German investors have long been interested in the Boston commercial real estate market, having already invested in office properties such as One Federal St.
Another wall is about to fall in Germany, and this time it could have direct benefits for Massachusetts commercial real estate.
Already a dominant international force in United States real estate investment, Germany is preparing to send even more dollars across the pond thanks to an anticipated lifting of restrictions on overseas investment. One new rule being pondered by the country will allow German mortgage banks to do business in the United States, while open-ended investment funds, similar to mutual funds, will soon be able to invest all their proceeds outside the European Union. Heretofore, such entities have been able to spend only 20 percent of their total pool overseas.
The two changes are “very big steps” for the United States property market, said James Fetgatter, chief executive of the Association of Foreign Investment in Real Estate, a Washington, D.C.-based trade group. Fetgatter said German mortgage banks, known as “Hypothekenbanks” have never been allowed to do mortgage financing outside the EU.
“They are already teeing up to come here,” said Fetgatter, with several such institutions preparing to open offices in New York in anticipation that the restrictions will be lifted soon by the German Legislature. German banks have previously been allowed to write construction loans in the United States, and Fetgatter said he believes the mortgage financing will become as popular as that has been for such construction lenders as Immobilen and Deutsch Bank.
On the equity side, the open-ended funds are similar to U.S. mutual funds, and have become a popular way for mom-and-pop German investors to get involved in overseas real estate. Such groups have helped fuel a massive influx of German money into the United States during the past five years, with the federal Department of Commerce reporting that Germany invested $4.3 billion to buy real estate in the United States in 2000, the last year figures are available. That compares to $1.1 billion invested in 1991 and $2.5 billion in 1997.
“They find the economy is so big and so resilient here, they have a lot of confidence in it,” Fetgatter said of the allure, adding that the terrorist attacks of Sept. 11 do not appear to have curbed the German appetite for United States real estate. Indeed, Washington, D.C., and New York City remain the most desirable markets for German monies, although Boston finishes a close third.
“It’s certainly one of the favored cities,” Fetgatter said of the Hub. “It’s seen as a very good market for them.” That is true even though overseas investment has dropped for many cities that rode the high-tech boom, including San Francisco. Fetgatter said investors apparently feel comfortable with Boston’s diverse economy, and are also drawn by the barriers to entry, an element that is lacking in such markets as Atlanta. Interestingly, Fetgatter said German investors are not especially keen on Atlanta and the South at present, reversing a long history of investing in those markets.
‘Jewel’ Hunters
German buyers have been leading players in the Massachusetts real estate market throughout the boom period, acknowledged Cushman & Wakefield principal Marci B. Griffith. She agreed there has been little dampening of enthusiasm despite the region’s recent woes, and said Cushman & Wakefield does anticipate the new regulations will enable German investors to be more competitive in chasing deals.
“They are going to be more likely to pull the trigger than they have in the past,” said Griffith, adding that such entities will likely continue to chase trophy assets in the downtown Boston and Cambridge markets. Along with a desire to acquire so-called “jewel-box buildings,” a term describing small but centrally located Class A office properties, the Germans have also shelled out big dollars for such prime Boston towers as One Federal St. and 125 High St.
Massachusetts real estate has always had an international allure, with Japan an aggressive investor during the 1980s and the Netherlands also active. Dutch monies have been used to invest in such properties as 75-101 Federal St., while Dutch financial services firm ING and its United States entity, Clarion Partners, have acquired such assets as a Class A office complex in Waltham and Museum Towers, a luxury apartment development in Cambridge. In February, Dutch-based Ibus Co. paid $53 million for 25 First St. in Cambridge, a 220,000-square-foot office building.
For the time being, however, Griffith said Germany is likely to continue on top of the investor list, with the open-ended funds said to represent $75 billion in capital alone. CB Richard Ellis/Whittier Partners principal Gary J. Lemire agreed that the German influx will mean added competition for domestic pension funds and opportunity players, but said the lifting of the 20 percent limit probably will not be felt until late this year and early 2003.
“They are starting to line up to buy U.S. real estate, but its going to take awhile,” he said. “I don’t think they are going to be committing at this time.”
Despite such delays, Lemire said CB/Whittier’s investment sales team is already working with the company’s overseas connections to assist the investors when the opportunity presents itself. Along with CB Richard Ellis brokers stationed in Great Britain and Europe, Lemire’s group expects to coordinate closely with CB Richard Ellis Investors, a third-party asset manager based in Boston. That division is already working with Deka, for example, a German open-ended fund that is reportedly raising cash to invest in the United States.
