Is it safe to invest in Denmark

PFA & Co. -
Why foreign pension funds invest in German real estate

With the purchase of 3,700 apartments for 1 billion euros in Germany, the PFA pension fund from Denmark made headlines in the summer of 2018. This is not an isolated case, more and more foreign, but also domestic pension funds see German residential real estate as a safe bank in times of low interest rates. This also has consequences for tenants, as two cases in Berlin and Munich show. The city authorities snatched 440 apartments from the Danish investor - out of concern for the tenants.

The purchase of the Danish PFA was the largest last year at 1 billion euros, but other foreign pension funds were also in the mood to buy. Investors from the USA, Great Britain and France together made purchases for well over a billion euros, according to a report by real estate consultant Jones Lang Lasalle, this is the largest accumulation of assets by pension funds and insurance companies on the residential property market to date. The rise has a simple explanation.

Those who manage billions of euros may not have money worries, but they still have a problem. Since the financial crisis, security-oriented major investors have been desperately looking for stable investments with reasonable returns. The days of government bonds with yields of 4 percent and up are over, today they are looking at extremely meager interest rates.

Pension funds must, however, preserve the value of the assets entrusted to them. The PFA exemplifies the challenge. It manages 80 billion euros, around a third of which does not generate any income. Without a change of strategy, your mountain of money will steadily decrease over the years. She is therefore under pressure to find better investments - German residential real estate is an attractive temptation there.

3.5 percent is better than nothing

In the Danish newspaper “Finanswatch”, the head of the PFA's real estate arm, Michael Bruhn, said about the expected return on his company: “3.5 percent is rather low compared to the high purchase price, but we have 200 billion crowns (26 billion euros), that bring absolutely nothing. ”The portfolio he took over from Industria Wohnen is therefore a“ bond-like investment ”for him. The comparison may come as a surprise when it comes to rental apartments, but experts share this point of view.

In purely financial terms, residential portfolios are comparable to government bonds from better times: Little returns, but reliable. In contrast to office or commercial properties, where major tenants and income can collapse, the small-scale tenant structure of residential properties prevents major losses. And especially in times of housing shortage, tenants are not in short supply.

So far, pension funds and similar investors have preferred to invest in commercial real estate because of the higher returns. But their now growing interest in residential real estate can be seen in the current figures. While their share of housing market transactions was around 4 percent in 2014, it was just under 14 percent in 2018, one of the highest values ​​to date. With a market volume of 16.3 billion euros, that's 2.3 billion euros. Because pension funds usually buy directly, they are also easily identifiable compared to investors who cover their tracks through intermediaries such as real estate funds. A total of 22.6 percent of the buyers recently came from abroad.

The problem is not the fund, but the administration

What does this development mean for tenants? Compared to many other investors, tenants actually do not need to fear their new owner PFA. A pension fund is not a grasshopper looking for quick profits. However, a foreign investor relies on local partners to manage his real estate; PFA chose the Munich-based company Domicil Real Estate GmbH. The comment of the managing directors Khaled Kassair and André Schmöller on the PFA deal made people sit up and take notice: “The portfolio offers real potential for increasing rental income.” It then prompted the city of Munich to exercise its right of first refusal when the PFA rejected a contractual regulation that the tenants of one of their properties would have protected against rent increases. At the end of November, 300 pre-purchase apartments were sold to a municipal housing association.

There was a similar case in Berlin: The PFA portfolio included a listed residential complex with 140 apartments in Neukölln. An exemplary PR campaign by the BoeThie tenant community (“Böhmische Strasse / Thiemannstrasse”) prompted the district to exercise its right of first refusal here too. Thanks to the efforts of several tenants, including the student Elena Poeschl, the resistance of almost 300 tenants made it into regional television, the weekly newspaper “Die Zeit”, the French daily newspaper “Liberation” and the Danish media.

The fact that pension funds are increasingly investing in residential property is just one symptom. It is the logical consequence of the privatization of hundreds of thousands of apartments from municipal stocks in the mid-2000s. This led to spectacular price developments - as with another property in Berlin that PFA recently acquired: nine houses with 134 apartments in Gleditschstrasse 49-69, a better residential area within walking distance of Potsdamer Platz. They were owned by the formerly non-profit housing association Gagfah for a long time. It was privatized in 2004, the new owner sold the plant to a Luxembourg company in 2008 for 2.1 million euros. In 2013 she sold them on to the German Industria Wohnen AG at an unknown selling price. Industria finally sold the energetically refurbished complex to PFA in 2018 for a price between 30 and 35 million euros, more precise figures are not available. If you take the lower value of this price, that's an increase to 1,428 percent - and that in just ten years. This was achieved through modernization, among other things, but the tenants paid the costs of 7 million euros - rents increased by up to 30 percent.

Since the purchase price is 37.5 times higher than the annual rental income, it is very likely that the PFA will use its rent increase leeway for the 3260 remaining apartments in order to get their money's worth.

The fact that most of the properties were formerly urban apartments is particularly bitter from the point of view of the cities and tenants. Investors like the PFA cannot be blamed for making use of attractive opportunities. Perhaps one should take an example from Denmark: The country has successfully protected its residential property market from foreign investors.

Adrian Garcia-Landa


How Denmark protects its real estate market

Anyone who wants to buy real estate in Denmark must have been resident in the country for at least five years. This applies to both private individuals and companies, exceptions require approval. The origin of the regulation lies in the Vacation Home Act of 1957. The aim was to prevent price increases by foreign buyers so that locals with less affluence could also afford vacation homes on the coveted coasts. The regulation was incorporated into the Maastricht Treaty. According to J. Van Gehlen from the consulting firm Dänische Advokaten, the purchase of the PFA would probably not have been possible if Germany had a similar arrangement.

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Hartmut Lindenberg
26.01.2019