04. March 2022 - F.A.Z.

By-passing the market – big time

Analysis of off-market transactions: more flexible and quicker than bidding processes

A few weeks ago the major brokers reported a record-breaking official transaction volume in Germany of more than 110 billion euros for 2021. But as for every year it has to be assumed that this figure does not by any means represent the market in its entirety. Ultimately a significant portion of the asset and share deals which are transacted off-market are never published.

The fact that numerous transactions still go unnoticed by specialists and experts is also strongly suggested by the 4th HPBA Off-Market Study in cooperation with Bulwiengesa: more than 29 per cent of the surveyed fund managers, project developers, family offices, stock corporations, as well as other professional and institutional investor groups, put their off-market share for acquisitions at between 25 and 50 per cent. Nearly one third of the respondents stated that their quota was even higher. Nevertheless, there is increasingly greater polarisation into “pro” and “contra” off-market-transaction groups.

The study namely arrives at the conclusion that the attitudes of professional market actors towards off-market models as well as their classical counterpart, the public bidding process, have changed since the 2010s. Market actors are increasingly taking a firmer and more professional stance: both the numbers of actors who exclusively sell or buy using off-market processes as well as those who have not pursued any off-market transactions of late have risen greatly.

However, just how large the unpublished off-market shares of the professional transaction markets actually are – i.e. how many transactions are “overlooked” – has for many years been at the focus of our joint research work. In the second issue of the study we arrived at a figure of 40 to 70 billion euros for Germany in the reference year 2018. In the latest issue Austria and Switzerland were also analysed for the first time ever. Although the differing data bases and above all the incomplete recording of transactions in rural Austria hamper a precise determination of a figure, we can assume that the volume in the German-speaking region in the coronavirus year 2020 was between 50 and 80 billion euros.

Closely related to the question of market volumes is also the proportion of share deals which at the very least are not fully recorded in the statistics of the land registry offices and which are also regularly conducted off-market. On average the survey participants have transacted 60 per cent of all their sales in the form of a share deal recently. Some experts even assume that this proportion is as high as 80 per cent. These figures have been maintained even in spite of the legislative reform under which a real estate transfer tax is levied on the complete transfer of shares. In addition, it is to be assumed that it is above all large-volume transactions which are processed as share deals, whereas smaller individual properties and portfolios are more frequently transacted as a classical asset deal.

But just like the entire real estate market the off-market segment has also changed as a result of the coronavirus pandemic. On the one hand this is true of the actual assets being traded: with a share of about 46 per cent residential real estate most recently dominated the off-market segment, whereby this is some 11 percentage points more than before the pandemic. Analogously to these market developments, logistics real estate also experienced a strong tailwind, whereas retail properties were traded comparatively less frequently.

But what is currently the key motivation for or against an off-market transaction? Above all with sales it is probably institutional actors’ own compliance rules which regularly pose an obstacle. In addition, off-market deals often take place more quickly and flexibly than bidding processes – something which does not suit each and every market player.

For many actors the most important argument in favour of an off-market deal, however, is the greater deal security: with an average success rate of more than 67 per cent for all transactions this is significantly higher than with on-market models, which have a success rate of just over 40 per cent. Whereas off-market transactions tended to offer greater deal security during the pandemic, the opposite was the case with bidding processes.

In contrast, the picture we see with the price delta between off-market and on-market models is not uniform, however. While 36 per cent of the respondents are prepared to pay in part significant price mark-ups, 37 per cent expect a price mark-down compared to classical bidding processes. It can, therefore, most probably be concluded that off-market transactions are not primarily motivated by the purchase price. Moreover, it can increasingly be seen that there is one reason why some actors are involved in off-market transactions much more frequently than other actors: it is a question of network maintenance, as testified by the interviews we conducted. Those who have concluded such a deal in the past and shown themselves to be a reliable trading partner, are much more likely to be addressed directly by a seller when a second property becomes available.

Andreas Schulten is the Chief Representative at the real estate analyst Bulwiengesa.

John Amram is the founder and CEO of the real estate service provider HPBA Off-Market-Solutions.