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Healthier Germany lures foreign money

Capital inflows into the real-estate market have increased by 60 per cent so far this year amid signs that the economy is recovering

International real-estate investors are pouring money into the German market with the country beginning to shed its image as the 'sick man of Europe'. In the second quarter, gross domestic product grew 0.9 per cent, the largest increase since 2000.

With the German economy evolving as one of the biggest winners of globalisation, fixed-asset investment in the federal republic is growing faster than at any time since the early 1970s. According to a recent study by Cushman & Wakefield, capital inflows into the German real-estate market have increased by 60 per cent so far this year.

Most of it went into retail properties which are profiting from a rebound in consumer spending. The stubbornly high German unemployment numbers were stuck at more than 10 per cent since 2003 but have been declining for the past couple of months. No wonder 60 per cent of the Euro18.1 billion (HK$179 billion) that were invested in commercial property in the first half of the year went into retail projects.

'The performance of German assets has been driven by increasing interest from foreign investors,' said David Skinner, head of European research at Pramerica Financial, the property investment arm of Prudential, the US insurance group.

Of the Euro95billion that flowed into European markets during the first six months of the year, about 20 per cent was committed to Germany, according to Jones Lang LaSalle.

A survey by Ernst & Young among more than 1,000 international investors in the summer revealed that 18 per cent of all participants rated Germany as 'extremely positive', with Germany taking third place worldwide behind the US and China.

Investors from neighbouring countries in Europe and from overseas do not only expect currency gains from the euro once the US dollar starts to correct, they also perceive German real estate to have the largest recovery potential, after German prices and rents were under heavy pressure for most of the 1990s and earlier in the decade.

'In terms of rental growth, Germany is the laggard in Europe,' Mr Skinner said.

The increasing interest among global investors in German real estate was highlighted at the Expo Real, one of the leading European real-estate exhibitions and conferences that took place in Munich at the end of last month, with visitor numbers jumping by 40 per cent on the first of three days.

But while demand is growing, the supply remains tight in many big cities. In the residential sector, 250,000 flats were built in Germany last year, just one-third of the number being finished 10 years before. The number of completed rental flats shrank over the past decade from 300,000 to 60,000.

But prices have still not responded to accelerating demand. Residential housing prices have been stagnating since the 1990s, the commercial property market has somewhat stabilised after a recent slump.

But investors are betting that the recent economic recovery and the revival of global interest will be able to boost valuations and office rents. Fuelling the expectations is the pending decision to launch German real-estate investment trusts, probably in the second half of next year.

'The lack of an existing infrastructure for reits in Germany is one of the biggest impediments to even more capital flowing into the market', said Nick van Ommen, chief executive of the European Public Real Estate Association in Amsterdam.

'If Germany had reits, approximately 5 to 10 per cent of all national assets would be invested in them and that would come up to around Euro40billion to Euro80 billion,' said Klaus Droste, one of the leading real estate experts of the Deutsche Bank group.

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