The German property market has been an item of speculation amongst investors for quite some time. Germany is a mature rental market, which accommodates a higher proportion of households than in the UK and property prices are not directly linked to UK property prices. Through high quality fund management and local property knowledge, and a rigorous due diligence framework, the German property market can produce net rent yields significantly higher than in the UK with lower costs of debt.
Performance
The Fund operates under established performance guidelines with each individual property expected to have a gross rental yield of 7.5 – 8.5%, achieving a geared return to investors in the region of 13% based on acquisitions so far. This is considerably higher than any other investment with a comparably low risk profile currently being offered in the UK market.
With €11m in equity already invested, the fund is working towards an initial property acquisition level of €100m by the end of 2008 and a total acquisition value of €1billion in the medium term.
There are still significant gains to be achieved in Germany with the Fund offering a strong, yield driven, socially responsible investment strategy.
The Acquisitions
The investment strategy is focused on a micro-acquisition approach. This micro-approach involves a detailed hands-on examination of each and every property acquisition by Kexgill property advisor to Landericus and an investor in the fund. Kexgill also oversee management of the portfolio. Extensive and detailed due diligence is undertaken on the ground, examining the smallest variables from the level of tenant involvement to the dates and length of existing agreements and on the ground discussions with the residents. This exhaustive approach ensures that only top-performing properties are considered for the Fund.
The managers have categorically dismissed the traditional macro ‘portfolio approach’ used by private equity and hedge fund investors in the past and indeed still used by some now. The purchase of large, pre-assembled portfolios of properties provides immediate size and presence in the market but inevitably the portfolio will contain a considerable number of under-performing properties. The micro-approach provides greater property due diligence as it allows a focused examination of each individual property instead of the traditional sample approach used for large scale portfolio acquisitions. Moreover, macro-based funds frequently rely on overly ambitious capital growth and a fundamental shift in the German approach towards home ownership. The Fund does not rely on disposals and assumes minimal capital growth.
Diversification
The UK residential investment market is currently in a state of uncertainty following unprecedented levels of demand up to July 2007. The German residential market has in contrast been flat for 10 years and does not require the correction currently occurring in the UK. The current worldwide credit difficulties have reduced the number of buyers in Germany creating opportunities to purchase the very best performing assets sometimes at less than half the original build cost 10 years ago.
The Management
The Fund Manager of Landericus is TradeRisks (Guernsey) Limited, a Guernsey based management company regulated by the Guernsey Financial Services Commission. TradeRisks Limited is the Investment Manager in the UK. The Investment Manager runs an investment committee consisting of property specialists in the German social and private housing sectors, together with financial analysis and modelling experts, representing the key stakeholders in the fund. All members of the investment committee are investors in the fund. This ensures that the interests of the investors (both active and passive) and managers are aligned. The committee presides over all property investment decisions.
Richard Stott BSc MRICS Managing Director (Kexgill Consultancy)