ATWEL International, s.r.o. www.atwel.com Page 2
GERMAN PROPERTY MARKET
Looking at property markets in Ireland, England, US, Spain, or Australia, one has to think that Germans live veryboring lives. Prices of homes in Germany have been nowhere close to roller coaster of its neighbors. According to theEconomist, prices of homes in Germany have been actually falling over past seven years. Since 2003, house prices fell19% in nominal terms and about 24% in real terms. That stands in comparison with markets in Spain and Britain,where the house prices increased roughly 50% in nominal terms and 20% in real terms. Applying a different metric,prices of home against average incomes also fell in Germany by about 20%, while in Spain it went up by 20%. Datafrom also reveal that by the end of the last year, renting prices implied 15% undervaluation of the German propertymarket (leaving Spanish, Australian, and Hong Kong market most overvalued ones by as much as 50%).German property market has another distinguishing feature. Half of Germans rent rather than own. That must be ashocking statistics to many Irish or Spaniards where rate of ownership reaches 80%. German property market is thusa lot about renting and rent yield.Our investment idea is quite simple. First, one should capture the undervaluation by investing into property REITsthat pay out most of the rental income in recurring dividends. Second, with general house price increases inGermany, rising NAV of the REITs should translate into further capital gains. Why should German houses gain onvalue? It is as simple as the Eurozone being trapped in a two speed environment and current rates and 10y bondyields are simply too low for Germany, having a tendency to fuel economic overheating and asset bubbles.Recently, we ran across a German company called Gagfah. It is the largest listed German REIT with a well diversifiedportfolio of housing units, most of them being spread across 20 largest German cities. 60% of the company is held byFortress Investment Group, a US based hedge fund. Given its effective control over company, the policy is set tomaximize return on its investment. The company runs a high dividend policy, providing almost 13% yield. Thecompany distributes almost entire funds from operations in quarterly dividends.We look for an ideal
entry point at around €5.
60 with stop-loss at 5.05. We target at least
€7.50 + received dividends.