Oktoberfest in German Real Estate?
Foreign investors are loving US commercial real estate, but where should Americans diversify? Consider Germany (and grab a bratwurst while you're at it), Berlin-based Optimum Asset Management managing director Georges Mario tells us.
Formed in ’06, Optimum is selling its first fund’s portfolio of German real estate to a French REIT for €200M, a 13.3% net return for investors. (Snapped above, Georges met with us last week in Berlin.) Optimum is currently raising its third real estate fund with a focus on Berlin (there’s a fourth focused on US gateway cities), Georges tells us, and it’s tapped Chicago-based firm Alpha Alternatives to solicit US professional investors, pension funds, endowments, and family offices. (The fund’s €250M equity, €500M investment volume.) Offering European exposure is the fund’s differentiator in a competitive market, he says.
In many ways, resilient German real estate offers much less risk than US assets, Georges tells us. The country took only a minor hit during the financial crisis, which saw the Spanish, Greeks, and Italians all putting their money into Berlin property for safekeeping, boosting the market further. Germany’s heavy regulation has created a balanced economy, the market has enviable liquidity, and Berlin is just getting started after lying dormant throughout the Cold War. Waves of post-war government-incentivized development led to precipitous drops in pricing, but an influx of vibrant young urbanites starting in the ‘90s (the Love Parade festival in ’97, above) has multifamily demand off the charts, he says.
Booming Berlin struggles with its commercial sector, Georges says. Communism drove away big firms like Daimler, BMW, and Porsche, and it’s unlikely they’ll make the costly move back without a strong signal from the government. German regulation can also make returns a challenge. (And current markets might call for a hedge/long-term outlook.) How Optimum bolsters yield: Tax savings (hence its Luxembourg HQ), in-house property management, and a value-add strategy (including assets out of non-performing loan pools). Berlin properties it eyes: multifamily, mixed-use, and mid-size office than can convert to condos within the inner-ring of the city. (Pricing is up 25% to 50% from just five to six years ago, he says.)
One value-add example within Optimum’s €600M of assets is 171-172 Uhlandstraße (above) in West Berlin. The firm found the trophy property in distress after a government incentive scheme gone wrong, and went through the excruciating process of getting all 200 co-financiers of the property to sign off on a sale. But it was worth the hassle. The property’s value has almost doubled in three years at €2,700/sq m, Georges says. A Berlin native (with a dad from Angola) who grew up in the French part of the divided city, Georges says being there when the wall came down was “the wildest party you could possibly imagine.”
Stay tuned for Part II of our story next week featuring Chicago's Alpha Alternatives!