Residential Portfolios, a special asset class

Residential Portfolios are a special asset class in Germany. Sizes of 20,000 to 30,000 apartments in one portfolio being sold once or twice each year. The former owners are either public sector companies or industrial groups refocussing their core business.

In the last weeks there has been a large debate about whether residential property could be an interesting investment opportunity or not. The well known private bank Oppenheim sees the main dangers in the demographic development in the German society as well as in cutting tax benefits for real estate.

Deutsche Bank research came to a different opinion regarding the demographic influence for residential investments. The rule that less people equals less need for apartments is not true.

Even considering that the decrease of population is going to be much stronger from 2010, it is forgotten that the number of households is increasing and the demand per capita is steadily going up.

Much more affected than residential property is in fact commercial property as the number of employees is decreasing more than the population which reduces the need for office and industrial locations.

LB Immovinvest in northern Germany published some more arguments in favour of residential investments. The risk distribution with a high number of tenants is much better than with commercial property, the tax environment is equally affected like commercial properties and institutions are very lowly invested.

As the price cycles are different and more stable than those of commercial real estate, LB Immovest says it is at least an interesting diversification for an institutional investor.

Most of the known buyers are coming from outside Germany like Deutsche Annington, which works with Terrafirma. They like especially those large portfolios which are offering a lot of potential of improvements.

The overall strategy is typically to cut the operating costs, to privatise apartments to the renters and to make use of the developing space in a profitable manner. An active management is not widespread for those portfolios as they are either managed based on a public sector approach or being outside the core business of an industrial group.

Arab investors could follow the examples of other foreign investors. To gain the special market insight it would be the most reasonable step to do so together with a local co-investor who is able to introduce an active management approach to the assets bought.