RCA in the commercial property press:

German Firms Scour U.S. for CRE Deals

Wall Street Journal reports: More than 25 years ago, when the U.S. commercial real-estate industry began to emerge from its last collapse, German investors were among the first to snap up properties at discount prices.

History may be repeating itself. While numerous foreign investors have begun to scout the U.S. market in recent months, German investors have been among the few that have actually done deals.

"Regardless of whether the U.S. has reached the bottom already or won't do so for another three-quarters of a year, prices today are good compared to long-term averages," said Matthias Danne, head of the real-estate investment business at DekaBank Deutsche Girozentrale.

Deka is the asset manager for Germany's savings banks and operates the country's largest portfolio of open-ended property funds, with a total of some €19 billion ($28.24 billion) in property assets under management. The German open-ended funds are required by law to maintain high levels of liquidity. As a result, they don't take on a lot of debt and are more focused on generating income through dividends than property appreciation.

In September, Deka purchased 1999 K Street, a 12-story office building designed by architect Helmut Jahn and located in the central business district of Washington, D.C. Deka paid $208 million for the building, which analysts said represented a capitalization rate of about 6.3% and was at the top end of prices of prime office space in the capital. The capitalization rate, annual net income divided by purchase price, is a measure of how the market values real estate.

But Mr. Danne said that from a long-term perspective, the deal still is a bargain.

"We got one of the best properties in D.C., a brand-new fully rented office on K Street with 15-year leases," he said.

Foreign investors have spent about $2 billion on U.S. commercial properties this year, nearly half of the amount coming from German investors, according to Real Capital Analytics, a New York property-research firm. Foreign investment could reach about $5 billion by the end of the year, the firm projects.

Compared with past years, however, foreign investment in U.S. property, never a major force, is the lowest it has been in recent years. At the peak of the property boom in 2007, foreign investors poured $33.4 billion into U.S. commercial properties, according to Real Capital Analytics. Last year, foreign investment plunged to $12.4 billion.

Unlike private-equity property funds, the German open-ended funds aren't looking for 15% to 20% returns, but aim at a dividend yield of 5% to 6%. That allows them to take a longer view of the market and to pay a premium to secure a deal.

"A lot of people are frustrated with the Germans for accepting 6.3% because cap rates in D.C. are more like 8%," said Dan Fasulo of Real Capital Analytics.

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Posted by: Matthew Stone

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