Off-market transactions gaining as downturn in market looms

The off-market segment for German real estate will continue to grow compared to on-market deals and is actually benefiting as a result of the corona recession – according to the third annual Bulwiengesa survey of the off-market sector commissioned by Berlin-based off-market specialist broker HPBA.

Nearly 54 % of respondents expect an increase in off-market transactions, while only 15% of those surveyed expect growth in on-market or structured sales models. However, more than two thirds of all survey participants generally expect a downturn in the German real estate transaction markets due to the corona crisis.

"The off-market studies of recent years have shown that the off-market segment with a transaction volume of more than €40 billion is not a niche market," said John Amram, Managing Director at HPBA. "The fact that this market segment is now growing shows that market players value advantages such as high probability of closing a deal, confidentiality, and a lower time and cost requirement compared to bidding procedures.”

The success rate of off-market transactions is on average 17 percentage points higher than for on-market transactions, the study claims. A quarter of all transactions even have an off-market success rate of 100%. The proportion of those with a 100% success rate is even twice as high off-market as on-market. The arithmetic mean comes out at a success rate of 55%, meaning that more than every second off-market transaction is successful - a far higher rate than on-market bidding processes, where only around 38% of the deals pursued lead to a successful conclusion.

More than 67% of all respondents expected a ‘moderate’ to ‘strong’ increase in distressed sales as a result of COVID-19, while around a third assume that there will be no change.

Most of the capital in the off-market segment is supplied from domestic German sources, with most coming the professional institutional players. Over half of all transactions are carried out by project developers and real estate funds. Family offices rank third with around 14%, followed by insurance companies, private equity investors and stock corporations.

With the previous two annual studies highlighting the extent of the off-market share of the total market, the latest study shows that only just over 3% of respondents did NOT make off-market purchases in the past twelve months. For sales, this figure was more than one third. This demonstrates that some players remain hesitant or are prevented by their own compliance guidelines. However, around 10% of all respondents now sell EXCLUSIVELY off-market.

According to Andreas Schulten, CEO of researchers Bulwiengesa, a large number of distressed sales are now probably handled in off-market transactions, as these promise more discretion than the larger-scale bidding rounds. Those who have to sell to generate liquidity have no interest in making the matter public, he says. “There’s nothing worse for an asset than having it being put up for sale and nobody making an offer.”

With a share of almost 38% percent of all sales, office real estate is the strongest sub-market in the off-market segment, followed by residential at about 34%. In project developments, the figure is reversed, with residential properties marginally outstripping office properties.

For this year’s survey, a total of 1,140 CEOs, CIOs, transaction managers and managers of traditional institutional investor groups such as real estate funds, insurance companies, pension schemes or pension funds as well as managers of family offices, private equity investors and other institutional investor groups were interviewed. Survey respondents represented about €500bn of AUM.

In the previous two years the study had caused ripples in Germany and no lack of discussion about the meaning of ‘off-market’, with several of the larger broker groups appearing to treat the findings with sniffy indifference. Much ado about nothing, seemed to be the reaction from several of the established players, as if to suggest that naturally their own information-gathering resources have already registered any sizeable real estate transactions well in advance of completion.

The term “off-market” was effectively defined for the first time when the initial study came out, and – without getting too legal about the definition – broadly means trading assets in the form of a sale or a swap deal which excludes the public or a broad range of competitive bidders, and negotiating with either a small group of interested buyers or in exclusive bilateral dealings with a single party, either directly by the seller or by a specialist off-market adviser.

As HPBA describe it, in a non-formalized process the procedure can be flexibly designed in terms of transaction volume, contract modalities and time frame according to the individual needs of the buyer and/or seller.