Off-market deals gain traction during pandemic, versus structured bidding

Just how many German real estate investment deals go unannounced, or aren't included in the annual figures compiled by all the big broker groups to meaure the overall market, is unclear. Many asset or share deals are transacted off-market, and don't make it into the official figures.

That's why the annual HPBA Off-Market Study is useful in giving an idea of just how many deals go unreported. Now in its 4th edition, the study is commissioned by Berlin-based off-market specialist HPBA and carried out by research specialists Bulwiengesa. The latest study, based on responses from over 1,000 participants, highlights how large is the grey area between on- and off-market, and points to increasing polarisation between the 'pro' and the 'contra' off-market transaction groups.

Attitudes of real estate professionals have shifted over the past 10 years to the various off-market models and their counterparts, the public bidding processes. Adherents of both processes would seem to have become more rigid in sticking to their preferences as against the other, over the last decade, the study suggests.

Two years ago, in reference to the year 2018, the HPBA study arrived at a figure of between €40bn and €70bn for the number of transactions that don't get officially included in the published shares of professional transaction markets.

This year's issue, which included Austria and Switzerland for the first time, the estimate for the volume of transactions in the German-speaking region in coronavirus year 2020 is for between €50bn and €80bn - whereby the researchers specifically note that the differing databases and particularly incomplete recording of transactions in rural Austria prevent arriving at a more accurate determination of a figure.

Nonetheless, in this year's survey, more than 29% of the surveyed fund managers, project developers, family offices, stock corporations, as well as other professional and institutional investor groups, put their off-market share for acquisitions at between 25% and 50%. Nearly one third of the respondents stated that their quota was even higher.

The issue of share deals in determining the level of volumes of off-market transactions is also critical. Many larger transactions are handled as share deals, which might mean they are not fully recorded in the statistics of local land registry offices and so might all through the cracks. Typically, smaller individual properties and portfolios are more frequently transacted as a classical asset deal, which would attract a real estate transfer tax, or Grunderwerbsteuer.

The survey participants said they have transacted on average 60% of their recent sales in the form of a share deal, with some putting the figure as high as 80%. This is despite the change in regulations affecting share deals, under which a real estate transfer tax is now levied on the complete transfer of shares.

The coronavirus pandemic has also left its footprint on investors' behaviour in the off-market segment. In terms of assets traded, residential real estate made up 46% - fully 11% more than before the pandemic. Logistics transactions also increased, while retail assets - unsurprisingly - were traded less frequently.

Institutional investors are now often guided in their choice of investment model by their own internal compliance rules. In selling, the vendor could be motivated by speed, in which case off-market deals offer a quicker and more flexible solution than long drawn-out structured bidding processes.

However, the study highlights what is often the key attraction of an off-market deal - greater deal security. At an average success rate of 67% across all transactions, this is quite a bit higher than on-market models, which typically clock up a 40% success rate. This trend was accentuated during the pandemic, with the off-market model increasing the likelihood of a successful deal completion, compared to the structured bidding models.

The study also examines the price delta between off-market and on-market models, and shows how here it lacks uniformity. With 36% of respondents prepared to pay in part significant price mark-ups, 37% said they expected a price mark-down, compared to classical bidding processes. This strongly suggests that non-price factors can be just as important in motivating buyers and sellers to look to the off-market model to conclude a deal.

The role that trust and network maintenance plays in concluding deals, and the desire to do repeat business with known partners, also seems to be decisive in determining why some players consistently return to the off-market model, say the researchers.