Germany's residential property market is set to take off and could yield stellar returns for investors, according to a real estate fund manager.
Nigel Bolton, manager of Scottish Widows Investment Partnership (SWIP) European Real Estate Fund, believes government moves to increase home ownership in Germany will rally the market.
Only 45 per cent of residential property in Germany is owner-occupied, with the remainder being rented out - one of the highest percentages of rental properties in Europe.
However, German Chancellor Angela Merkel, who took office in November last year following an inconclusive September 18 election, has been making moves to sell off the country's public housing stock.
"Residential property in Germany is pretty interesting," said Mr Bolton. "We think the (rental) trend will start changing.
"The change in government, with Merkel's proposals to increase home ownership and sell off a lot of housing stock is akin to what Margaret Thatcher did in the UK (in the 1980s).
"There's a liberation process going on in Germany just now that's enabling people to get on to the housing ladder."
The increase in consumer emand and the recent announcement that Germany is preparing to introduce its own real-estate investment trust (REIT) structure would stoke house prices, said Mr Bolton.
He anticipated single-digit increases this year and a "significant uplift" in the next five years, as a culture of home ownership developed.
"House prices (in Germany) are pretty flat and over the last 10 years have gone down, but we're starting to see prices going up for the first time in a decade.
"Germany is one of the cheapest residential markets in Western Europe at least, and it's significant that house prices have gone positive."
SWIP European Real Estate, a one-year-old £40 million fund, was one of the first of its kind when it was launched in September 2005, giving retail investors access to European listed property securities previously only available to institutional investors.
The fund invests in REITs in European countries where they are already available and will be able to invest in UK REITs following their introduction in January 2007.
It was initially overweight in UK property stocks, such as Land Securities and British Land, after the government gave the go-ahead to UK REITs. But Mr Bolton reduced UK holdings and took an overweight position in Germany at the start of 2006.
That has helped it outperform during its first year, turning in a 40.5 per cent return against an increase of 20.6 per cent in the IMA Specialist sector, according to Trustnet data.
German stocks that have contributed to the fund's top quartile performance include logistics and commercial property business IVG and residential property firm Patrizia, which has been buying and renovating a portfolio of public housing stock.
Spanish retail operator Rio Fisa, French casino business Mercialys and shopping centre owner Klepierre, also of France, have added to returns.
Mr Bolton, head of European equities at SWIP, was bearish on Eastern Europe, pointing to lax planning restrictions, over-development and a shortage of high-quality commercial property.
But he remains positive on the UK listed property market in the lead-up to the introduction to UK REITs.
"The UK REITs structure looks set to perform better than the market had initially expected and this should increase the potential for higher payouts," he said.