- Real estate with a volume of at least 40 billion euros to be sold in non-public transactions each year
- Project developers and real estate funds most frequently conclude deals off-market
- Off-market deals can offer cost advantages – both for sellers and buyers
Those wishing to sell a property or a portfolio are fundamentally faced with the choice of addressing a large number of potential buyers publicly or specifically addressing a small selection of investors. A structured bidding process versus an off-market deal is the choice that has to be weighed up by a seller. During the coronavirus crisis the off-market option seems to be gaining in significance.
According to a study by bulwiengesa and the transaction consultant HPBA, the majority of surveyed investors (54 per cent) expect to see an increase in off-market transactions in the coming twelve months, while two thirds assume there will be an overall decline in the trading volume on the German real estate market. In contrast a mere 15 per cent expect that there will be an increase in on-market deals in the coming twelve months; 38 per cent anticipate a decrease.
149 real estate professionals participated in the survey in May of this year, including representatives of real estate funds, insurance companies, pension funds and pension schemes, as well as managers of family offices, and private equity investors. It is the third time that bulwiengesa and HPBA have analysed off-market deals.
As in the two previous years they estimate the sales volume from non-public transactions to be at least 40 billion euros. This does not mean that these deals are kept out of the public eye following completion. “The major brokers ultimately also accompany many off-market deals,” explains Andreas Schulten, the chief representative of bulwiengesa. He assumes, however, that a substantial portion of these deals are not included in the published transaction statistics of the brokers.
According to Schulten it is striking that it is above all project developers and real estate funds which utilise the off-market option. Listed real estate companies and private equity investors, in contrast, do so more rarely.
Schulten stresses that this is not a grey, dubious shadow market in which it is typically private equity investors which conclude dodgy property deals. “This is a myth. The largest percentage of properties traded off-market is to be seen with office real estate, followed by residential buildings. And the actors are not international private equity funds, but primarily German institutional investors. This is the quite normal German real estate market.”
In contrast to the norm a very large proportion of share deals are not conducted publicly, however. The proportion amounts to 35 per cent, whereas the average, taking on- and off-market transactions together therefore, is about 17 per cent. In the survey in the previous year the proportion of share deals was 31 per cent.
According to the HPBA managing director John Amram there are a number of reasons to opt for concluding an off-market transaction. “Discretion, the quality of the matching, deal security” are among his examples of the most important factors. And naturally the cost argument. Bidding processes are long-winded and expensive, something which ties up capacities and resources. It is not unusual, he says, for bidding processes to cost half a million to one million euros, which are then lost if the process is not successful. Conversely the prices for which properties are sold off-market should be lower in view of the fact that these expenses are no longer applicable. “It is our experience, however, that buyers tend to be prepared to pay a little more on account of the deal security,” says Amram.
The study does not reach a clear conclusion, however: About 40 per cent of the respondents state that price mark-ups are appropriate, just over 34 per cent regard price mark-downs as justified, in contrast. The rest do not see any difference. “It is fairly well-balanced,” states Amram.
As a result of the coronavirus crisis some of the features of off-market deals have come to the fore to a greater extent. The discretion aspect is appreciated in particular by three quarters of the investors, for 71.4 per cent access to potential investors stands out, and 62.4 per cent are pleased by the accurate matching in the current market environment that is characterised by uncertainty. “Investment conduct changes in uncertain times. This is why it is all the more important that sellers find the ‘right’ investors,” says Amram.
The authors of the study also asked the market participants whether they expect an increase in distress sales of properties and project developments with clear price mark-downs as a consequence of the economic crisis. Nearly two thirds are of this opinion. In contrast only 30.9 per cent of the respondents believe that investors will increasingly form joint ventures so as to overcome liquidity bottlenecks or to minimise risks.
The distinct prospect of upcoming distress sales and the clear expectation of a growing off-market segment go hand in hand according to Schulten. “Distress sales will definitely not be completed using bidding processes. Security and discretion are ultimately of much greater importance here.”
