Core. Core. Core. We hear so much about the merits of core property these days – stable, guaranteed cash flow with blue chip tenants on long, rock-solid leases in prime business locations – that it’s a wonder any other form of property gets a look-in at all.
Of course, in most cases, it doesn’t. Investors won’t look at it. Banks – or their putative successors, the insurance com- panies – won’t finance it. Fund managers tremble at the idea of sliding down the quality scale or ‘up the risk curve’ to present secondary or tertiary gems to their financial masters, for fear of being seen to have gone off message.
Actually, there shouldn’t be any problem in finding core commercial assets. German open-ended funds currently in the throes of dissolution will be offering up some of Europe’s finest properties for years to come. After all, investing in core office properties was all that they did throughout the years of plenty. Now that thirteen of the funds are in liquidation, they’re not in breach of any pesky German laws preventing them from selling at below certain specified values, nor are they encumbered by any other restraints designed to purvey the patina of security and stability behind which the German open-ended funds industry hid in its heyday. You’ve got plenty of core property to sell? We’re buying core, and we want to do a deal.
But wait. It turns out many of these assets are not so core after all. German funds unwinding themselves are well behind schedule on their three-year mission to sell off the family silver. Given the condemned nature of the stricken funds, why are their goods not flying off the shelves? Were their managers unable to partially de-risk the assets and add value to them while they were being held – and if not, what’s core about them if a bank won’t lend on them to the next buyer? Pssssstt. What if it turns out that several of these properties have almost no value at all...?
Amazingly, the open-ended sector as a whole is still sucking in more German savings than it is shrinking in volume through the disposal of assets – which in many respects is testimony to the strength of the product category, and the power of its remaining protagonists – such as Union Investment, Deka, and RREEF - to use their distribution muscle to offer their customer base an appealing investment.
Now that the open-ended and Spezialfonds sectors look like they have been granted a stay of execution, it remains to be seen whether the market will revert to patterns of old, or whether Germany can develop a genuine appetite for the listed sector, including REITs.
There’s little evidence of it so far, we’re sad to report. Despite a number of recent studies – and we report on one of them in this issue – which purport to show that more than 60% of German institutionals plan a significant increase in their asset allocation to real estate, the reality is that the capital markets are still seen by insurers and pension funds as a slightly unsavoury place to transact real estate deals.
We are a long way from the day when German institutionals will invest in a meaningful way in the US or Asian property markets through local listed companies – although there has been plenty of recent experience of hands-on direct investment in office properties on the other side of the world, only to end – all too often – in tears. And yet, with Germany’s demographic time-bomb ticking relentlessly away, Germany’s insurers and pension funds are unhealthily overcommitted to the domestic market. There is a screaming need for them to look further afield to the world’s growth markets, but this will mean more trust in the capitalistic means of delivery. Even France has put its real estate industry through the wringer over the past ten years and is reaping the benefits of reforms in its listed sector, with a recent study by consultants PwC suggesting that the now 35 French REITs generated over 66,000 jobs last year alone. The sector has been the most dynamic growth story on the French stock exchange over the past ten years.
Surprisingly, last year was a record year in Germany for listed companies raising capital, and the listed sector has raised nearly €3.0 billion from domestic and international investors since the dark days of 2007, so all is not lost. Foreigners, at least, seem to have optimism in a strengthened listed sector in Germany, even if locals still view the markets with scepticism.
Even the stodgy Bundesbank published a worthwhile study some years ago, which drew parallels with the listed sectors in Australia and the Netherlands in the early 1990s when those countries’ open-ended funds were likewise threatened by a run on their liquidity after investors withdrew cash and redemptions were frozen.
But when the Australian government forced the frozen funds to list on the stock exchange as an exit route, the listed sector actually took off; the number of listed property companies jumped from 11 to 47 in six years and market capitalisation rose six-fold to a $30bn, helping to provide dividend income to Australia’s compulsory pension scheme. The Australian real estate market now enjoys the rank of third-most transparent in the world, while Germany languishes in 12th. Likewise in the Netherlands, where the frozen open-ended fund Rodamco only really took off after receiving a large capital injection from a Dutch pension fund, and subsequently spun off four now-listed entities before its own “marriage made in heaven”.
We’ve got more than €20bn sitting here in frozen German funds, and most of that is invested in so-called core properties that are proving to be not-all-that-core. We’d welcome the market lowering its sights a little and paying a little less homage to the notion of core. There’s more than core out there, and in stagnant times the smartest capital is going to start finding it.
