Studie, Koreanisch, 2 Seiten, Sandfires Ltd.
Autor: Florian Behr
Quelle: Noble Asset, Magazine for Real Estate Leaders, Issue 67, April 09
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Sandfires Ltd. Property & Investment Consulting
The following Article will be published in the Korean property magazine “Noble Asset”, issue 67, April 2009
Germany, located in the heart of Europe is one of the most strongest economies in Europe and presumably the leading country within the European Union. With 82 million inhabitants Germany achieves a GDP of nominal 3.322 Billion US$ (means 40.410 US$ per head; for comparison: South-Korea: 19.750 US$ p. head).
A BBC-study (13.000 people in 21 countries were asked) , published in February 2009, states that Germany is internationally accepted as the country having the greatest influence on the world’s global politics.
How was it possible for a country being devastated and economically nearly dead after the loss of the second world war in 1945 to come to this high life standard, enormous productivity and worldwide best reputation?
The answer on that is fundamentally based on the introduction of the “social market economy”, a form of government, where the markets are in general free for competition between the market players but where some regulations avoid abuses of market powers (e.g. by monopoles or cartels). It also differentiates from the “free market economy” by specific regulations protecting the rights of socially deprived and taking care about specific situations, where people need to be protected and to be given specific care (e. g. job protection, medical care, maternity protection etc.). The general idea is that wealthy people have to contribute to the common welfare and to support the indigent fellow citizen. “Ownership has its responsibilities” is the key word of the social market economy in Germany.
Based on this form of government the question, how a country was able to come up to this high standard un such a short time can be concluded within just three sentences: the Germans were always very well educated, the mentality is very entrepreneurial and there is a lot of ambition in everyone to work hard and efficient to achieve set targets. These skills enabled Germany to start from scratch; people helped each other to rebuild the cities and - as there were no production facilities left after the war - the engineers developed new machines and trendsetting facilities enabling the economy to produce with this new equipment all kinds of goods in much shorter time a much higher quality than all the surrounding countries that still produced on outworn, old fashioned machineries. This was the start for the flourish development of Germany’s economy and it’s slogan “made in Germany” was quickly highly respected as a symbol for quality and reliability.
High quality engineering is still one of the major industries of Germany and many brand names are famous worldwide (Mercedes, BMW, Porsche, Volkswagen, Siemens, Thyssen-Krupp). But surprisingly the German economy is not primarily driven by these big companies; the small and medium sized businesses are the main forces of the German business power. These companies, are still often driven by an entrepreneurial owner (often in it’s 2nd or 3rd generation from the same family of the original founder), and survived all economic ditches by flexibility, innovation courage and the strong commitment of the entrepreneur. Brands like Wuerth (Screws and assembling technologies; www.wuerth.com ), Kone (elevators; www.kone.com ), Liebherr (cranes and heavy machinery; www.liebherr.com/lh/en ), Grohe (sanitary fittings; http://www.grohe.com/ ), Schindler (escalators, elevators; www.schindler.com ) are only some of Germany’s well known mid-size company names.
German’s international businesses success leads into a significant export surplus in Germany’s balance of trade
The tertiary business sector developed significantly from the mid 50s and the service and hospitality business became more and more dominant for German’s economy
Education was always the key to the boom in Germany; the school system and the good education within the Universities made Germany famous for different sciences, great research results and patents.
In parallel to this Germany established an additional education system that qualifies young people after 9 years of school education by a specific professional education and apprenticeship that usually requires additional 3 years of learning. These people are the powerful and high qualified workforce that built up the strong middle class which is significant and most important for Germany’s economy
Impact on the property market
Respecting the above mentioned career of the German economy, where the entrepreneurs started their small businesses “in the garage of their homes” growing steadily, they built their company on their own financial capabilities without taking major financing risks on board. This means the mentality of German companies is to run their businesses in their own premises. Even many blue-chip companies followed this route and invested lots of money to own the real estate accommodating their businesses.
The pure office market developed in parallel with the tertiary sector and it is slightly different to the above mentioned freehold mentality of the factory market. As offices are easy to move and the younger businesses (e.g. the “New Economy” businesses) haven’t any money to invest in properties, offices where mainly occupied on leasehold base, if they were not directly related to a production site. The office property market, driven by financial investors who built the offices to let them out, developed in accordance to this increasing demand and became very profitable. Even without any pre-leases offices were built and vacancy rates swung in parallel with the economy.
Property financing trends:
Within the last 10 years the owner occupier became aware of the enormous value of their real estate and the money involved what is blocked to be invested in their original core (e.g. production-) business. They started to qualify their assets as “core” and “non-core” to allocate disposal opportunities. This cognition and the new financial perspectives discovered by this new mindset attracted investors who offered the classic sale-and-lease-back transactions.
Nowadays, investors developed many different new opportunities to take over the properties from the owner occupier; therefore they do not only have to respect the needs of the seller or the occupier, but they also have to respect the requirements of the different accounting systems that the seller might use. Many international German companies have to respect the German HGB- and the American US-GAAP accounting system in parallel.
To make a property more attractive for a potential buyer, the owner transfers the property in an SPV (special purpose vehicle company) to prepare a share deal instead of a regular asset deal. This is much more tax efficient and enables the buyer to save land purchase tax in case the seller would be prepared to keep about 6% of the shares of this SPV company for some years.
To use these SPVs becomes more and more common, as this separate company would not harm the parent company in case of any financial difficulties; also if such a SPV is brought to the market to be disposed, the original parent-company (mostly a holding company) can lie quiet. In addition to that, a big tax benefit can be created by SPVs as this company can be set up in a low-tax country, independent, where the property or the parent company is located. So many German properties are kept by Luxembourg companies in the form of a “s.a.r.l.”.
Other financial structures like “Property Leasing” or “REITS” become more and more attractive investment vehicles as the banks are not prepared to lend sufficient money to the property investors at the current crunch.
It is comprehensible that especially foreign investors love to invest in properties leased to one single, AAA-rated tenant; unfortunately nowadays these opportunities are very rare, as the original landlords became aware of this “extra-income” and have already sold their properties to investors or don’t want to lose flexibility by binding themselves in long leases.
About 1 – 2 years ago, Germany faced a seller’s market and large portfolio holders agreed to long leases on some properties and bundled these together with old, outworn and low value properties; as the market was on its high and all investors were happy to get any real estate in Germany, they even paid extra for bigger portfolios, even as they had to accept some vacant or “less attractive” properties with the package. Today the market has changed and any offers, containing several buildings have to rebate the sum of the value of the containing properties. This is even the fact if there are only valuable properties involved in the package deal and is caused by the lower number of powerful investors that are able to buy portfolios at this time of the market crunch, The buyer’s market is back!
Where are the investment trends in Germany if the long leases and sale-and-lease-back transactions are not achievable?
From investor’s point of view, inner-city top-locations are still looked for. Luckily, Germany is not as centralized as many other countries, where there is only one (mostly the capital-)city and where all businesses are located. In Germany about 80 cities with more than 100.000 inhabitants are nominated as metropolises whereof 12 inhabit more than half a million and three more than 1 million people. At least the top locations within the top-10 cities are very interesting for investors and as all business is not only concentrated in one city, it is potentially easier to allocate lucrative opportunities in inner city centers than in other countries.
Alternatively sites with good visibility along German motorways and within the catchment area of bigger cities become more and more attractive not only for logistic companies; good accessibility and showing the brand to thousands of passing drivers is a selling point and attracts office users as well as hotel companies, factories and stores (Do It Yourself-stores, factory outlets etc.).
Germany has many attractions for visitors and many foreigners go there to see the culture, the mountains, the coastline, the famous “Black Forrest”, the castles and the mixture of modern and historic building (survived or rebuilt after world war II) within the cities. Especially outside the major cities, lots of smaller family owned Hotels accommodate the private holiday makers. Within the cities nearly all international chains are already present and provide their services to business travelers as well as holiday makers. They are seeking for additional premises in top-inner city locations or to get into these cities with their additional brands of lower / higher standards, but these opportunities are very rare.
A new trend is seen as low-cost (about 3-star) hotel operators try to find inner city B-locations; their concept follows the route of the companies’ cut in travel cost and also the needs of low budget city holiday travelers. As these operators are mostly prepared to sign long lasting management contracts (lease agreements are becoming rare), it is a good opportunity for foreign investors to invest in this kind of hotel-properties, as this kind of operator-driven business wouldn’t need any activity of the investor after the building is adjusted to the operators need.
Following the trend, not to stay in your own business accommodation and keeping the business flexible for moves, growth and increases, Business Parks are becoming more and more attractive. There are several investors who respect these requirements and who provide flexible contracts and small units for their tenants. As this is relatively new for Germans, just a few investors have spotted this attractive market segment; the number of transactions of adequate properties is increasing.
The German economy is focused on setting a good example in protecting the environment and saving energy. This is supported by the government and forced by many laws, rules and regulations introduced during the last years. Not only the heating systems in the buildings were affected by these new regulations, even the entire buildings had to be tested and certified on their efficiency and their insulation. Consequently many old buildings were set up to modern standards getting new heating systems, insulations, new windows and roofs.
Newly built premises have to follow strong efficiency regulations and wouldn’t get planning permission without showing their effectiveness. As heating costs and other extra charges were already in the focus of the tenants, this issue became even more important for the landlord who wants to sell or let out the property. Energy wasting properties are nearly unmarketable.
From history the German’s are more focused on putting money aside instead of major consuming or even credit buying. Nowadays the younger generation has a more different mindset and sometimes it seems they think to “become happy by going shopping”. Many retail investors focused on this mentality change and identified inner city MEGA stores and huge shopping centers as a niche to invest. These arcades are growing everywhere and the multitude of German’s typical smaller entrepreneurial retailers (especially butchers, bakeries and other food-sellers) are pushed back by the attractiveness of the big “all-in-one” Malls. This changes the appearance of the city centers but will not dramatically impact in the small shops outside the inner city-centers, where the inhabitants do their daily shopping and where they have built up a personal relationship to the owner which they know for ages and where there is always time for a quick chat about local news.
Trendy investment locations
The magazine “Property Week Global” published in it’s February issue a survey of over 500 leading investors, bankers and developers where 10 cities in Europe were nominated as the top property investment markets. Two German cities are leading this list (1. Munich, 2. Hamburg) before competitors like Istanbul (Turkey), Zurich (Switzerland), London (UK), Moscow (Russia), Paris (France) and two more German cities (9. Berlin, 10. Frankfurt) were part of these 10.
This shows the attractiveness of the German cities for property investments.
As mentioned above, the German businesses are diversified and scattered in many cities; therefore there are many good opportunities in many cities with reliable tenants and high purchase power of the inhabitants. Nuremberg, Dusseldorf and Stuttgart are interesting and well known cities, but also investments in smaller cities like Bonn, Wiesbaden or Augsburg are looked for. The beauty of the investments in these smaller cities is the lower acquisition price for the properties and to benefit from sustainable mid-size businesses who are the reliable tenants and who run the engine of the German economy.
Cities like Essen, Dortmund and Duisburg (every city about 500.000 to 580.000 inhabitants) define an area, where Germany’s heavy industry was located from history and also after world war two. The structure of this area has completely changed since the heavy industry is not present any longer and lots of new businesses started to grow in this most dense populated area in Germany. Not only retail, but also many office and modern production facilities were subject to profitable investments and this ongoing trend makes it worth to have a more detailed look at this area, if profitable investment opportunities beside the mainstream are looked for.
After the re-unification of eastern Germany (former “German Democratic Republic”) with Germany in 1989, lots of investments were undertaken by private investors and the government as well to fill the backlog left by the communistic misgovernment. It’s sad that regardless the big investments, the eastern part of Germany hasn’t economically developed as expected. This overall perspective forces international investors to overlook very profitable investment opportunities in the cities of Leipzig or Dresden. At least in the long run, these eastern German cities will not stand back to comparable cities in the west and some insiders have already mixed eastern German properties in their portfolio.
Germany’s economy is benefitting from its centralized location within Europe, the young economy (just about 60 years since world war two!), a stabile government and the high profile within the European Union and the rest of the word.
The entrepreneurial mentality, the accuracy of the people and the financial liability of the individuals qualifies the Germans to be respected as one of the world strongest economies that is a guarantee in economical turbulent times.
This issue makes Germany as an investment target very attractive and as the economy is very diversified and the businesses widespread across so many cities, many lucrative investment opportunities are provided for more conservative investors but for opportunistic investors as well. There are no restrictions for foreigners to buy freehold in Germany, and the transaction process is save and regulated, but nevertheless good advice by local consultants is highly recommended to find the suitable investment opportunity, to get advice during the due diligence process, to be supported during contractual negotiations and to get a full understand of the role of becoming a landlord in Germany after the notarization and hand-over of the property.