On the up: new apartment blocks
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The day after the UK voted to leave the European Union was a busy one for Formart, the German real estate developer. “We got three orders for condominiums in Frankfurt,” says Saul Goldstein, whose private equity group ActivumSG runs funds that own Formart.

Germany’s property market has been booming for several years, as investors look for ways to gain exposure to the country’s stability and relatively robust economy. Between 2009 and 2015, investment in German property leapt sixfold to €82bn according to data from Savills, the UK property group, and since Britain’s vote to leave the EU there has been speculation that the market could get another shot in the arm.

“Some money that was targeted to go to the UK is now being targeted to go elsewhere,” says Gunther Deutsch, head of European transactions at Barings Real Estate Advisers, adding that Germany has been a particular beneficiary.

In three months following the UK’s referendum, Germany did indeed overtake Britain as Europe’s biggest destination for property investment, drawing in €13.6bn to the UK’s €10.1bn during the third quarter, according to data from Real Capital Analytics.

3.5%

Rental yields on some prime properties in Berlin

The property market in Germany — where home ownership rates are the lowest in the EU and residential properties are often owned by property companies — looks set to continue to draw investors. According to RCA, of the top 10 European cities ranked by property deal volumes so far this year, four are German. Experts say the decline in deal volumes in the third quarter was more due to reluctance to part with prime assets than any lack of demand. “The investment pressure on institutional investors is enormous,” says Matthias Stanke, managing partner at Colliers in Frankfurt. “If they sell an asset, then they need to find somewhere to reinvest the money.”

Wolfgang Behrendt, who heads UBS’s global real estate business for Emea takes a similar line. “It is getting more and more difficult to find good assets, even in off-market deals,” he says.

4.5%

Potential prime rental yields in Leipzig or Dresden

In response to the intense competition for properties in Germany’s top cities, investors are moving to less well known destinations, according to Tom Leahy, director of Emea analytics at RCA. He says while rental yields on prime properties in Berlin could be as low as 3.5 per cent, in Leipzig or Dresden it is possible to get yields of 4.5 per cent.

Investors are looking at assets such as hotels and care homes, which have higher running costs but which offer the prospect of higher returns. Primonial, a French wealth manager, has spent more than €1bn on German housing for the elderly in 2016.

Germany’s huge number of migrants — there were 442,000 asylum applications in 2015 — also need accommodation. “The refugee influx isn’t likely to have much impact on the middle or high end of the market, but it will certainly affect the low end,” says Mr Goldstein, whose fund is financing a site in Berlin to help provide temporary accommodation for new arrivals.

Mr Stanke agrees. “I think the wave of refugee arrivals will make it easier to rent out buildings for which it was previously hard to drum up much interest.”

The biggest driver, however, is likely to remain the combination of Germany’s economic stability and rock-bottom interest rates that has fuelled the market for the past five years.

Additional reporting by Judith Evans

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