Despite losing billions of shekels in investments in overseas real estate markets, ranging from farmland in Eastern Europe to projects in the US, in the 2008 financial crisis, some Israeli developers still see investment opportunities abroad. One of the markets being targeted is Germany.
Despite the economic crisis and the prevailing uncertainty in the Eurozone, Germany has become a target for Israeli developers, especially income-producing real estate companies. Barely a week goes by without an announcement by a public company about a large transaction in the country.
Germany's latest macroeconomic figures show that the world's fifth largest and Europe's largest economy is not immune from the crisis on the continent, and the German economy's growth rate has slowed and its unemployment rate is rising. Nonetheless, the Bundesbank believes that the economy will stabilize.
Israeli developers investing in Germany say that the country's relative economic immunity, compared with other Eurozone economies, is the main reason for investing heavily in it. A study by "Globes" has found that Israeli developers' investment in Germany has exceeded NIS 13 billion.
The sense that Israeli developers prefer Germany over other countries is founded on the huge transactions (some of which have not yet been closed), which have totaled €554 million (NIS 2.8 billion) in the past three months. The largest transaction, by Fattal Hotel Management Ltd. and partners, was the acquisition of a portfolio of 22 Holiday Inns in Germany for €300 million (NIS 1.5 billion).
The Israeli companies are focusing their efforts on locating income-producing properties (mostly office building and commercial centers) in large cities, such as Berlin, Frankfurt, Hamburg, and Munich. It is easy to find stable, long-term tenants, such as government companies, multinationals, and national chains, in these cities, lowering the investment risk.
In addition to Germany's economic soundness, investment in German real estate is supported by financing options, high business transparency, and assets with stable, long-term tenants. Summit Real Estate Holdings Ltd. (TASE: SMT) has operated in Germany for nine years. "Germany has become a safe haven for many investors," says controlling shareholder and chairman Zohar Levy. "Liquidity there is less than in the past, because the banks are less afraid to lend, but the market is strong and liquid, and it is possible to find financing."
Levy says, "Israeli like what they see in Germany today, because it is a market that is easy to work in, it has liquidity, and it is close to Israel. There is an oversupply in Israel, Eastern Europe has been a dead market for years, and the US is far away."
Aspen Group Ltd. (TASE:ASGR) is another real estate company which has operated in Germany for several years. CEO Ilan Gifman agrees with Levy, saying, "The German economy is very strong and the interest rate is the lowest since the Eurozone was established. There are options to raise money in the country at low cost, and the conditions there make it possible to finance real estate transactions at an interest rate of 3-3.5%."
Gifman adds, "There has been a slowdown in Germany lately, and there is more caution there, too. The banks are very selective, far more than in the past. A bank that finances a transaction is meticulous in its selection. They have lowered the average financing ratio to below 70%. Nonetheless, there is no reason not to succeed there, if it is possible to obtain financing for high-yield transactions."
Ashtrom Properties Ltd. (TASE:ASPR) CEO Motti Sela says, "A good company can obtain financing from the German banks; not at the levels of the past, but if you don’t try to buy everything, it's possible to obtain steady financing from several banks. The spread between interest rates and yields on properties in Germany can definitely create excellent cash flows."
Sela adds, "We're a fairly conservative company which likes stability. Once, the stability and boredom that characterized Germany were considered by many as negative traits, and everyone went elsewhere to invest. Today, stability has become Germany's most important feature. The German market is very sophisticated, with clear rules and a good payment ethic, and we really like doing business there. The success in Germany is also linked to the kind of tenants; our tenants include the Bavarian State Ministry of the Environment and Public Health, the electric company, and Deutsche Telekom, so there is little worry about problems."
Summit Real Estate tops Israeli investment in German real estate, with NIS 4 billion, followed by Brack Capital Properties NV (TASE: BCNV) with NIS 3.4 billion, Electra Real Estate Ltd. (TASE:ELCRE) with NIS 2.5 billion, ADO Group Ltd. (TASE: ADO) with NIS 1.35 billion, Fishman Holdings unit Industrial Buildings Corp. (TASE: IBLD) with NIS 800 million, insurance company Menorah Mivtachim Holdings Ltd. (TASE: MORA) with NIS 600 million, Aspen Group Ltd. (TASE:ASGR) with NIS 500 million, and Ashtrom Properties, with NIS 435 million.
Institutions are interested
Investment institutions are also avidly interested in what the German real estate market has to offer. In the past few weeks, Menorah-Mivtachim has invested €16 million (NIS 80 million) to buy two commercial properties near Frankfurt and Munich through a special purpose company established with partners to build a portfolio of commercial properties across Germany. Menorah is not alone - Harel Insurance Investments and Financial Services Ltd. (TASE: HARL) and Migdal Insurance and Financial Holdings Ltd. (TASE: MGDL) are among the Israeli insurance companies with substantial real estate interests in Germany.
Menorah Mivtachim real estate department head Lior Mor says, "Business conduct in Germany, in terms of transparency and legal issues, is straightforward. Germany is one of the strongest economies today, even though it is located in Europe, which is dealing with a crisis and great uncertainty. We believe that the German economy will stay strong, which is why it is a target market."
Mor adds, "As a market, the risk level is Germany is at a completely different level from, say, Eastern Europe. The upside, too, is relatively limited. As a pension fund, we must be very conservative and responsible. That is why we do not seek land with a 30% IRR in two years, but properties that will give a lower return, but have tier-1 tenants in long-term leases."
Write-downs and write-offs exist too
Despite the prevailing optimism among developers, the German real estate market has caused heavy losses to several companies which invested in it during the boom years, such as Igal Ahouvi's Ravad Ltd. (TASE: RAVD) and Yitzhak Tshuva's Delek Real Estate Ltd., which was forced to make hundreds of millions of shekels in write offs within a few years of buying properties.
In the past few months, Israeli investors got a reminder of the risks inherent in every corner of the globe. One of these investors, Electra Real Estate, a unit of Elco Holdings Ltd. (TASE: ELCO), controlled by Georg Salkind, has had to write down tens of millions of shekels on one of its 22 properties in Germany, after a receiver was appointed for it.
ADO Group is a subsidiary of Shikun & Binui Holdings Ltd. (TASE: SKBN), controlled by Shari Arison, which owns 4,000 rental apartments in Berlin. ADO CEO Shlomo Zohar says, "In the past, some companies operating in Germany were financed at high rates, and the financial risk became critical. Some of these companies obtained finance for up to 90% of a property's value, and when the loan expired and they sought to refinance, the banks would only give them 65% of the amount."
Zohar adds, "The banks here carry out countless checks. When we seek financing, we do it in accordance with the thinking of the local banks, which want a debt coverage ratio, shareholders' equity, and managerial capability." He also warns about another risk that hurt some Israeli investors in the past. "In peripheral locations, demand is less stable, and this can cause problems. Germany has areas with positive migration, but there is negative migration in the rest of the country. Berlin has the highest positive migration, and 85% of its more than four million residents live in rental homes, and there is little competition on the supply side."
On the brink of recession
For over two years, the debt crisis in Europe has threatened to break apart the Eurozone, and in contrast to the dire conditions in some countries, including large countries like Spain and Italy, Germany's financial stability stands out. Psagot Investment House Ltd. macroeconomics department manager Ori Greenfeld says, "Until the fourth quarter of 2012, we saw a strong economy in Germany, with a low unemployment rate, and growth. Germany is a very competitive country, without strong unions like in Spain, for example. It is also an export-oriented economy, especially of heavy industry products to emerging markets, where growth is continuing."
Greenfeld adds "Whereas yields in Italy and Spain are rising, making it difficult to obtain credit, the situation in Germany is the reverse: it has a lot of money in the banks, low interest rates, and it is in excellent financial shape, despite the problems in Europe. The interest rate in Germany is lower than in the US, because when there was pressure in Europe, a lot of people in the Eurozone transferred their money to the strong countries in it, beginning with Germany.
But a preliminary assessment by the Federal Statistical Office of Germany in January warned that the economy contracted by 0.5% in the first quarter of 2012, and that growth for the year slowed to 0.7%, below the forecast of 0.8%. The fourth quarter estimates puts Germany at the brink of a recession, and the Bundesbank cut its 2013 growth forecast to 0.4%.
Greenfeld says, "Germany still depends on Europe, and it seems that there will be a contraction in the first quarter of 2013 and the start of a recession." He adds, however, "Looking forward, the situation could lead to growth in the second half of the year. Until 2012, the crisis in Europe was mainly handled through austerity measures, and Germany wanted to set the example by taking several such measures. They appear to have brought it to recession, but also a budget surplus."
Therefore, Greenfeld says, "Ahead of the elections in September, the German government will turn its attention to encouraging growth and jobs, and less to austerity."
Published by Globes [online], Israel business news - www.globes-online.com - on February 12, 2013
© Copyright of Globes Publisher Itonut (1983) Ltd. 2013