This time last year we were investors in the Japanese Residential Investment Company (JRIC). As the name suggests, it was a company that invested in residential condominiums located in prime locations across Japan.
It was an exciting area of the global property market with valuations coming from a low base and a healthy yield of more than 6 per cent – albeit assisted by debt. The vehicle offered great diversification away from UK commercial property, which tends to be the ‘go to’ trade when seeking property exposure.
But in the latter stages of 2015 it was taken out at a significant premium to the market value by a private equity group. The vehicle as a whole was deemed to be worth a great deal more than the effort of anyone building their own portfolio from scratch.
This was a good investment with a happy ending of sorts. On the one hand, we were delighted to get a serious uplift in valuation, but we also acknowledged we were left looking to replace what was a very steady performer.
That process led us to look at the funds investing in the German property market, the characteristics of which remind us somewhat of JRIC.
Despite rents increasing progressively in recent times, they remain among the most affordable in the Western world relative to incomes. Berlin is not only cheap compared with other German cities, it trades at remarkably lower valuations relative to other European cities.
For example, London prime property demands prices of €24,500 (£20,200) per square metre. This compares with €13,600 in Paris, €4,500 in Dublin and just €4,100 in Berlin. The low valuations also limit the desire for new construction, so the supply versus demand fundamental remains favourable and lends itself to Germany having one of the most liquid property markets in the world.
The German property market is coming off a low base; real prices fell by 14 per cent between 1990 and 2007, and there remains a great deal of upside potential with a low ownership ratio of 52 per cent, compared with the EU average of 70 per cent. Just 16 per cent of households within Berlin are owner-occupied.
Projected demand for housing far outweighs supply, and the ever-increasing urbanisation and immigration further lends itself to the theme of German property – evidenced by the statistic that new leases in Berlin are at a 40 per cent premium to passing rents.
Ongoing European Central Bank loosening monetary policy will continue to massage down the borrowing costs of the sector even further, offering additional support and liquidity.
If we consider that roughly $10trn (£7.5trn) is invested in negative-yielding bonds, then German property remains an attractive source of yield with risks – due to valuations – arguably no greater than investing in government debt in the present climate.
Even if the lion’s share of capital returns have been made in recent years, the income story remains compelling.
James Sullivan is investment director and senior fund manager at Coram Asset Management
