Beware the curse of the P-word when telling the world what you do
Here’s a challenge for a young enthusiastic researcher – per- haps a budding MBA student, or a graduate looking for suitable material for a thesis or a doctor-al dissertation. We’re looking for empirical proof of a theory we have long suspected to be true, but to date - lack the scientific evidence to back up our conviction. Which is this - that companies that integrate the word ‘Passion’ in their corporate slogans have historically and inevitably under-performed both their peers and the wider stock market – and often by a scandalous margin.
Why this might be so isn’t immediately apparent, although our instincts suggest it almost certainly has something to do with a misguided and unhealthy obsession with the company’s own needs, rather than with those of its clients. It may have to do with an over-emphasis on the marketing message, rather than a mastery of the skills required to run the business. The adoption of the P-word may stem from laziness, a lack of imagination, or to hide the absence of any other real purpose – we really don’t have an answer, other than to cast a chary eye on any company claiming to possess it.
Whatever the reason, IVG Immobilien’s “Passion for Real Assets”, as its slogan declares, has accompanied the destruction of 98.2% of the company’s value over the last five years. The company’s trials may not be over, as it grapples with its banks and bondholders to reschedule its debts, but it has made clear that all of its stakeholders will be asked to pony up their sweat, tears, lucre, and - who knows - even passion, to bail it out of this almighty hole.
Clearly, what’s needed is a Solution. But sadly that word Solution, too, ranks up there with Passion in the annals of cursed, meaningless slogans, which have helped steer their owners to grief.
Seven years ago your editor tried to dissuade a German real estate bank from adopting a slogan which embodied not one – but both – the words that have borne witness to so much corporate disaster. Since it’s not really our job to advise on matters of corporate communication, our mild protestations were – understandably - rebuffed. Hubris, fashion, arrogance – call it what you want, the lure of those empty words are seemingly boundless. The slogan was duly adopted, and under the rallying banner “A Passion for Solutions”, the bank bestrode its world like a colossus, before Eurohypo – yes, that’s who it was - disappeared under the billions of losses it incurred in ist brief but glorious years in the limelight.
But back to IVG Immobilien. Part of the problem for Germany’s erstwhile largest listed company is its overseas holdings, bought at the peak when it seemed the company could do no wrong. Not only did it overpay for many of its trophy assets, but in the case of the Gherkin in London it borrowed in Swiss Francs, which have sharply appreciated against sterling over the period. It’s hard to see how IVG, and the countless investors in its EuroSelect14 fund which owns the Gherkin, can appease the banks on this one without heavy losses.
IVG’s woes are in contrast to most other German listed property companies, who have basked in Germany’s rising status as a home for global capital, and seen their market caps swell as the sector remains in favour. If we can believe the latest studies, Germany has now gained ‘favourite-nation status’ among Europe’s real estate markets, pushing it ahead of the UK for the first time. This bodes well for the obvious commercial centres, but it’s clear that investors are also fanning out into the provinces to unearth value which only locals may have concerned themselves with before.
DG Hyp, the property financier owned by Germany’s cooperative banking system, forecasts in its latest Regional Property Centre report that rents in prime offices in regional centres such as Dresden, Essen and Bremen should edge up 0.5% this year. Not a lot, perhaps, but rents in lesser secondary or tertiary locations are almost certainly falling. The recent track record of the leading regional cities has been good, confirms DG Hyp, with prime rents rising about 2% annually, and better than the 1.6% averaged in the seven largest cities, along with healthily lower vacancy rates of 6.5% versus 9% in the bigger cities.
In retail too, prime retail rents in the regional cities have risen only marginally in recent years due to oversupply, while rents in the top cities are close to topping out, the DG Hyp study suggests – an argument with which Joachim Stumpf of BBE Handelsberatung will readily concur, in an interview in this issue. The demographics play a role here, as well. Between 2005 and 2015, the number of households in Germany will have risen from 39.2m to 41m – a rise of 1.8m households, with much of the increase in regional cities as singles and new immigrants move closer to their new or existing workplaces. That’s a lot of curtains, bedclothes, fridges and toilet seats – but there’s a lot of new building finally going on to house all these consumer products, too.
As much of the rest of Europe deteriorates, Germany really does continue to benefit from its neighbours’ alleged misfortunes since the start of the financial crisis. A defensive strategy of investing in Germany is looking increasingly attractive to real estate investors, not least because of the rising strength of German domestic demand, to complement that of its famed exports.