- The Washington Times - Thursday, November 7, 2002

Recent changes to financial rules overseas have opened the door for German investment in U.S. real estate, but the deals have been slow to come to the Washington region.
Legislators in Germany passed new laws in July allowing operators of German open-ended funds, such as mutual funds, to spend 10 percent more money on investments outside the European Union.
But the only deal of note involving a German fund this year came when Blue Capital Investments, a subsidiary of one of Germany's largest banks, paid about $78 million, or $385 per square foot, for a 10-story building at 799 Ninth St. NW.
"There are a tremendous amount of off-shore operations looking at Washington, but given the relative lack of product, it hasn't changed the dynamic," said John Kevill, a broker in the D.C. office of real estate services firm Jones Lang LaSalle, and co-author of a report on the subject.
Some industry sources said German investors are taking time because they have insisted on newer buildings with nothing but top-tier office space, preferably in central business districts or other prestigious locations. Such properties are rare in Europe.
"A typical German fund will look at Class A, trophy-quality assets of size," Mr. Kevill said. "They want as big as they can get. They want properties that are reasonably new and in good shape."
Others acknowledge that German funds have long valued big, top-notch buildings but said the new laws will make it easier for German funds to build a more diverse portfolio made up of multiple smaller properties.
Those with knowledge of the German economy said the lack of new deals stems from a poor economy both here and abroad. And with real estate prices climbing in the District, German investors are taking their time.
"They are very market driven," said James Fettgatter, chief executive of the Association of Foreign Investment in Real Estate. "The prices are continuing to rise, and the funds are being cautious."
And, many real estate investment sources said, deals don't happen overnight.
"I think we have to be a little bit patient," said Thomas Hopf, a real estate attorney for the Frankfurt office of Faegre and Benson. "The funds have to be sure that they can earn with the property enough money to guarantee the investors a sufficient yield. So it is not easy to find the right investment."
Furthermore, open-ended real estate funds may be declining in popularity. They attracted about $850 million in August, down from $1.3 billion in July, according to BVI, an investment fund association.
But, sources with knowledge of the investment climate in Germany say the plunging stock market there is pushing money toward real estate and that big deals involving German open-ended funds will come eventually.
"It's a safe-harbor feeling, and a feeling that real estate can't lose money," said Alexandra Merz, a senior investment analyst with Moody's Investor Services in Paris.
Germany ranks fifth in the world in the amount of money it invests in real estate here, and many German funds, including Blue Capital, were active long before the relaxing of spending rules.
Jamestown, a German mutual fund with offices in Cologne and Atlanta, is said to be involved in discussions to purchase One and Two Independence Square, now owned by Boston Properties and occupied by NASA and the U.S. Department of Commerce in Southwest. TMW Real Estate Group, a real estate advisory firm with offices in Atlanta and Munich is said to be advising Jamestown and is involved in many other deals around the region.
"I think that in the next [few] months you will recognize significant investment of German real estate funds in the U.S. market," Mr. Hopf said.

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