CNBC Business | The German property question

The German property question

Investors are scrambling for property in Germany, but there are pitfalls

Domestic and international investors are fighting for a piece of the German property sector, but buyers should tread carefully in an unevenly recovering market. Mark Faithfull reports

Investors just can’t get enough of German property at the moment. While the exclusion of residential property from recent real estate investment trust (REIT) legislation may have disappointed many, especially acquisitive foreign speculators, both domestic and international investors are circling an ever-dwindling supply of assets.

Traditionally the German real estate market has been an almost completely closed shop, with domestic institutional investors, owner-occupiers and property funds monopolising investments and being prepared to pay high prices to keep foreign investors on the outside.

A falling out of love with property, issues with open-ended funds and consumer pessimism have precipitated a big sell-off in the past three years, and foreign buyers, attracted by keen prices and comparatively high yields by European standards, have swept in. Controversially, private equity investors also jumped on multi-tenant residential properties being sold by cash-strapped city councils, in the belief that they would be able to sell these off to REIT funds this year – a hope dashed by the politically motivated final stipulations for German REITs (G-REITs).

Indeed, German investors offloaded a record €61.5bn in commercial real estate globally – up 275% on 2005 – during 2006, according to Moving Further and Faster, a report by property agency Jones Lang LaSalle.

German domestic sales of commercial real estate accounted for €39bn of that total. The bulk of sales activity came from German open- and closed-ended funds, followed by large corporate and government disposals.

“Many German funds had a tumultuous year in 2006, with net outflows from German open-ended funds totalling almost €7.5bn, although net inflows have now resumed,” says Robert Orr, European head of Jones Lang LaSalle’s International Capital Group. “Other German funds have taken advantage of the overwhelming appetite for German real estate from cross-border investors and are taking the opportunity to sell non-core assets. Funds are also preparing for GREIT legislation by reweighting and diversifiing their portfolios.”

German investors are now investing heavily back into their home market, however, and this trend will remain very evident in 2007, says Orr: “Recent months have seen a remarkable turnaround in German fund activity. A number of funds are now cash-rich, and are scouring the globe for investment opportunities.”

That confidence can be seen in a series of deals made in the first few days of May alone. UK fund management group Henderson Global Investors and German property developer Management für Immobilien announced plans to raise up to €1bn for their German Shopping Centre Fund, which will initially buy established shopping centres and project developments. Michael Englisch, Henderson’s head of German operations, believes retail property investments are a solid bet. “These trends are expected to continue fuelling the demand for high-quality shopping centre space within the German market,” he says.

UK fund management group Teesland is to raise an initial €370m in equity capital by the summer for its diversified German Aktiv Property Fund, which has a seed portfolio of property assets worth €800m. Teesland plans to expand this to €2bn by acquiring high-yielding properties with mixed commercial uses. Meanwhile, Bahrain-based International Investment Bank has announced its acquisition of a €73m portfolio of commercial real estate properties in Münich, aimed at providing the bank’s Gulf-based investors with access to the German commercial property market.

“I would take exception to the proposition that Germany’s economy is re-emerging,” says Herbert Quelle, head of economic affairs for the German Embassy in London. “We clearly have a broad and profound recovery. If you look at the medium- and long-term prospects, Germany is somewhere you would want to go.”

Thomas Demmel, partner with Field Fisher Waterhouse Deutschland, adds that although there has been a lot of focus on REITs, there are plenty of other investment opportunities. “REITs are not the only way forward,” he says. “There is plenty of potential in rental growth and there is a lot of restructuring in the former Eastern Germany. You have to be careful where you invest, however; in the East you need to look at the microclimate or land a great deal.”

Tony Smedley, head of continental European investment funds for Invista Real Estate Investment Management, also cautions that investors must buy prudently and is concerned at the thought of a mad dash to grab property.

“At the moment Germany is a very competitive market and something of a herd mentality has emerged, with some investing for the sake of investing,” he explains. “There are also a lot of private sellers, and that can mean more challenges for buyers. Closing deals is not always easy, and German tax rules mean there is quite a lot of shrinkage from gross to net profits. Faced with two investment returns of 5%, one in France and one in Germany, I would generally favour the French investment because net returns will be higher.”

Demmel believes that G-REITs have been weakened by the exclusion of residential properties, but points out that these investments can be brought to market by other methods.

However, Quelle counters: “Yes, the current rules are set in stone, but we can be assured of continuous revision and if people can be persuaded, the system may change. The current government coalition is in place until 2009, but for REITs this is just the start; they may not meet the maximum demands and expectations now, but in five years the situation may be different.”

The biggest market concern should be Germany’s dwindling population, warns Ulrich Hoppe, director-general of the German-British Chamber of Commerce and Industry. “In the next 40 years the population is expected to decline by 10% to 12% and the economically active population by nearer 20%,” he says. “This needs to be addressed by higher birth rates and higher immigration, but the decision to restrict immigration from the newest EU states shows that Germany as a society is not yet ready for that. What we need now is 15 years of strong economic growth to give the current population confidence about immigration.”

Such concerns appear not to be deflating a property hotspot enjoying unprecedented global attention among Europe’s mature markets. Strong GDP growth, falling unemployment and a desire to create a more transparent real estate market suggest that Germany will remain in demand.

by C. SANKEY

EU accession in 2004 marked a watershed in the modernisation of Malta’s economy. With virtually no natural resources and a population of just 400,000 Malta has had to adapt.

The economy has shifted from being a low– cost, high–volume manufacturing hub backed by a sturdy tourism sector, to a diversified, service–oriented economy. Manufacturing remains important and tourism still accounts for around 25% of GDP, but Malta’s strength has been the ability of its English–speaking workforce to fill service sector jobs in finance and ICT. Of the 4,500 manufacturing jobs lost in the past 5 years, many have been reabsorbed into these areas.

Malta’s resilience is best demonstrated by the recently signed joint venture between the government and Dubai– based TECOM to establish SmartCity, a state–of–the–art ICT hub modelled on Dubai’s Internet City. Estimates suggest the $300 million investment will contribute in excess of €500 million annually to Malta’s GDP by 2014 while generating several thousand jobs. Malta’s education system is already geared to producing IT professionals to take up the employment opportunities SmartCity is expected to create.

Prime Minister Dr. Lawrence Gonzi espouses this new vision, “We have gone through a dramatic change. We are now a service–oriented economy where we win on efficiency, competitiveness and quality. SmartCity is just one example. Over the next decade, we want to make Malta the centre for excellence in ICT in the Mediterranean region. We don’t have oil, but we have a better resource than that – people. We are channelling EU funds into developing our human resources. We have a workforce that is flexible, trainable and fluent in English. We offer easy access to the Mediterranean basin and the EU’s internal market. The challenge now is to become a strong regional presence in the areas we have identified such as finance and ICT.”

The transformation has not been entirely pain free and there is inevitably a hangover from the legacy of the old manufacturing base. Malta’s last big textile factory closed its doors last year with the loss of 900 jobs. “How can Malta compete with China in textiles?” asks Minister for Investment, Industry and IT, Austin Gatt. “We have been forced to move away from the traditional industries and concentrate on our competitive advantages. We still have high–end manufacturers like STMicroelectronics and De La Rue, but we are like a good Italian boutique. No matter how many clothes China produces, people still need Italian suits and we are dedicated to providing tailor–made solutions for investors. Financial services are a good example. With a respected regulator, legislation that facilitates and fantastic HR skills we are fast becoming an important niche player.”

Funds and UCITs to domicile on the island. Malta is also firmly established as a captive insurance domicile where passporting rights allow the industry to sell its services across the EU.

MFSA Chairman, Joe Bannister stresses that they are not resting on their laurels. “There are two areas we are currently exploring: trust management, in which we have extremely good legislation and pension scheme management.”

Finance Malta

Convincing the international financial community of Malta’s viability is critical. “Finance Malta” has been established to enhance Malta’s financial brand. Alan Caruana is liaising with the industry to spread the word. “We need to win mind–share for Malta as a financial jurisdiction. Malta is small, but capable and nimble. Our tax structure is very attractive and we are fully EU compliant. We want to build on the gains the sector has already made and expect its contribution to GDP to double.”

Tourism — Hospitality, Diversity and Heritage

Every year about 1.2 million tourists enjoy the hospitality of the Maltese people. Many are attracted by 6,000 years of history, from prehistoric megalithic temples to Valletta’s magnificent architecture — a limestone legacy of the Knights of St. John. Straddling two major continents, successive conquerors have each left a distinctive footprint, resulting in a tourism product rich in diversity and heritage.

According to Sam Mifsud, Chairman of the Malta Tourism Authority, the Maltese are keen to shed a slightly dowdy image. “We need to be smarter in the way we market Malta. Our brand is now based on hospitality, diversity and heritage. We are a small island, but we offer great variety. Malta is a unique experience and an ideal short break destination.”

An Industry in Transition

Tourism is the leading services activity both in terms of employment and a key foreign currency earner, but is emerging from a period of transition. Although tour operators still play a significant role bringing in tourists, habits are changing and people increasingly book online, at the last minute, for shorter breaks. In response the MTA launched an online booking portal. “The market has moved on from the week’s holiday in Europe,” says Mifsud, “so we created a focal point for tourists to see what we have to offer and book directly.”

As an island, flight capacity is critical in ensuring Malta’s ability to bring in tourists. Despite the fact that Air Malta increased capacity in 2006, overall capacity dropped. Since then a number of budget airlines have been brought in, including Ryanair. “Flight capacity for this year is resolved”, says Minister of Tourism Francis Zammit Dimech. “Budget airlines will help and Air Malta has reacted very positively to the competition.”

Air Malta — Taking On The Competition

Air connectivity is essential to an island economy. Tourism, trade and the ability to attract investment all depend on it, so Air Malta’s role cannot be overstated.

“99% of our visitors arrive by air,” says CEO Joe Cappello, “and through an extensive network, Air Malta has been essential in establishing links with the outside world. We are committed to tourism generation and we opened markets such as Germany from scratch, investing in routes and even hotels.” The investments continue today. Through a multi–million dollar lease agreement the airline boasts a brand new Airbus fleet.

Since 9/11 the industry has faced severe challenges and Air Malta’s bottom line has been hit, but the airline is fighting back against high fuel prices and increased competition. “We have never been subsidized and have never been a drain on the economy,” says Cappello. “Since 2002 have we faced difficulties but tackled them head–on. Following 9/11 there was a downturn in traffic and then we were hit by the rising cost of fuel.”

Cost cutting measures and the enhancement of revenue streams has been achieved and management is working closely with the four unions to hammer out a collective agreement to achieve further flexibility from the workforce.

But fuel continues to be the bugbear. “If not for the price of fuel we would have been in the black last year,” says Cappello. An aggressive hedging policy limited the damage, but the benefits lessen in time as hedges run out. “Do you continue to hedge when fuel is $75 a barrel?” he asks. “Our strategy had to change. We went for more caps so we could benefit from any downside. But like any insurance policy, it comes with a premium. What we need now is stability. If we can settle close to $50, we have a pricing mechanism in place to deal with it.”

When budget airlines entered the market last year there were fears that passenger numbers would be hit, although Cappello stresses that “the impact of low cost carriers will take a full year cycle to assess.” Early figures are promising: in the final quarter of 2006, the airline carried 28,000 more passengers compared to the corresponding period in the previous year. Air Malta’s price structure has been reviewed, but the airline is committed to challenging the low–cost carriers on quality and it remains a full–service carrier.

A process of rationalisation is underway to adapt to the new low price/high volume environment and a market that is shifting towards direct points of sale. Previously, tour operators were responsible for most of Air Malta’s bookings. They retain a 50% market share, but their contribution is in decline. There is now a greater emphasis on direct sales through online and call centre bookings. Areas such as IT and the call centre have been outsourced; others divested to allow the company to focus on core businesses. Stretching the tourist season and leasing aircraft out during off–peak times have addressed the issue of seasonality. Air Malta now also operates on a variety of routes within the EU and therefore no longer depends solely on the Maltese market.

Fighting talk from Cappello: “We’ll have an operational profit within 18 to 24 months. We are here to stay. We are not going to curl up and die simply because low cost carriers have arrived.”


Joe Bannister, Chairman of MFSA	Minister for Investment, Industry and IT, Austin Gatt	CEO of Air Malta, Joe Cappello

Sustaining Growth

Competition is woven into the fabric Maltese society and it shows in many aspects of daily life: half the population supports Italian football; half watch the Premiership. Half are Nationalist; half are Labour. Half use Go mobile; half use Vodafone.

Such generalisations are crude and it has been said that the complexity of the Maltese character is in inverse proportion to the size of the population, but a similar pattern is evident in Malta’s banking habits. The landscape is dominated by two giants, HSBC Malta and Bank of Valletta. Both record impressive results, so for shareholders the challenge is sustaining growth.

How does the “World’s local bank” take on a local bank? In favourable economic conditions it is not a zero sum gain. The battle is being fought in a growing market.

HSBC Malta is able to bring the weight of a global giant to bear. “We offer the full range of banking products in exactly the same way as we do everywhere else in the world,” says CEO Shaun Wallis, “and I expect each division here to be up to speed with the latest trends and products that we offer around the world, so all our customers here are able to benefit from them.”

Malta is a mature market. HSBC has 260,000 customers out of a population of 400,000 but many are double banked, so competition is focused on maintaining operating expenses and enhanced product delivery.

“We believe there is still significant potential to grow our business, while keeping costs flat,” says Wallis. Jargon such as “cross–sell ratio” and “straight through processing management” are taken very seriously in a sales–driven environment.

Malta’s geographical size is no obstacle to innovation and HSBC’s experiences on the island have been shared with the rest of the group.

INVESTING IN MALTA

HSBC Malta is the largest and most profitable listed company on the Maltese Stock Exchange.
It employs around 2000 people (including call centre staff) of which only a handful are non–Maltese.
The bank is the largest employer in the financial services sector.

Malta’s ICT infrastructure and English–speaking workforce has persuaded a number of international companies to use the island as a base for their call centres. One of them was HSBC who invested an initial €7 million to establish a global call centre. In view of “very good customer feedback” an additional €5.5 million investment was announced in May that will double the number of call centre staff to 500 by the end of the year.

This recent announcement was hailed by Prime Minister Gonzi as further evidence of change that Malta’s economy is undergoing and the attraction to major foreign investors from all sectors including Nestlé, Methode Electronics, STMicroelectronics, De La Rue, Lufthansa Teknik, Actavis, Dubai’s Tecom as well as HSBC.

“This proves that Malta has a successful role to play in a new globalised economy. We have an environment that is conducive to business, the necessary infrastructure and excellent human resources. As an EU member, Malta has gained more recognition internationally and this has served to enhance our political, social and economic stature,” he said.

George Mangion, Senior Partner of PKF Malta – an audit and business advisory firm – has been instrumental in establishing numerous iGaming companies on the island and has vigorously championed Malta as a “prime captive insurance destination.”

Reaching out for international business from Malta is not always easy, but Mangion’s efforts in many ways mirror Malta’s developments. He has forged his reputation over a 30–year career building a stable of domestic clients, but was swift to see opportunities for growth abroad, particularly as Malta’s integration in the international financial community gathered pace.

The firm was established in 1988 and is now a member of PKF International, a global network of independent firms operating in 119 countries. The association has benefited local clients who increasingly want to look overseas, as well as give Mangion the clout to serve a growing list of international customers.

Malta is now firmly established as a leading iGaming hub. The industry was targeted early by the MFSA and as a result a number of gaming companies came to Malta. But a change in the UK’s tax regime succeeded in drawing most of them back to the UK. Since 2004, however, many have returned to Malta. According to the chief regulator, Mario Galea, Malta currently has over 250 licence applications on its books. “As gaming companies sought to go public, our regulations offered them the most protection and credibility,” he says. The stringent regulations include anti–money laundering provisions, real time monitoring and the promotion of responsible gambling.

“Malta has proved that prohibition does not work; tight regulation is the answer,” says Mangion. A subsidiary of PKF Malta, GMM Business Solutions, acts as a one–stop–shop for gaming companies setting up in Malta. “I work hard to polish Malta’s image as an iGaming hub and now we need to make sure they stay here for good. The US embargo has completely transformed the landscape and EU members are still working out how to deal with their monopolies, so I invest heavily in organising conferences to maintain contacts and keep abreast of all the latest developments.”

Malta is also coming of age in the insurance sector. The islands are proving to be an attractive captive insurance domicile and are geared up to take advantage of EU passporting rights. IFRS was introduced in 1998 and Malta is one of the few jurisdictions to allow the redomiciliation of companies.

Mangion stresses Malta’s advantages. “Malta is competitive because we combine a favourable tax regime with a firm but manageable regulatory environment. The regulator is approachable and we have the man–power to cope. We also have very attractive PCC regulations which so far have only been taken up by one company. PCCs are very flexible and reduce the cost of establishing a captive, which should attract smaller companies in the future.”

FORTINA SPA RESORT

Bringing Spa Treatments To The Bedroom

by C. SANKEY

Michael Zammit Tabona is spearheading an effort to promote Malta as a health tourism destination. He has been at the forefront of the industry for many years and his own Fortina Spa Resort boasts one of the most comprehensive spa facilities in Europe.

The five star Fortina Spa Resort, with magnificent views of Valletta, caters to health resort connoisseurs and brings together the most cutting–edge spa treatments from around the world.

Perhaps the most innovative feature of the resort is the world’s first therapeutic spa bedrooms. The concept is to allow guests the opportunity to enjoy spa treatments in the privacy and comfort of their own rooms that come equipped with an astonishing array of apparatus. The rooms include a two–person spa and a stress buster machine designed to increase oxygen intake, lymphatic drainage and stimulate a higher metabolic rate. A therapeutic bath and steam massage shower provide a number of treatments including aromatherapy, seaweed and mud treatments. There is also a Dermalife machine for detoxing. The spa bedrooms have large balconies with sun beds, a private roof garden complete with barbeque and a private concentrated seawater swimming pool.

Should you require any assistance, personal therapists are on–hand to offer a variety of facials and massages in your bedroom or on your private patio and a personal chef can be booked to cook your choice of food al fresco.

“We have a choice of seven international restaurants, seven swimming pools and four spa centres in the hotel with every conceivable type of treatment,” says Zammit Tabona. “It is the ideal way to indulge yourself.” The dazzling array of treatments include Ayurveda massages, a Cleopatra bath, Le Stone therapy, Kneipp walk, Oxyjet facials and crystal sound therapy, to list a few of the more exotic ones.

“We have also been doing physiotherapy here for 20 years. Gary Neville from Manchester United uses our facilities and we have recently opened a dental surgery that offers the latest treatments at exceptionally competitive prices. We identified health tourism years ago and we are unique in the variety of health and wellness related services we offer.”

THE NURSE OF THE MEDITERRANEAN

During the First World War, Malta became known as the “Nurse of the Mediterranean” but its association with medicine dates back over 2000 years. The curative qualities of its herbs and climate were documented during Roman times and the Knights of St John developed hospitals on the island and founded one of the oldest medical schools in Europe. During the 19th and 20th centuries, Malta served as a base for the care of injured troops in war–torn Europe.

That tradition is alive today. Malta is ranked 5th in the world by the WHO in the Health League Table. The opening of the state–of–the–art Mater Dei Hospital marks the completion of one of Europe’s largest health– related projects.

Recent ECJ rulings suggest that patients within the EU facing “undue delays” are entitled to seek treatment elsewhere in the EU at the expense of their home country and Malta is offering itself as a health tourist destination. “Malta’s resources are ready to cater to this need,” says Zammit Tabona. The rulings are yet to be fully tested by law, but the implications are potentially far reaching.

Initially, Zammit Tabona’s plan is to target UK Healthcare Trusts. UK waiting lists, while falling, have certainly not been eliminated, forcing the Trusts to decide what constitutes an undue delay. “We have appointed a consultant to lobby the Trusts on our behalf and our target is to get ten Trusts on board in the first year. Costs here are typically 30% cheaper than in the UK with no compromise on quality.”

In addition to the Mater Dei Hospital, Malta’s facilities include fully equipped private hospitals and several spa hotels, including Fortina, ideal for post–operation recovery. Medical training for doctors and surgeons follow the UK syllabus closely. Dr. Frank Portelli of St. Philips Hospital points out that they have had no instances of MRSA for over 5 years and English is spoken at all levels of staff.

For private healthcare patients or for operations not covered by either the NHS or private insurance such as cosmetic surgery, Malta has introduced a health card — an innovative finance plan that allows patients to repay the costs of any procedure including flights, accommodation and recovery time, over a number of years.

www.hotelfortina.com

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