Hotbed of innovation, centre of stability, exemplary amalgamation of economic success and social responsibility: Germany never tires to sing the praises of its strong medium and mid-sized companies (SMEs). And the outside world continues to admire this German Mittelstand – ever willing to make acquisitions as and when opportunities arise. For real estate investors, however, SMEs seemingly do not play a major role (yet). By Nikolai Dëus-von Homeyer

Surprisingly, many domestic and international property investors seem to largely ignore the strengths and the potential of Germany’s high-performing SME segment. International investors are well aware, of course, that Germany’s multi-centre structure lacks the one single dominating property market that exists, for instance, in France or London. However many still hesitate to venture beyond the circle of the “top 7”. Even German investors tend to focus on the top 7 since many lack the local expertise and the capabilities required for the demanding management of the typically smaller assets.

Similarly, the typical property investor is no fan of tenants from the SME-universe, preferring one large company with a long-term lease to a diversified group of smaller and mid-sized outfits.

Both factors lead to investors letting opportunities slip through their fingers. Opportunities to tap into attractive markets, for one: 70 German cities have more than 100,000 inhabitants, for instance. Germany’s megacities Berlin, Munich, Hamburg and Cologne together are only home to a small part of the German population – 90 % live elsewhere. And many of the frequently SME-type “hidden champions”, i.e. global market leaders that operate below the radar screen of the capital markets or the media, are headquartered outside of the big metropolises. As a result, there are many wealthy regions with a strong infrastructure out there that offer attractive living conditions.

Looking to the Mittelstand makes sense, not only when considering potential investment locations: investors also stand to greatly benefit from the real estate holdings of the German Mittelstand: over 80% of the properties from which German SMEs operate are owned by these players. Many are not properly run from a real estate professional’s perspective, which means that adequate asset management could offer significant value potential – that across the board, from office buildings to production or, for instance, logistics properties.

This brings us straight to the third advantage of an SME-focused property strategy: buildings or portfolios with a diversified tenant base from the SME-universe promise stable cash flows. Losing a tenant is less problematic since the income derived from this tenancy represents only a small portion of overall revenues and new uses for the vacated spaces can be found more easily than if a big company and single occupier fails to prolong its lease.

Lower demand pressure, the opportunity to exploit as yet untapped earnings and value potential and a stable and well-balanced portfolio: focusing on the German Mittelstand does pay off, including for property investors.