Most people in Germany have heard of the Sony Center in Berlin, a national symbol of urban regeneration and architectural excellence. Only a few, however, know that since 2010, it’s been owned by the Korean National Pension Service (NPS), or that in 2013 NPS also acquired the Siemens Forum in Munich for €150 million.
The Sony Center is not the only famous European architectural landmark to have recently changed hands. The Lloyd’s of London building, designed by Richard Rogers, was also acquired in July 2013 for £260 million (€326 million) by Ping An, a Shenzhen-based Chinese insurance company. Never have Asian investors been more active in Europe.
Over the past several years, Asian investors have acquired prominent properties in major cities in the United Kingdom, United States, Canada and Australia at an increasing pace. In Paris, the Peninsula, the Mandarin Oriental and the Shangri-La recently opened just a stone-throw away from the Arc de Triomphe to cater to the new mega-rich and their seemingly insatiable passion for luxury shopping. Amid this frenzy of new activity, however, I saw few Asian investors or oriental hotel brands heading to Germany.
This is changing. As commercial ties between Germany and China continue to improve and Chinese investors increasingly use Germany as a base to move further into Europe, increasing real estate investments into Europe’s largest economy are the next logical step.
During a recent visit to Hong Kong, while discussing potential investments in Germany with some local investors, I noticed they were highly impressed with the safety and security offered by Germany and with its stable economy, compared to the rest of Europe. This view was confirmed in a recent conversation I had with Timo Tschammler, international director of JLL, who is helping a number of Chinese “first movers” into the German real estate market. Chinese investors, he said, are particularly attracted by the low degree of volatility in German commercial real estate. “They look for core properties – the bigger the better,” he said. CBRE, for example, reportedly helped raise more than US$230 million from South Korean institutional investors, enabling IVG to lead these investors to purchase the Gallileo Tower, a 36-story office building in the central business district of Frankfurt.
Until recently, Chinese and Asian investors focused on acquiring trophy assets in city centers. But in the United Kingdom and the United States, they have already become active developers in their own right. In January 2014, for example, Greenland Group, a large Shanghai-based Chinese developer, acquired a former brewery in the southwest of London for £600 million to redevelop it into a shining new mixed-use compound with apartments, offices and retail shops. The XIN Development Group became the first major Chinese developer to carry out a large-scale development project in the United States. The company’s first residential project in the country, Oosten, was not a glass skyscraper on 5th Avenue, as I would have expected, but rather a 46,000 square-meter compound of loft-apartments and townhouses on a site bought out of foreclosure in the former industrial neighborhood of Williamsburg, in Brooklyn, New York.
Chinese investment in Europe is also booming due to a drastic change in government policy that took place in 2006 when the government issued the new Outward Investment Policy. This policy encouraged private and commercial investment abroad, possibly to hedge against an over-exposure to the Chinese economy or a risky local real estate market.
All the real estate advisors I have talked to confirm that Chinese investors, while looking for quality, are not overly keen to buy real estate with a yield below 5 percent. The search for alternative investment opportunities is also driven by rapidly falling yields in Asia. With Hong Kong now the second most expensive real estate market in the word and yields of prime office properties in Seoul, Korea, dropping to 2-2.5 percent in 2014, local asset managers are looking beyond Asia for higher returns.
As commercial ties between Germany and China continue to improve and Chinese investors increasingly use Germany as a base to move further into Europe, increasing real estate investments into Europe’s largest economy are the next logical step.
On my trip to Asia, local investors confirmed that Europe, with the exception of London and maybe Paris, is perceived as cheap. Differentials in financing costs also play an important role. Marcus Lemli of Savills told me that despite prime yields in the major German cities now being similar to London, the difference in borrowing costs means that higher initial cash-on-cash returns can be achieved in Germany.
The visit of Chinese President Xi Jinping to Germany in May 2014 was a confirmation of a healthy relationship between the two countries and of the strong interest of Chinese investors for Germany, which, according to the European Council of Foreign Relations, is already China’s largest trading partner in Europe. China has also become the top foreign investment destination for German companies.
Traditionally cautious, the Chinese started looking at Germany in 2007, and by 2014, according to China’s Ministry of Trade, it became the European country with the best investment opportunities. According to LSE, China is now the second largest non-European investor in Germany after the United States. When German Chancellor Angela Merkel reciprocated the visit in summer 2014, the Chinese government, as a sign of improved economic ties, announced a quota of approximately €10 billion, which will allow German institutional investors to acquire Chinese securities under the “Renminbi Qualified Foreign Institutional Investor Program.”
So I was not surprised when JLL reported that Asian investment into German real estate grew by a staggering 916 percent since 2011 to approximately €1 billion in 2013. Joachim Wiebeck the co-head of International Investment at CBRE Germany said that Germany has become the main target for Chinese investors looking at continental Europe. He believes that, together, the top four German cities now attract the highest investment from Chinese investors after London.
A very active market supports his views. Since August alone, Asian investors spent over €500 million buying German commercial real estate. I also believe that there are encouraging signs that they are starting to look beyond direct investment in trophy assets. Recent transactions include the acquisition of two hotel portfolios for €155 million and a €221 million investment by POBA, a South Korean pension fund, in a high-end office portfolio through a 50 percent joint venture interest in seven of Dream Global REIT’s properties. JLL expects the total amount invested by Asian investors into Germany by year-end to be between €2.5 and €3 billion.
Given the pace at which Chinese investors are moving to Germany, it will probably not be long before Berliners will be able to enjoy a massage at a Mandarin Oriental hotel or shop in a Sun Hung Kai shopping mall.
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