DEALING WITH A MOVING TARGET

Countless market reports and specialist articles begin with sweeping statements such as: “Rarely has excess demand on the German real estate investment market been greater, something which currently favours sales to a strong degree.” This statement is – purely in terms of numbers – correct to a large extent. The majority of residential and office real estate markets are characterised by a glaring supply shortage. Nevertheless, things become problematic if such an argument is removed from the greater context and applied across all locations as the sole yardstick (or is used as a universal argument for high purchase prices). For the markets are now more complex than ever before, and so such an overgeneralised cause-and-effect schema is simply not convincing. Instead, short-term political and economic turnarounds result in a variety of possible reactions. At the same time this means that classical buyer and seller profiles now no longer exist in an unadulterated form – we can see that the real estate market is becoming more individualistic and more dynamic to a greater extent than ever before. The ideal trading partner for a real estate sale is therefore increasingly becoming a “constantly moving target”.

Berlin: A prime example for external factors

In particular the world of politics has gained significantly in importance in recent years as an external factor on the real estate investment market. Nowhere else is this seen as strongly with residential real estate as it is in the German capital. Uncertainty is growing among large numbers of market players, and above all now that draft legislation has been presented for a rent cap. A key location-independent factor is also the fact that in the short term it is only possible to execute a transaction as a share deal to a limited degree. And ultimately – according to a study conducted by HPBA in cooperation with bulwiengesa – share deals account for about one third of all transactions. These political realities ensure that a number of portfolio holders have decided to complete an exit sooner rather than later. Numerous other investors have suspended their purchasing endeavours and against the background of current developments only intend to become active again once there are price mark-downs of more than 20 per cent. Nevertheless, residential real estate as a product will continue to find buyers: conservative investors seeking defensive investment products with a long holding period and a regular cash flow will simply “sit out” the current imponderables. The ongoing low level of interest rates with, at the same time, a high degree of investment pressure is a factor which also continues to favour investments in the capital. In addition, properties suited to being split into individual apartments are still being bought.

Those market players who decide to go through with a (complete or partial) exit and re-investment can, by contrast, react differently, for example by moving into other cities and regions as an alternative measure. Or they can stay true to Berlin and focus on less heavily regulated commercial real estate instead of apartments. This phenomenon of increasing political and economic complexity is not only found in Berlin or with a single asset class by a long way. A general increase in global economic uncertainties and geopolitical risks, coupled with the threat of an economic downturn in Germany ensure that more and more market players are reorienting themselves ever more quickly in a wide variety of directions. But the pace of the industry’s own processes has also been accelerating ever more quickly for some years now, and companies are adjusting their business models to the current tense market situation. Strategic reorientation and a possible change of management within the company are both on the agenda, for example. Such changes in investment strategy on the part of individual market players are not always immediately apparent to outsiders.

Reorientation with consequences

This has far-reaching consequences with sales. Although there are still numerous factors which favour the seller and allow for an exit with excellent conditions, with a customary transaction period of two to three months it has become the rule that the most promising partner for a successful deal changes once or even several times in the meantime. At the same time it would be dangerous to rely on the “usual suspects” without further evaluation just because a property or a portfolio suits their former purchasing profile. Naturally this also means that just because a market player is interesting today this will not necessarily also be the case next week.

Against this background the seller also has to be prepared to take an undogmatic approach and to reorient quickly if necessary. In other words: he has to act as if dealing with a moving target, negotiating flexibly but still focusing on this target so as to get the transaction wrapped up quickly once an agreement has been reached. Thus, the parameters for the possible ideal business partner change. It is not by any means the purchase price alone which plays a role with such a complex starting position. It is just as important for the seller to choose a highly qualified investor, or to have one recommended by a mediator, with whom the transaction can be completed quickly and above all with a high degree of execution certainty. Those displaying too little flexibility, in contrast, could possibly miss a strategically favourable point in time for an exit. In addition there is the danger that when a transaction fails – for whatever reason – and this becomes public knowledge, the property can be regarded by the market as “damaged goods” because in the view of a third party it was not possible to attain the desired price.