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Anyone taking part in next week’s Expo Real property trade fair in Munich will find themselves in one of the hottest locations in Europe to invest in residential real estate.

Prices for residential property in Bavaria’s prosperous capital have risen 12 per cent in the past 12 months, according to research by Jones Lang LaSalle, which specialises in commercial property.

With some of Germany’s biggest companies and lowest unemployment rates, Munich may be playing in a “league of its own” in the country’s residential property market, as Andrew Groom, JLL’s leader of valuation and transaction advisory in Germany, puts it.

But plenty of other parts of the eurozone’s largest economy are experiencing very strong demand for residential property, with foreign institutional investors and locals vying to snap up properties in core locations, and opportunistic investors making a comeback.

In Hamburg and Berlin, median purchase prices have also grown at or close to double-digit rates over the past year, JLL says.

“The German housing market appears to have awakened from its deep sleep,” says Alexander Koch, an analyst at UniCredit, the Italian bank, who expects “respectable but not excessive price growth” that might have considerable regional variations.

With interest rates low, the German economy prospering in spite of turmoil in the eurozone, and with few other asset classes looking attractive, the right kinds of residential properties in the most in-demand cities have been sucking in investment.

“There are two factors that are making the core market even hotter. One is new investors coming in – a number of funds have started or are starting aimed at the residential market – and the other is the state of capital markets in general,” says Karsten Nemecek, managing director, corporate finance – valuation, at Savills Germany, real estate services provider. “Amid extreme volatility and negative real interest rates on many assets, money is flooding into property as an attractive alternative.”

Peter Brock, the Frankfurt-based asset manager for Grainger, the UK property company, says private investment has been behind price rises in good properties in the big cities, driven more by wanting to find inflation protection than attention to yield. “In some areas institutional investors have simply been priced out of the market because yields are so low. Quality properties have been snapped up unbelievably quickly and in some cases there seems to be overheating, particularly in Berlin and Munich,” he says.

Another sign of Germany’s attractiveness is the growth in transaction volumes. Savills says 92 residential portfolios, totalling 34,600 homes, were sold in the first half of the year. That represents more than half as many deals again as in the same period of 2010 and a 2 per cent increase in the number of units sold.

But the total amount paid in those transactions fell from €2bn ($2.75bn) to €1.7bn, suggesting much of the increase in deal volume was at the opportunistic end of the market.

In effect Germany has a two-tier market, says Mr Nemecek. “Prices being paid vary immensely.

There are high prices being paid for the best units in the best locations and a number of opportunistic purchases of cheaper units or deals out of insolvency.”

Further deals are expected: one of the biggest portfolios up for sale belongs to Landesbank Baden-Württemberg, the Stuttgart bank, which wants to offload 21,500 units as it restructures.

Property professionals say investors are much more cautious about where they put their money than they were five or six years ago – with justification, since prices for new apartments are still falling in less popular areas.

Tobias Just, head of real estate research at Deutsche Bank, says yields mirror risk better than a decade ago, after a “repricing” in eastern Germany.

Mr Nemecek says: “Investors who dare to move into riskier regions or assets are being rewarded with very attractive yields.”

Berlin, to many investors, is the most interesting residential property market in Germany. Rents are still only half the levels of Munich but are catching up “at full speed”, says Roman Heidrich, JLL’s leader of residential valuation advisory in Berlin.

April’s initial public offering of GSW Immobilien, a property company focused on Berlin, gives investors an alternative way to play the market in Germany’s capital. Whitehall and Cerberus sold about 60 per cent of GSW, which has about 48,000 units.

Grainger’s Mr Brock says: “One of the most interesting developments in Germany has been the emergence of a number of domestic residential property companies that are relevant to international investors. There has been a step forward in capital market terms.”

However, despite the strong interest in Germany, refinancing of some earlier residential portfolio deals remains a concern, with estimates of up to €13bn of debt in such deals to mature up to 2013.

One of the best-known examples is Deutsche Annington, the property company owned by private equity group Terra Firma, and one of Germany’s biggest landlords. It has €5bn of a complex securitised loan to refinance by 2013 and is in talks with lenders.

GSW paved the way for its Iinitial public offering by refinancing almost €900m of commercial mortgage backed securities in separate tranches with six different banks. It is an approach other borrowers may have to consider as wary banks shy away from getting overexposed on big deals.

Source: Financial Times,  September 28, 2011