‘Ignore Germany’s smaller cities at your peril’

Investors ignore Germany’s secondary cities at their peril, delegates heard at Real Asset Media’s European Outlook H2: Germany Investment Briefing, which was held last week in Frankfurt.

Panel of the European Outlook H2 – Frankfurt event: Thomas Veith, Partner Real Estate, PricewaterhouseCoopers, Dr. Carsten Loll, Partner Real Estate, Linklaters, Lars Schnidrig, CEO, Corestate Capital Group, Norman Nathan Gelbart, Partner, Israel German Business Group Leader, Pricewaterhouse Coopers, Tobias Schultheiß, Managing Partner, Blackbird Real Estate

‘International investors don’t’ always realise quite how fragmented economic power is in Germany’, said Lars Schnidrig, CEO, CORESTATE Capital Group. ‘Medium-sized cities are the backbone of German industry, just look at the share of GDP they produce. There are 180 cities with over 50,000 inhabitants with fantastic growth prospects and good assets. Their strength is the reason why Berlin will surely grow but it will never acquire the dominant status that Paris has in France or London has in the UK’. 

Even retail will continue to be interesting there, he said, because as big cities become expensive, people move to smaller towns where they find more affordable housing but also a sense of community.

‘We focus on commercial real estate in Germany’s smaller cities, 30,000 inhabitants and over, assets that are more stable than properties in the big cities,’ said Tobias Schultheiß, Managing Partner, Blackbird Real Estate. ‘We are seeing growing interest for two reasons: it is a new type of property which is not yet institutionalised and the risk is comparable to multi-let buildings, as I prefer assets with at least ten tenants, which ensures that even if one tenant leaves you don’t have a problem’.

Investors that are showing interest are smaller German family offices but also London-based private equity firms, he said, while the small ticket size is deterring Asian and Middle Eastern investors from getting involved, as they look for assets over €100 mln. 

‘My properties start at €2 mln and go up to €6-7 mln per asset, but the idea is to grow it into a portfolio which is spread nationwide to keep over the long term’. 

The residential sector is a different story and low rents are a deterrent to development. ‘In some secondary cities they have an average free market rent of  €5 m2 and below €8 m2 for new-builds’, Schultheiß said. ‘These rents don’t even cover construction costs, let alone the price of the land. The big problem is that it doesn’t pay to build, so there are almost no new residential buildings for rent’.

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