Germans buying real estate in New York, D.C.

Office tower in Rosslyn, Va., sold for $106.7 million

October 30, 2002|By Michael Brick | Michael Brick,NEW YORK TIMES NEWS SERVICE

When the Commonwealth Tower just across the Potomac River from Washington in Rosslyn, Va., changed ownership in July for $106.7 million, the buyer was a German investment fund. And so was the seller.

Recent changes to the regulation of some German funds and mortgage banking practices, intended to strengthen Germany's competitive position in global finance and to promote Frankfurt and Munich as investment hubs, are contributing to an increased flow of German capital into commercial real estate in the United States.

"The money is pouring into the United States," said Jerrold Barag, chief investment officer for Lend Lease Real Estate Investments, an international real estate services concern. Other factors include stable currency exchange rates, weakness in world equity markets and low interest rates that contribute to low returns from savings accounts and other forms of debt investing in Germany.

Looking for income

"They're not looking for appreciation, they're just looking for the income," Barag said.

German investors have spent $3.4 billion, or a little more than 50 percent of the $6.4 billion in foreign capital that has been used to buy commercial real estate in the United States so far this year, according to Real Capital Analytics, a consulting and research firm based in Manhattan that tracks and attempts to identify the buyers of properties worth $5 million or more. In all of 2001, the firm tracked only $5 billion worth of purchases using foreign capital.

The sale in Rosslyn, involving a 343,000-square-foot building that is 92 percent leased to a dozen primary tenants, is "indicative of the transaction velocity and their market share," said Warren Dahlstrom, a broker in the Washington office of the commercial real estate services firm Cushman & Wakefield who worked on the sale.

"What these funds are doing is packaging them and selling them through some of the largest banks," Dahlstrom said.

The money enters U.S. real estate markets from Germany in two forms, closed-ended funds and open-ended funds. Closed-ended funds own between one and three assets, and shares are sold to high-income investors for tens of thousands of dollars. The investors are considered to be the taxpayers, so their income of a few thousand dollars a year is taxed by the United States at a low rate. These funds are largely unaffected by the regulatory changes.

For open-ended funds, which have been amassing capital as investors anticipate improved returns from new flexibility allowed by the regulatory changes, the tax advantages alone are meager, and they have not changed in more than a decade. The lack of tax advantages available to open-ended funds indicates that their investors expect high returns for other reasons, including the new strategies available after the regulatory changes, tax experts said.

"The mutual funds do not go to the U.S. because of the tax treatment, they go because of the performance," said Thomas A. Eckhardt, a partner with the accounting firm Ernst & Young Germany who works in New York.

Finding more investors

And they are finding more investors for their U.S. ventures. There are about 20 registered open-ended mutual funds in Germany that are required to maintain significant levels of liquidity because their shares are publicly traded and immediately redeemable. By July 31, the funds had assets of 66.67 billion euros, or $65.7 billion, compared with assets of 50.81 billion euros, or $50.1 billion in the middle of 2001, according to Hans-Dieter Schulz-Gebeltzig, a partner who works in Frankfurt in the real estate practice of Linklaters, an international law firm based in London.

The open-ended funds, most of which are managed by big German banks and insurance companies, are the primary beneficiaries of the changes, which became effective July 1. They were previously limited to investing no more than 20 percent of their assets in real estate outside the European Economic Area. The new law eliminates that limit, substituting a provision that the funds' exposure to currency fluctuations may not exceed 30 percent. It also allows them to acquire minority interests in joint ventures and to invest up to 49 percent of their assets in majority share investments instead of only 20 percent.

Because of these German regulatory changes, in the United States, "one, they will spend more money, and two, they will have more flexibility in the deals they do," said Jon Caplan, a senior director of Cushman & Wakefield in the United States who has traveled to Germany to study the funds' strategies.

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