Germany: Funds – An Inside Perspective On The Changing Regulatory And Investment Climate

Monday, April 23, 2012 - 14:12

The Editor interviews Mario Leissner, Managing Partner of King & Spalding’s German office in Frankfurt am Main.

Editor: Please update us on what has transpired with respect to the practice of the Frankfurt office since last year’s interview.

Leissner: The number of real estate transactions that we have handled is about the same as last year. Germany continues to be one of the leading European countries in terms of number of real estate deals, health of the market and the trust of investors in the market, but it has still not returned to the levels achieved before the economic crisis.

Although we are actively involved in real estate deals and advising with respect to real estate fund management, our most active area is advising as to regulatory compliance and fund structuring and restructuring triggered by new legislation in Europe and Germany. The target of the new legislation is not only typical real estate funds but also asset managers and others that so far have not been regulated. 

The Alternative Investment Fund Managers Directive (AIFM Directive) must be implemented by individual countries by 2013. It requires all national legislatures in Europe to create rules that will apply to everyone involved in any type of fund business. I’m not talking only about real estate funds but any type of fund business.

Everyone who is a manager of a so-called alternative investment fund (with “alternative” actually including every type of fund) will be subject to the AIFM Directive.  National legislatures including the German national legislature are about to create the national laws that will fulfill the requirements of the AIFM Directive.

The result is that everyone who is active in the real estate field in Germany and who is dealing with any type of real estate vehicle, including funds, will be part of and subject to regulation under this new legislation. As we are one of the leading, if not the leading, regulatory practices here in Germany, we will become even more active in helping our clients and future clients comply with the new legislation in addition to the existing regulations.

Because the existing regulations affecting real estate funds have been changing so rapidly, the principal focus of our practice has been to help our clients comply with the changing rules. All of this is taking place while we are also engaged in our typical pure real estate transactional work.

Editor: Does that mean that your office’s practice now includes counseling funds other than real estate funds?

Leissner: That is true. However, our main business is still advising real estate market participants, principally real estate funds. However, our regulatory practice includes clients that are money market funds, stock market funds and a variety of other funds. We also have corporate, M&A and private equity fund practices although they are not a principal emphasis of our business.

Editor: Does your office’s practice include advising U.S. investors and funds?

Leissner: It is my hope that more U.S. investors, asset managers and fund sponsors will realize how good the European and in particular the German market is for them. A few U.S. fund sponsors have asked us to structure so-called special funds or other types of vehicles to enable German and European institutional investors to invest in U.S. real estate. These include typical German institutional investors like German insurance companies and German pension schemes and pension funds, which are all subject to German regulations. Since these German investors are subject to German regulatory law, we advise the asset manager or fund sponsor with respect to the structure that they should offer to them that will be both tax efficient and compliant with the applicable regulations.

U.S. investors should consider investing in German assets. German assets may be a little bit boring, which means that nothing will provide a 20 percent yield, but on the other hand they are extremely safe, so you can get safe results, safe cash and safe yields in Germany without substantial risk. Interest rates are zero or close to zero in the U.S. If you can get a four, five or even six percent return on extremely safe real estate investments in Germany, that is quite a good number from a potential U.S. investor’s perspective.

Editor: What is the overall business climate in Frankfurt? It seems very obvious from what I’ve been reading that Germany has not suffered greatly as a result of the recession.

Leissner: That is true. Germany is the only European country that has emerged from the crisis stronger than before. Our economic growth rate is truly impressive, with German industry doing really well. 

Editor: Do Germany’s business laws offer advantages?

Leissner: Businesses coming here can trust the German legal system. There’s no reason to be concerned. Under the German tax and regulatory system, if you have a good structure you can reap great advantages. 

Editor: In the real estate area, are there particular opportunities that American companies should be aware of?

Leissner: Number one, significant amounts of German institutional money is waiting to be invested.

Number two, there is a lot going on in terms of regulatory law and legislation, so if you are considering how to structure your business here, you have a unique chance to take full advantage of the new regulations I spoke about earlier. Existing businesses may find themselves facing difficult and costly restructuring. You can avoid every legal mistake that companies that have always been here were prone to make in the old regulatory climate. It’s exactly the right time for foreigners to come to Germany.

Number three, real estate and other assets can be acquired at fair prices. We didn’t have the ridiculous inflation of prices that occurred in most countries.

Number four, you get extremely good quality here. There is no country in the world that has better construction quality. German construction laws are so strict that every building will be there forever.

Editor: Do you find that more foreign players are entering the German real estate market?

Leissner: We are seeing some. Foreigners may look at trophy buildings and trophy properties only and may miss the other good opportunities. Middle East and Israeli money is starting to flow again into Germany, so I wouldn’t wait too long.

Editor: Is your office involved with M&A apart from real estate?

Leissner: Yes, we are. We do have a number of M&A and corporate clients. We are working on two transactions for U.S. clients where the target companies are small high-tech German companies with a number of patents.

Editor: I understand you served as general counsel of the market-leading German institutional real estate investment fund sponsor, Oppenheim Immobilien-Kapitalanlagegesellschaft mbh. Does this continue to be a strategic alliance for you and the firm?

Leissner: Yes. I started my career as a lawyer in a law firm in Berlin, and then I chose to become general counsel of that market-leading institutional real estate fund sponsor. I built a 10-lawyer legal and tax department there. After leading this department for seven years, I brought it to King & Spalding after having opened the Frankfurt office.

Editor: So you have a corporate counsel perspective, which I would think would be very helpful in dealing with your clients.

Leissner: I believe one of the main advantages of what we did during those seven years is to be able to stand in our clients’ shoes. We know what they are thinking. We know what they are expecting from legal advisors. We know what their concerns are with respect to fees. We know, as you only can if you have an inside perspective, how real estate fund sponsors operate. As a purely external lawyer who never, ever, worked inside a fund sponsor, you would never be able to judge the impact of regulations as we can.  We pride ourselves on knowing how to deliver exactly the type of service our clients want. Lastly, because of our background with Oppenheim, fund sponsors treat us as part of the industry.

Editor: For a global U.S. company that might be interested in establishing headquarters someplace in Europe – Paris, London or Frankfurtwhy would Frankfurt be the best choice?

Leissner: That’s quite easy. Frankfurt is in the middle of continental Europe, which is completely different from London. Frankfurt is right in the middle which means that it is a good place to quickly get to everywhere in Europe, including Eastern Europe, which is extremely interesting to many investors. Secondly, Germany, and not just Frankfurt but Germany in general, is a very multicultural country having no prominent issue at all with speaking different languages; normally many people here speak English in a sufficient way, and then we have no cultural issues or differences with other countries, nationalities or races, whereas, for example, the French market is a purely French market. If you go to France you can expect to get around in France, but you cannot expect to get any information in a language other than French. You will not find anybody speaking any language other than French except for some advisors, of course lawyers, but that is almost it. There will not be a bridge function in Paris or London to elsewhere, whereas in Frankfurt, you find a sort of bridge to other places in Germany, other countries in Europe, other cultures, other nations, and other languages, so it is really multicultural here and very open to everything and anything. Then, we are much safer than other countries: our legal system is much better than in other European countries, so you are protected here from A to Z, and our industry is much more attractive. You find leading technology in Germany that you would not find in many other countries and there’s a lot of money here.

Please email the interviewee at with questions about this interview.