Portfolio Management: So simple under current market conditions?

8 August 2016 10:00

Favourable market conditions in the real estate industry have resulted in record transaction volumes of €18.1 million in Germany alone in the commercial retail segment. Ideal conditions for Portfolio Managers, or perhaps not?

The singular consideration of such record transaction volumes frequently overlooks the fact that the discrepancy between supply and demand has more or less increased and not decreased despite such record transaction volumes. Prices have also climbed to record levels over the last years. The market – including the Basic Retail segment – is a seller’s market. It is becoming increasingly difficult to acquire desirable and suitable portfolio properties having acceptable yield-risk profiles.

Due to the continuing high demand for Basic Retail properties and the declining yield requirements, not only do prices for top properties continue to rise. Increasingly high risk properties are coming to market at prices which would not have been justified several years ago and which do not realistically represent the risk potential. From the perspective of a portfolio manager, whose funds are primarily focused on continual expansion, such development brings great challenges as concerns strategic growth objectives and property / portfolio risk management. Such is especially relevant as related to the current financing environment. The low financing costs can tempt one to embellish the targeted yields despite a higher purchase price by means of an inflated loan to value (LTV) quota. Exactly this excessively increases portfolio risk, especially when one assumes normalization of the real estate cycle in the next years, and thus, based upon the high acquisition prices, the issue of property devaluation / losses at the time of property divestiture shall again become part of the agenda.

From our point of view there exists the great danger in the current market environment of assuming too much portfolio risk. It is less the case of overpaying for top properties, but rather acquiring risky properties without the requisite purchase price reductions. The GRR Group pursues a combination of measures aimed at minimizing portfolio risks under these current market conditions. This begins with our focus on sustainable commercial real estate as well as the avoidance of risky properties not bearing corresponding price reductions, and continues with our focus on flexible and specific longer holding phases up through conservative financing ratios despite presumed positive leverage effects. It is essential to learn from the events of 2007 and not to pursue yields at any and all costs. A sustainable yield-risk profile is far more important.

Alexander Mohaupt

Head of Portfolio Management