Good value and a glut of sellers have seen Irish pour into German property, writes Derek Scally

Irish investors are moving into German commercial property in record numbers, driving demand and prices in what analysts say is now Europe's largest property hot spot.

Davy stockbrokers, Quinlan Private and Signature Capital are just some of the names to have made significant investments on behalf of Irish investors in German retail property in recent months, buying large retail properties in Cologne, Essen and Hamburg.

This wave of foreign investment in the past two years has come as a pleasant if puzzling surprise to German property owners at a time when many of them are anxious to sell.

"There are interesting parallels with the mid-1990s when we saw very significant German investment coming into London at a time when British investors were perplexed," says Dr Nick Axford, head of research and consulting at CB Richard Ellis real estate services.

Property analysts Jones Lang LaSalle have said that, in the first half of 2006, German commercial property transactions reached a value of €19.7 billion, equal to the total business conducted in this area in the previous year.

Some 82 per cent of this year's investment came from foreign investors reassured by rising economic prospects, dropping unemployment and increasing consumer demand.

Germany's second-largest city, Hamburg, has overtaken traditional favourite Munich among foreign investors interested in commercial property. Leading property agents in the port city posted a new transaction record of €1.4 billion in the first half of 2006, with a year-end forecast of €2.4 billion.

"In previous years, foreign investment only counted for around 5 per cent of turnover. Last year it reached 50 per cent and this year it's around 70 to 75 per cent," said Christoph Ringleben of the Grossmann & Berger agency in Hamburg to Die Welt newspaper.

Compared to struggling Berlin, Hamburg is a boom town with a strong business community, industry base and affluent population.

Of particular interest to investors are German retail properties which, according to a study by Frankfurt's Lohnbach Investment Partners, are "attractively valued in international comparison".

Davy stockbrokers has been one of the most active Irish players in the retail sector, buying two prime developments in Hamburg for €169 million in the last months.

It was followed into Hamburg by Cork-based CMC, which has invested €65 million on a shopping centre in the Altona district.

Further west a consortium led by Quinlan Private has bought a six-storey mixed use development in the centre of Cologne's shopping district comprising 16,000sq m of retail space and office space of 10,000sq m.

Down the road in Essen, Signature Capital spent €54 million on a retail office block on the main pedestrian shopping street last month, bringing its total investment in German property to more than €150 million.

"When we look at real estate, we have a different perspective," says Enda Woods, a partner at Signature.

"I can see why a German investor who's had a torrid time of things for over a decade would welcome the fact that foreign investors are now in the market - sell now and get out."

But he is convinced not only of the good value and quality of what's on offer, but that it made sense to buy at a cyclical low-point.

As the market heats up, Irish investments are approaching larger German property players such as the German Property Fund (DIFA).

DIFA spokesman Fabian Hellbusch sees foreign investors' "rediscovery" of Germany as a combination of a market correction and a happy coincidence.

"Partly it's a correction after years of low interest from investors abroad.

"The foreign investors we're seeing now entering the market are here for the medium to long-term, meaning the interest will hold," he says.

"German investors are still interested in Germany, but many are reweighting their domestic portfolios and offloading excess property here."

The well-publicised difficulties of high-profile German property funds earlier this year have resulted in a sell-off of properties of a type and quality that is increasingly difficult to find elsewhere in Europe.

German investors have discovered to their delight that they can sell an entire portfolio intact to a foreign investor who, at a stroke, becomes a property player in Germany.

Just this week, DIFA concluded one of its largest deals, selling an office portfolio worth €860.5 million to US investor Tishman Speyer Properties, owner of New York's Rockefeller Center.

Germany's commercial property market is expected to get a further shot in the arm next year when the federal government finally gives the green light to real estate investment trusts (Reits), providing significant tax breaks for companies that redirect profits to investors.

Many analysts suggest it is not necessarily German commercial property that has become more attractive, but that the country's 6 per cent yields are now looking better than before as prices rise and rental yields sink across the continent.

"German property just looked expensive to the rest of the Europe, particularly because of local circumstances and the economy not performing well," says Dr Axford of CB Richard Ellis real estate services.

Compared to more conservative German property funds, he says Irish investors are playing a more aggressive game with debt, setting high yields against low interest rates.

But, like many analysts, Dr Axford is concerned by the mixed signals about how quickly Europe's largest economy will recover and how steady that recovery will be.

After a forecast of 2.5 per cent growth this year, things are expected to cool down again in 2007, particularly if January's three percentage-point VAT hike hits consumer spending.

Meanwhile, an optimistic IFO business confidence index has been offset by a drop in the ZEW index of economic sentiment, with German investment analysts and institutional investors concerned about further interest rate increases from the European Central Bank.

And, with Germany's commercial property market now bustling with international investors, prices are rising and yields are dropping, making calculations tighter than before.

"We would urge investors to look very carefully to see how dependent their investment is on German economic recovery," says Dr Axford. "It's a recovery that has proven more elusive over the years than many people have expected."