Eckart John von Freyend discusses the future of G-REITs

By Christopher M. Wright

Eckart John von Freyend, founding member and head of the German trade group Central Real Estate Committee (ZIA), has been at the center of efforts to bring REIT legislation to his country and unlock the value of German property for investors. ZIA is a leading promoter of the real estate industry within the Federal Association of German Industry. He became president of the Institute of the German Economy (Institut der Deutschen Wirtschaft) in Cologne in 2007. Previously, John von Freyend was CEO of IVG Immobilien AG.

German REIT legislation passed in June 2007. What are some developments you expect within the industry?
We may see the first IPOs of G-REITs in late 2007, although some companies will want to wait for the pending major corporate tax reform for fiscal reasons.

German residential property built before Jan. 1, 2007 was excluded from the REIT legislation, but some observers believe this will change in the future. Do you agree?
In my eyes, there is no way to rationalize the exclusion of residential property. It was purely a political decision, and we are optimistic that it will be corrected with a modification of the REIT Act within the foreseeable future.

Are there any other significant differences between G-REITs and REITs elsewhere that investors should know about?
Apart from the exclusion of existing residential property and ownership periods mandated for the application of the exit tax regulation, G-REITs essentially mirror U.S. REIT legislation. However, it is important to come to a uniform regulatory solution so that a pan-European REIT can take place.

Investors are attracted to growth throughout Europe, but it is commonly perceived that Germany’s population is not growing, economic growth is sluggish and high unemployment remains a problem. Why should REIT investors consider Germany?
The picture you just sketched was certainly not unjustified in past years. Recently, however, Germany has reported robust economic growth, while unemployment rates have dropped substantially. Meanwhile, the economic recovery has precipitated a rising demand for floor space and a higher uptake on the commercial real estate markets.

Reportedly, office property values are higher in Warsaw than in Berlin, yet Berlin is a “world capital” like London or Tokyo. Is office space underpriced in Berlin, and, if so, is it a good opportunity for REIT investors?
Sound properties with appreciation potential are more affordable in Berlin today than they are in central London or in Tokyo’s central business district. At the same time, valuations of German real estate are showing upward momentum.

However, Berlin has a stabilization of rents and the potential for development. Additionally, with Germany being a decentralized country, investors should keep an eye open for other markets such as Cologne, Düsseldorf, Frankfurt, Hamburg or Munich.

Initially, which sectors offer the biggest opportunities for G-REITs? Are there certain cities that are a better investment than others?
Office REITs will play a major role, because office property represents one of the largest real estate market segments.

Additionally, the concentration on a specific region is by all means a promising strategy. The across-the-board approach, by contrast, strikes me as a business model that will make it hard to conceive of an equity story that will sound attractive to investors. Investors take a keen interest in the competencies and visions of a given management, as well as in the question of what expertise can be documented in the track record of past years.