Apreoccupation with size is widespread in the world of real estate. So it comes as no surprise that German property professionals have, as is almost traditional now, eyed up London and Paris with a certain amount of envy. Europe’s top two cities for real estate have been attracting the lion’s share of property capital for decades. This is because, firstly, they have the largest amount of office, shopping centre and hotel space for sale there and, secondly, investors can find what they want for less effort than in Germany. They are scouring a single market in both cities. In Germany, on the other hand, investors have to turn five to seven smaller cities upside down to find a suitable property. And there is another reason why high-volume properties have always been easier to find in London and Paris than in cities between Kiel and Munich: properties of a different, chiefly more luxurious, style have always been built in the capitals of centralised countries. This means they are viewed as El Dorados by potential buyers who, without batting an eyelid, are happy to spend hundreds of millions on a single building without dwelling on burdensome administrative detail.
Anyone seeking to invest over €100 million in a single asset in Germany, according to market experts, has a problem simply because such a small number of such properties exists. Yet that has evidently changed. The major estate agents’ review of the 2014 real estate investment year makes the shortage of high-end prime properties valued at over €100 million seem a story of times long past. For instance, CBRE counted 78 transactions which were above the 100-million-euro mark for last year alone. Of these 40 were portfolio deals – leaving 38 purchases of single asset properties. But where are these many large and expensive properties suddenly coming from? “From the new construction activity of recent years and the upward price trend”, notes Jan Linsin, Head of Research at CBRE in Frankfurt am Main. Germany’s property strongholds (Berlin, Düsseldorf, Frankfurt am Main, Hamburg, Munich) have all benefited from the appetite for large properties. “Investors have found what they are looking for even in smaller markets, such as Düsseldorf”, reports Ignaz Trombello, Head of Investment Germany at Colliers, referring among other examples to the sale of the Kö Galerie by funds managed by the US investment company Blackstone to Allianz Real Estate for €300 million.
The buyers – as a rule, sovereign wealth funds, pension funds, public limited property companies and other major funds – always face the question though of whether a big chunk is actually easy for a portfolio to digest. This starts with the purchase price. The flood of foreign investors has increased demand for large-volume properties and/or portfolios in Europe substantially and forced up the prices even further. “The competition for large-volume properties is now even higher than for medium-sized real estate”, notes Peter Birchinger, Head of Portfolio Investment Germany at Jones Lang LaSalle (JLL). For a long period this was the other way round, he adds. A large single-asset investment is definitely a bad move if it was purchased at too high a price.
Wanted: stable anchors
The proportions of the expensive newcomer in relation to the existing portfolio should also be considered before any major purchase is made. “Under ideal circumstances, a large-volume new addition can have a stabilising effect thanks to the improved cash flow”, says Marcus Lemli, Chief Executive of Savills Germany and Head of Investment Europe. An unfavourable consequence, on the other hand, could be the increased cluster risk, he adds, if, for example, in a difficult market phase a key tenant drops out. For the market expert Lemli the stable anchor effect of a property purchase exceeding €100 million and the cluster risk it can pose are two sides of the same coin. Whether a dream purchase turns into a nightmare depends ultimately on a number of factors. By following a few rules, however, one can certainly minimise the risk of adding an expensive flop to their portfolio. “A multitenant property brings with it more diversification in terms of structure than a building with a single tenant”, is Birchinger’s assessment.
This is one reason why shopping centres and office buildings with many leases – better still of differing lengths – are highly favoured by prudent purchasers of large-volume properties. Location, reusability and marketability are further factors cited by the JLL expert that should be scrutinised before embarking on a major investment. Such considerations are also crucial to Union Investment’s day-to-day business. “Major investments can hold bigger risks if they do not fit into a vehicle’s overall structure”, comments Björn Thiemann, fund manager at Union Investment. A fund valued at €10 billion can easily digest a property worth €200 or €300 million, especially where diversified shopping centres with many tenants are concerned. For smaller funds, on the other hand, properties worth less than €150 million may be too big, warns Thiemann. Another argument in favour of large-volume property purchases is that the execution of a single 250-million-euro deal is more efficient than the purchase of ten properties costing €25 million each. “In this case ten properties need to be examined and assessed and ten contracts drawn up. That costs both time and money”, explains Thiemann. If the appetite of professional investors for major investments persists – and there are some signs that it will – their proportion could rise in future. In view of the continued investment pressure in global real estate markets and the ongoing low-interest-rate environment, the preoccupation with size is not likely to change much in the foreseeable future.