets at real estate consultant and services provider Jones Lang LaSalle (JLL ).

At the same time, there's no question those who favor REITs see them as a way to attract foreign investment and help stabilize Germany's fragile real estate market. A slow economy and massive overinvestment have led to office vacancy rates of 17% in cities such as Frankfurt. REITs wouldn't do much to conjure up tenants, but they would provide funds for a more liquid market to dispose of assets. "It will drive up prices," says Geza Toth-Feher, a lawyer at Paul, Hastings, Janofsky & Walker in London who follows the market. That's why REITs legislation has support from both banks and investors, who hope a new law will go into effect in 2006. "There are no major antagonists," says Klaus Droste, managing director of global corporate finance at Deutsche Bank (DB ), who leads industry lobbying efforts.

Still, the legislation isn't a done deal. Backers and government officials are still trying to figure out how REIT dividends should be taxed. The government won't want to lose tax revenue, but foreign investors aren't used to paying German tax on stock dividends. One solution may be a flat tax of 20% or so on REIT dividends paid to foreigners. And there is still a risk that Finance Ministry officials will block approval. Plus, as with any law, politics could affect the outcome. Sale of German property to foreigners is still a sensitive issue, especially when big blocks of apartments are involved.

Proponents are anxious to win passage fast, before the 2006 national election campaign gets going and the legislative process comes to a standstill. "We have to do it this year," says Siegmar Mosdorf, a former senior aide to Chancellor Gerhard Schröder who is working as a consultant to REIT advocates. Failure of the legislation would be a serious blow to Germany's real estate industry, which has not had a good run since the early 1990s. REITs are hardly the whole solution to the real estate slump. But if they could help avoid debacles like DekaBank's, that alone would be a major achievement.

By Jack Ewing in Berlin

Business & Economics, Deutsche Welle
Foreign Investors Turn to German Property Market

British and American investors are turning to the German residential property market due to low euro zone interest rates of two per cent and the fact that German house prices have hardly risen in the last 15 years, making mortgage payments equivalent to or less than rent levels. John Carrafiell, head of European real estate at investment bankers Morgan Stanley told reporters that the boom in German property was the investment opportunity du jour during a speech at the annual MIPIM property trade fair in Cannes on Wednesday. Carrafiell's comments echoed a recent report by the Royal Institute of Chartered Surveyors which described the German housing market as a "long-term stagnant market which appears to be picking up as owner-occupiers increase their mortgage demands." The report also found some regional differences, with East Germany still afflicted by oversupply of housing, whilst house prices in cities like Munich and Frankfurt have seen moderate growth.

Morgan Stanley Real Estate to expand its business in Germany

Frankfurt, March 08, 2005 — Morgan Stanley Real Estate today announced at the MIPIM property conference that it will further expand its investing business in Germany by establishing a regulated real estate investment management company that will offer institutional and retail investors access to core real estate investment products. The Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) has authorised Morgan Stanley to launch a Kapitalanlagegesellschaft (KAG), to be known as Morgan Stanley Real Estate Investment GmbH. The KAG will manage investment capital in a variety of funds on behalf of institutional and retail investors in Germany seeking to invest on a global basis.

With this move, Morgan Stanley Real Estate is continuing the strategy it has already successfully used in other countries, which is to broaden the range of its core real estate products organically or through appropriate acquisitions, such as the acquisition of US real estate investment businesses from Lend Lease Corporation in November 2003.

Speaking at the annual MIPIM conference, John Carrafiell, Head of Morgan Stanley Real Estate in Europe, said: "We believe that Germany is one of the most interesting markets in the world. Institutional and private investors invest in real estate here more than in any other country, and have invested around €260 billion in real estate funds to date, an amount comparable to the market capitalisation of all REITs globally."

"In the light of this strong demand, we plan to offer our own core products in Germany in the future. To date, in Germany, we have been active largely as advisors and by acquiring non-performing loans and considerable residential real estate portfolios. Going forward we will pursue a broader strategy in which we continue to invest in the German real estate market and also offer private and institutional investors in Germany the opportunity to invest in global real estate."

"We are planning to launch two new products - (i) a fund for institutional investors - or Spezialfonds - and (ii) an open-end real estate mutual fund for private investors. The institutional fund will be launched soon. The mutual fund is expected by the end of 2005. Morgan Stanley is seeking distribution agreements with German financial institutions, insurance companies and fund distributors", said Carrafiell.

The mutual fund will invest globally and the institutional fund will focus on the Asian-Pacific markets. "Morgan Stanley has 120 dedicated real estate professionals based in Asia and the KAG can rely on this strong team", said Carrafiell. Only recently, Morgan Stanley Real Estate Funds acquired the headquarters of Mitsubishi Motors in Tokyo for approximately US$1.3 billion.

"Currently, we are seeing a paradigm shift with the open-end real estate funds in Germany. While a couple of years ago many funds invested only or predominantly in Germany, today they increasingly make use of the enhanced investment possibilities abroad", said Carrafiell.

Morgan Stanley Real Estate has a global presence, with 450 employees in 12 countries. In addition, the company can rely on a global network of Morgan Stanley offices in 28 countries. In 2004, the Morgan Stanley Real Estate Funds, together with DIC Deutsche Immobilien Chancen, acquired a portfolio of 57 assets from the Frankfurter Sparkasse. In addition, the Morgan Stanley Real Estate Funds and their partner, Corpus Immobiliengruppe, acquired ThyssenKrupp Wohnimmobilien GmbH, representing approximately 48,000 apartments. The purchase price was approximately €2.1 billion. Morgan Stanley is also active in the non-performing loans market in Germany, with the Morgan Stanley Real Estate Funds currently closing the acquisition of a real estate loan portfolio from Hypo Real Estate Group with a volume of approximately €394 million.

Poor, sexy Berlin: the failure of urban planning
Reason, Dec, 2004 by Dave Copeland

ON AN ENGLISH-language walking tour of Berlin--before the Irish tour guide can deliver his own rant against the misguided urban planning at Potsdamer Platz--a Vietnamese woman points to a triangular skyscraper across the square that was supposed to be the central focal point of "new" Berlin.

"That building? The way the corner points directly at the square?" the woman says. "That's bad feng shui."

That pleases the tour guide, who goes on to describe the square as a failed attempt to convert a bombed-out wasteland, left untouched throughout the Cold War, into an artificial center of commerce. But the visitor's statement probably wouldn't sit well with the Berlin city planners whose heavily subsidized efforts to make the city the economic capital of the European Union have faltered.

Immediately after the Berlin Wall fell in 1989, there were glimmers of hope in the form of private investment. Broadcast companies set up bureaus in the newly reunited city, and Western businesses looked for space to tap into the formerly closed-off markets of Eastern Europe. Overzealous government officials took a page from the American urban planning playbook, forging "public-private partnerships" to offer subsidies to seemingly anyone who wanted to build an office tower or a luxury apartment building. The large sums of government money, scantily supplemented by private funds, fueled a building boom that lasted through much of the 1990s. Even today, the Berlin skyline is littered with construction cranes, and signs in both English and German offer dirt-cheap rates on never-been-used apartment and office buildings.

But even as the building boom refuses to die, owners of some new apartment buildings contemplate tearing them down. The cost of maintaining and securing the unlived-in structures is becoming too much. The broadcast companies, which had planned to invest in Berlin in two waves, never sent the second influx of jobs and are scaling back the work force they did send.

"You just can't merge the East and West German economies like that and expect success," says Pieter Judson, a historian at Swarthmore College who has studied the social costs of reunification and postwar reconstruction. "It's being built up as a symbol. They want to attract new business and industries, but it's going to take years to happen, and in the meantime the government is just pouring more and more money into these projects."

The symbolic center of Berlin's excess is Potsdamer Platz, which was once Berlin's equivalent of Times Square. With beer halls and stores selling everything from the latest fashions to gourmet foods, Potsdamer Platz became a central meeting point for pre-war Berlin.

By the time the Berlin Wall fell in 1989, however, Potsdamer Platz was a literal wasteland. More than 80 percent of the square had been destroyed in World War II, and there had been no time to rebuild it before the wall and its death strip cut through the heart of the district in 1961. East Berliners stayed away, and West Berliners were reluctant to build anything in the wall's shadow. Having been handed a clean slate by the German Democratic Republic, Berlin city planners came up with a post-reunification vision that was intended to recreate the pre-war Potsdamer Platz with a decidedly 1990s twist. Between 1997 and 1999, 17 major buildings designed by internationally renowned architects were completed on the site, which was developed by Daimler-Chrysler and Sony. If all of the construction materials used to rebuild Potsdamer Platz were loaded on rail cars, the train would stretch 5,0000 kilometers.

With thousands of square meters of office space, 8,000 new housing units and five multiscreen movie theaters in a 50-meter stretch, Potsdamer Platz was to be the symbol of the "new" Berlin, which German officials hoped would emerge as the cultural and economic capital of Europe. On paper, Berlin became increasingly attractive not only as a result of the fall of the Soviet Union but also because the eastward push of the European Union created new ties to developing economies in Poland, the Czech Republic, and Hungary.

Or at least it seemed attractive to German planners. "All of the sudden [in the early 1990s] Berlin is going to become the de facto center of Europe," explains Fariborz Ghadar, director of Pennsylvania State University's Center for Global Business Studies. "Germany suddenly has a much more dominant role. The United Kingdom is not really seen as Europe, and French influence is seen as having been reduced, so the Germans just poured money into Berlin like crazy. They anticipated Berlin being the big center of Europe, and it just hasn't happened yet."

Ghadar thinks part of the problem is that there are already a number of relatively strong regional economies in Germany. Berlin has to compete not just with Paris and London but with Frankfurt, Munich, Hamburg, and Cologne.

"I think the reason it hasn't happened for Berlin yet is that the Germans are a little gun shy about articulating [their goal of European leadership] too strongly and the French are just adamant about Paris being the center of the world," he says. "If it's going to happen in Berlin, it's got to happen by market Mechanisms," not planning.

Berlin is the perfect storm of urban planning gone wrong: too much government money, too much top-down planning, and too great a desire to build a tourist attraction masked as a symbol. So far, the top-down planning model has produced what is at best a tourist trap, at worst an outright failure.

Perhaps that's because Berliners have never seemed to want a traditional central meeting place. Berlin's history reaches back 750 years, and even before the forced division of the Cold War, it was more a collection of 23 urban districts than a metropolis with a distinct town center. Even though Potsdamer Platz drew 20,000 cars daily in the early part of the 20th century, making it the site of Europe's first traffic light in 1924, Berliners still had a strong degree of district pride, which was only strengthened by the city's Cold War experience.

In short, creating a common city center for all 3.4 million contemporary Berlin residents is impossible. As a major international city, it's too big, too unwieldy, and too important to have just one busting town square.

"The idea was to turn this into a lively space," says Christian Tuschhoff, a Berlin resident since 1985 and a visiting political science professor at Emory University in Atlanta. "But Berliners have not moved there, and all the flats are empty. They don't find this an attractive magnet" Planners, he concludes, "created something artificially."

Berlin isn't the only city to learn these urban planning lessons the hard way. Granted, NewYork still has its Times Square, but it's more a destination for tourists--much as Potsdamer platz is becoming--than a place where people want to live. And it's next to impossible to single out any one residential or neighborhood business district that defines any other major urban area, whether in Tokyo, Los Angeles, London, or Moscow. Contemporary urban growth patterns have turned many cities into collections of places, which combine to create an overall urban identity. Surely it's no accident that the Berlin districts that are doing best are also those that have been thus far ignored by city planners.

In Mitte, a district in the east that has been left relatively untouched, trendy restaurants jostle for space with student-dominated bars, while back streets offer small cafes and one-of-a-kind apartments. With five major thoroughfares crashing into each other at a central square, it is an urban planner's nightmare--gritty, chaotic, and full of businesses ranging from coffee shops to Thai restaurants. The major difference between it and Potsdamer Platz: It's crowded with a healthy mix of tourists and locals, as well as small, one-of-a-kind shops and restaurants.

Berliners think of themselves as a member of a district, not as a member of Berlin," Tuschhoff says. "Berliners will not go to Potsdamer platz unless they have to. They will shop and live and confine their daily lives to the districts, and that prohibits the city life of a true metropolitan area from developing." Berliners--particularly those who were in the east before the wall fell--talk about the strong sense of neighborhood pride, neighbors helping educate each other's children, weathering food shortages, and, on occasion, plotting an escape to the west.