Public Property Companies in Germany are just Getting Started

Published on 2014/12/10
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The planned merger of Deutsche Annington and Gagfah is not the first of its kind, as it comes in the wake of the GSW/Deutsche Wohnen merger. Moreover, a series of smaller listed housing companies is well under way, and is set to continue.

Do you remember the debate surrounding German REITs a few years ago? At the time, the left wing of the Social Democrats managed to get the residential REITs banned. It made Germany the only country in the world to outlaw REITs for existing flats. The reason behind this piece of legislation was (once again) the spin that the German Tenant Union gives to the concept of “social justice.” Ironically, listed residential property companies have nonetheless become the dominant vehicle among the listed property companies with a combined market capitalisation of approximately 24.86 billion euros. Thank goodness, banning REITs failed to stop anyone.

Other listed residential property companies will hit the market soon enough. Smaller companies are in the process of stocking up on housing units – cases in point being Grand City, Adler or Westgrund.

I find it hard to fathom the motives of Germany’s institutional investors! 95% of the shareholders of the major residential property companies hail from abroad. They are obviously smarter than many of the German players. Germany’s equity investors sold off the major part of their housing stock roughly ten years ago (naturally, at a time when prices were at their lowest). Nearly all of them (with the exception of Gerling) were on the selling side back then. Housing was considered dull and unprofitable. In recent years, though, some have begun to reinvest in residential property (now that prices have soared).

The prudent ones among the institutional players invested through Patrizia, e.g. in the Bavarian housing company GBW AG. The share price of Patrizia has tripled since 2011. Or they invested in institutional residential property funds managed by specialists such as Wertgrund, Patrizia, d.i.i. or Industria. Others invest in housing estates in their own right, or pursue new property developments in the residential sector.

So why, pray, do they ignore listed residential real estate companies? Insurance companies, superannuation schemes, and foundations across the board keep professing their intention to expand their housing portfolios. Yet they seem to commit themselves a penny at a time. What exactly is the reason for a group such as Allianz not to step up its investments in residential property, e.g. by taking over companies like GSW or Gagfah? Why not indeed? What is holding back other big players such as Ergo or Gothaer? Acting on this opportunity would have significantly boosted their residential property quota.

It is perfectly normal for equity investors in the United States or in Asia to invest in listed real estate companies (especially in REITs). In Germany, sadly, this remains a rare exception. Even sound REIT funds – and they do exist in Germany – are more or less ignored. Just recently, the SEB REIT fund had to be dissolved again for lack of interest among investors.

The dilemma in Germany is this: institutional investors often show a very very simple mindset: “Real estate = safe. Safe = lowest possible volatility. equities = volatile. Therefore, please spare me with real estate equities!” Of course, it is an absurd way of thinking. People like Warren Buffet shake their head over anyone equating “volatile” with “unsafe.” It is an equation that bespeaks a simplistic mindset.

If you chose to have your real estate stocks valued by a surveyor just once a year instead of subjecting them to the instant valuation of the stock exchange your volatility would virtually flatline. But since when does the fair market value of the underlying asset depend on the way it is packaged (e.g. in an institutional fund rather than a listed public company)? In what way is a given asset improved if you appraise it less frequently, making it seem more stable and thus less volatile? And how could apartments be worth less just because they are looked after by the professional management of a listed property company rather than by an in-house apartment of an insurance company?

Another point I’d like to make: German investors with massive commitments in public property companies is not the only thing I’m missing. There is also a lack of large listed commercial property companies with a keen focus. Aside from Deutsche Euroshop, there are very few, small players in the retail segment, but among these are some with a rather sound performance, such as VIB. The office sector is left without its top dog after the demise of IVG. Could Deutsche Office take its place?

In the coming years, I’m not only expecting the company to go ahead with an IPO next year while also expecting further takeovers in the housing company sector, but also expect new public commercial property companies to be formed. When will we see major retail REITs? When will we see the big-ticket office REITs? And where is the REIT for corporate real estate and logistics real estate?

Here is what I think: All of these vehicles would long be up and running if Germany’s institutional players asked for them. Unfortunately, this has not been the case. At the moment, those who buy into German public property companies are almost exclusively Anglo-Saxon investors (with some Swiss and Dutch investors thrown in for good measure).

That is why it delights me all the more to see the formation of major public property companies such as Deutsche Wohnen/GS and Deutsche Annington/Gagfah, because these companies drive home the point for all and sundry: The future of public property companies in Germany has already started.

About the Author

Dr. Rainer Zitelmann is one of the leading experts for the strategic positioning and communications of companies.