February 17, 2009 / 8:24 AM / 10 years ago

German homes as good as gold

FRANKFURT (Reuters) - German residential property is joining gold as a safe haven for investors disillusioned with equities and afraid other assets will be eaten away as measures to combat the financial crisis prompt a spike in inflation.

“Residential property is boring. There is no ‘sexy story’. But today, boring is beautiful. Today, capital preservation is more important than high returns,” said Udo Scheffel, Chief Executive of German residential property company GBW.

The German cities of Munich and Hamburg were the top two investment locations in Europe for 2009 in accountancy firm PricewaterhouseCoopers’ latest annual survey of real estate executives and fund managers, and four German cities were in Europe’s top 10.

In both Munich and Hamburg, residential was the most popular category, PwC said.

“Germany is the best port in a storm right now,” said one survey respondent.

“Residential will become more popular as it retains its value,” said another.

Some economists say the huge monetary and fiscal measures deployed by governments and central banks worldwide to boost growth and lending could lead to significant inflation down the road, which would benefit real estate prices.

In such a scenario even triple-A-rated government bonds, usually a safe haven for investors, stand to lose in value.

Inflation could turn into an “enormous problem” leading to “massive risks” for investors on a two to five-year horizon, Credit Suisse Global Investment Strategist Stefan Keitel told a recent mutual funds conference in Germany.

“The safe haven will turn into a battlefield,” he said.

CASH FLOW

Such fears have prompted many risk averse investors to bet on gold, the price of which has risen over 25 percent in the past three months.

With diversification the golden rule of asset allocation, investors are looking elsewhere, too.

One of those drawn to German homes is Peter Brock, managing director of Grainger Deutschland GmbH, the German arm of Grainger, Britain’s largest residential property landlord.

“German residential is going to become increasingly attractive for institutional investors seeking long-term, low-risk cash flows,” he said.

“We still see a market that is extremely stable and a market that has certainly proved its investment worth, especially when you look at the comparative price falls in the UK,” said Brock, whose company entered Germany in 2006 and now owns or has majority interests in around 7,300 German housing units, with a market value of around 530 million euros (473.3 million pounds).

Adjusted for inflation, German house prices fell less than 1 percent in the year to end-September, compared with a fall of more than 14 percent in Britain, according to data compiled by property consultancy BulweinGesa.

Residential real estate proved more stable and less risky during a turbulent 2008 than offices, retail space, hotels or warehouses, measured by property consultants KingSturge’s German market sentiment index published in January.

“Residential will become more attractive for investment because low new housing construction volumes mean rents will grow and small valuation fluctuations guarantee stable returns,” said Sascha Hettrich, partner at KingSturge in Germany.

BACK TO BASICS

“British and U.S. funds are back again, having forgotten all about us for the past 18 months,” said Johann Kowar, Chief Executive of Austria-based residential property company Conwert , which is also active in Germany.

“It’s back to basics, away from exotic products such as collateralised debt obligations or the securitisation of soccer players’ future transfer fees,” he said.

“Stock market investors have a bloody nose. Those who are holding bonds are worried whether they will have lost capital a year from now. That uncertainty heightens the motivation to go into tangible assets such as residential property,” Kowar added.

This year AXA Investment Managers, part of French insurer AXA, launched a new German residential property fund, AXA Immoresidential and is aiming for an annual return of at least 5 percent.

“Institutional investor interest in residential property has increased noticeably,” said AXA fund manager Ulf-Harald Koepke.

Additional reporting by Sinead Cruise in London, editing by Will Waterman

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