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COMING TO AMERICA

German law change allows real estate funds to invest overseas

Retail property owners who have been holding on to their assets take note: A recent law change in Germany could send fresh investment dollars flowing into U.S. retail real estate.

The new law, passed July 1 by the German parliament, allows open-end real estate funds to invest outside the European Union for the first time. Similar to mutual funds, German open-end funds accept contributions from individual investors and then pool the resources to buy properties that would otherwise be out of reach financially. The tightly regulated funds were previously restricted as to the types of properties they could invest in and where the money could be placed, explained Paul Dudman, a partner in the Frankfurt, Germany, office of Cushman & Wakefield Healey & Baker.

There are currently about 19 such funds in Germany, which up to now were allowed to invest only in the EU. Despite those restrictions, however, open-end funds were always successful, said Alexandra Marconnet, a vice president of tax and legal issues for BVI, a Frankfurt trade association for fund management companies.

Now funds are being set up for global investment, said David Vriesenga, a director of global funds in the Paris office of Moody’s Investors Service. Though estimates for potential dollars are somewhat scattered, Vriesenga estimates that at the end of the second quarter, open-end funds had about 67 billion euros ($66 billion) under management.

“The German and European markets are not that big,” Marconnet said, adding that the funds’ scope has to be expanded because “the interesting properties have more or less already been acquired.”

The law change bodes well for retail properties, but the sector must clear two hurdles before it can benefit from these funds. First, although U.S. investment professionals expect the U.S. market to receive an enormous chunk of the forthcoming capital, it has to compete with a number of sophisticated real estate markets overseas in, for instance, Australia, Japan and the United Kingdom. Second, shopping centers have to compete against other property types, specifically office space, to attract German investment.

“Really, it comes down to properties that have strong income returns and good fundamental attributes,” said Jerry Barag, chief investment officer at New York City-based Lend Lease Real Estate Investments.

Not surprisingly, Germans are expected to zero in on neighborhood and community centers, which are popular among all investors because they are seen as relatively safe in these troubled economic times. German investors are also interested in power centers, but they are expected to avoid regional malls, said Barag.

“They don’t understand [regional malls] as well, and the lease rollovers have been more tumultuous,” he said.

To be sure, the U.S. real estate market does have better returns than its overseas competitors, outpacing those of Australia and the United Kingdom by as much as 200 basis points, Barag said. And Germans will certainly favor U.S. real estate’s returns of 7 percent to 9 percent over the performance of, say, German government bonds, which are yielding less than 2 percent.

Currency risks could deter Germans from investing heavily in markets with the euro’s domain, though that is not a major concern at the moment, because the euro has gained parity with the dollar, noted Dale Anne Reiss, who runs the global real estate practice of Ernst & Young International.

Observers note that German investors have traditionally favored real estate as an investment vehicle. KanAm, a Munich REIT, is a major shareholder in The Mills Corp., and is an equity partner with the Arlington, Va. REIT on many of its properties.

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CAPITAL LEASE, LEND LEASE FORM REAL ESTATE SERVICES ALLIANCE

Capital Lease Funding and Lend Lease Capital and Real Estate Services have formed a corporate property services alliance so that they can better serve companies affected by anticipated regulatory changes to accounting rules. Imminent changes from the Financial Accounting Services Board could affect the treatment of synthetic leases and may force many companies that previously held their real estate assets in off-balance sheet structures to incorporate them into their financial statements. The new rules are expected to be in place by March 2003. Together, Capital Lease Funding and Lend Lease Capital will offer advisory services, building construction services, financial products and strategies, and ownership options.

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