GERMANY: Public Housing in Private Hands

Ingolf Rossberg is the mayor of this majestic eastern German city. But watching him stride around his ballroom-size office, wreathed in smoke from his cigarillo, one could mistake him for a European real estate tycoon.

Yet he is that after a fashion. Mr. Rossberg reached a deal in March to sell Dresden's entire stock of 48,000 city-owned apartments to an American private equity firm, the Fortress Investment Group, for $1.2 billion. In a single stroke, Dresden wiped out its burdensome public debt.

"We had to move fast," he said, "because if you had 10 German cities selling their property, it would be a buyer's market."

That may soon be the case. German cities are lining up for a mammoth wave of foreign investment in their property. Lured by a German real estate market that is the most stagnant in any major European country, and a vast supply of well-kept public housing, American and other foreign companies have already snapped up dozens of projects in Berlin, Bremen, Essen and other German cities.

Affordable public housing is a pillar of the German welfare state, and the prospect of vast pieces of it falling into the hands of pinstriped financiers from New York or London has unsettled many people here. In Dresden, 45,000 of them signed a petition opposing the sale.

"When a new owner is profit-oriented, it brings changes," said Peter Bartels, the chairman of the Dresden renters' association. "We're not sure yet what kinds of changes. But we know there will be changes."

Foreign private equity investors, mostly American and British, have already spent $25 billion since 2003 on apartments owned by German cities and companies. With the owners hungry to raise even more money, analysts forecast that 750,000 additional units will be sold over the next five years.

The acquisitions have not been limited to residential real estate. A property fund owned by Goldman Sachs paid $4.7 billion in March for a controlling stake in the real estate holdings of KarstadtQuelle, Germany's largest department-store chain.

"The heavy money in London and New York sees a lot of money in German real estate," said Allan Saunderson, managing editor of Property Finance Europe in Frankfurt. "We are at the beginning of a long process that will see a large chunk of Germany's public-sector housing sold."

The foreign appetite dovetails nicely with Germany's needs: virtually every major German city is awash in debt. And with the limited health of a convalescing German economy, they have had few other ready ways to raise funds. Thanks to its sale, Dresden can promote itself as the first debt-free major city in the country.

Mayor Rossberg, who selected the Fortress bid after cutting a list of 83 bidders to three finalists, said, "We found that the interests of Fortress were parallel to the interests of Dresden."

Not everyone agrees. The tenants who opposed the sale said they feared that Fortress would raise rents or even throw people out on the street. They question how a private equity firm, with its need for hefty returns, could own public housing without squeezing the people who live there.

"These investors have no social conscience whatsoever," said Thilo Kluge, 45, a tenant in a city-owned apartment who campaigned against the sale. "They have a single interest: Make my bank account fatter."

Some German politicians have tried to capitalize on such fears.

During last year's election campaign, the chairman of the Social Democratic Party, Franz Müntefering , who is now the labor minister in Chancellor Angela Merkel's broad-based governing coalition, referred to private equity firms as locusts, plundering German assets and exploiting the locals.

Fortress, based in New York and run by bankers formerly at Goldman Sachs and the asset management firm BlackRock, seems aware of the possibility of such resentment. It has taken pains to assure tenants that it will be socially responsible.

"We want to cooperate over the next decades," Robert I. Kauffman, the head of Fortress European operations, said at a news conference on March 10 to announce the deal. The head of its German business, Matthias Moser, ruled out an "aggressive strategy to raise rents."

Fortress declined to comment for this article.

The residents will be protected by an agreement, known as the Social Charter, that Fortress had to sign to stay in the bidding. The contract limits its ability to raise rents - including those that are below market rate - and protects tenants from being evicted. People over 60 or with severe disabilities are guaranteed lifelong tenancy.

Moreover, Fortress must hold on to 34,000 of the apartments for 10 years before it sells them. And when it does, it must offer existing tenants a 15 percent reduction from the market price. Finally, it cannot renovate the apartment complexes into luxury condominiums.

Analysts say the rights granted to the residents are not much different from those that govern Germany's highly regulated rental market. But that raises a question: How will Fortress recoup its billion-dollar investment?

The company has said it wants to reduce the vacancy rate in the apartments, currently 17 percent. To do that, experts predict, Fortress will have to lower rents to attract new tenants. "That would be friendly for the tenants," Mr. Bartels of the renters' association said, "but it would cause problems for the city."

Dresden, he noted, has tens of thousands of apartments owned by cooperative associations. If the rent on the Fortress apartments were to decline, it would put other cooperatives under pressure to match the lower rents.

Mayor Rossberg, who is a member of the pro-market Free Democratic Party, said he would welcome a problem like that. And anyway, he noted, with 40,000 vacant apartments in the city - a legacy of the westward migration of East Germans after the fall of the Berlin Wall - people already have the flexibility to move from one apartment to another.

If Fortress can increase occupancy rates, analysts said, it would probably be content to wait a decade to sell the apartments. Much of its capital, Mayor Rossberg said, comes from state pension funds in the United States, which he said allowed Fortress to be a patient investor.

"The rule of thumb is that the firms only put in 25 percent of their own money," Mr. Saunderson of Property Finance Europe said. "The rest is bank financing. You take out your 25 percent in a few years, and you have a rolling program of sales. People grow old and die, or leave the apartments."

Given the timetable involved in these investments, the foreigners also appear to be betting on the local economy. Dresden, with a jobless rate of 14.6 percent, would seem to be an unpromising market. But Mayor Rossberg said the city's population had begun to grow again, as its strengthening commercial base attracted people from elsewhere in eastern Germany.

In general, Germany looks less risky than it did three years ago, when the early speculators arrived.

As the atmosphere brightens, analysts say that German consumers will begin to spend money again. "Germany is a very wealthy country, but their problem is that they don't know it," said Philippe Tannenbaum, the head of research at EuroHypo, a German bank that finances property deals.

The question is whether they will start buying real estate. Home ownership has only limited popularity in Germany, which has one of the highest percentages of renters of any advanced economy. And professional German investors have turned up their noses at their home market.

"Germans think seaside condominiums in Florida are a good thing to buy," Mr. Saunderson remarked, "at the same time that Americans are bailing out of what they view as a frothy market."

To some extent, the rush into German real estate merely reflects that lack of other good options. Real estate prices in the United States, Britain, France and Spain have risen at torrid rates for the last few years, making Germany look like a bargain.

Berlin, for example, has had a vast auction of state- and city-owned apartments. In 2004, Goldman Sachs and Cerberus, a New York-based hedge fund, bought 66,000 units for $2.5 billion. Gagfah, a state-owned company, sold 80,000 apartments to Fortress for $4.4 billion.

In the largest transaction to date, Terra Firma, a private equity firm based in London, paid $8.8 billion last year for 138,000 units owned by a subsidiary of E.On, the German utility company.

Not every German city is cashing in on the gold rush. After Fortress acquired a stake in some apartments in Munich through the Gagfah deal, the city bought out the company. The mayor of Munich, Christian Ude, said he did not want to sell public housing to foreign investors.

In Dresden, Mayor Rossberg said the opposition to the Fortress deal was more sound than fury. While 45,000 people signed the petition, out of a population close to 500,000, there are 70,000 residents in the city-owned apartments alone. That suggests, he said, relatively thin opposition.

By wiping out its debt, the mayor said, Dresden would save nearly $100 million a year in interest payments, freeing money for schools, cultural programs and urban development.

Mr. Kluge, the tenant who intensely opposed the sale, said he hoped he could stay in his place, a small, tidy apartment with a burbling fish tank in the living room. He has lived there since 1998, supporting himself and his family with unemployment checks and other payments.

"People are just resigned to these things happening," he said.

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