Buy, Sell or Hold? That is the question…

If you are a company, should you own your own property or outsource ownership to third parties, merely using the facilities to produce your saleable product? The answer to this is obviously influenced by several factors.

One of those factors appears to be of a cultural nature. In Germany, listed companies and those in the famed Mittelstand show a marked preference for owning their own real estate assets, with an ownership ratio of over 70%. In the UK the equivalent ratio is under 40%, while in North America it is frequently no higher than 25%.

These figures are in inverse proportion to what are often perceived as cultural attitudes to home ownership. Many Germans have traditionally preferred to rent and let others enjoy the headaches of ownership – while the Anglo-Saxons view the commitment to a mortgage as a badge of honour, with ‘getting on the ladder’ a key step on the path to adult success, no matter the short term pain.

Over the years your editor has been puzzled by this conundrum. We have often moderated at conferences organized by the excellent CoreNet Global, a worldwide association dedicated to the interests of the tens of thousands of professionals holding strategic responsibility for corporate real estate – that is, real property held by a company for its own operational purposes. We have always asked audiences about this ‘inversed relationship’ – but never been fully satisfied with the arguments, pro and contra.

The most we’ve been able to conclude - after several wide-ranging explorations of the subject - is that German traditional aversion to debt, a certain suspicion of (if not outright hostility to) the demands of the capital markets, and perhaps the impression of favourable tax treatment leave German companies feeling more ‘secure’ by owning their own buildings. Nothing wrong with that. It’s how things are done here.

Now, for the first time, a comprehensive study attempts to quantify the price German listed companies pay for this ‘security’. The study, by Dr. Karim Rochdi of the IREBS Business School of the University of Regensburg, analyses 600 German listed companies across all industries in respect of their owner-occupied property holdings.

Dr. Rochdi concludes that these companies may be committed to optimizing all aspects of their operations, but are not so in respect for their property holdings. More specifically, he concludes that listed companies with a high proportion of owned property assets see their shares trade at an average discount of 17% to their net asset value, while those with the lowest share of property in their balance sheets command a premium of 31% on NAV from the market.

Non-real estate companies have an average of 10% of their balance sheet tied up in property, yet expect a much higher yield on their core producing assets than they do on their property, he says. Upgrading and maintenance of their properties swallow up costs and resources, often without the same stringent accounting that would apply to other investment decisions. With assets not being ‘marked to market’, the company’s balance sheet is often viewed as harbouring hidden risks by outside investors – and marked down accordingly.

This phenomenon is even more acute in Germany, where property assets are traditionally held in the books at historic costs. For large German companies, whose property holdings would not infrequently dwarf those of listed European pure-property companies, this can lead to investors failing to get a clear view of the company’s positioning. Many of these assets slumbering in corporate balance sheets are likely to attract much higher valuations today than when they were bought, he points out. Yet they remain a drag on the company’s performance.

Dr. Rochdi, who now works for the Berlin-based industrial property fund manager BEOS, believes that many company bosses are not themselves fully aware of the potential value of their property holdings, and should be considering taking advantage of the low interest rates and widely-available financing to lighten up on their ownership, in favour of more sale-and-leaseback or similar options.

With the DAX 30 top listed companies in Germany (not counting property company Vonovia, itself part of the index) themselves own real estate valued at more than €85bn, the potential impact would be enormous, even if only a fraction of the capital were released. Given the current seemingly insatiable demand for German core and core-plus property, coupled with heightened liquidity across all European markets, Dr.Rochdi’s plea for more attention from corporate bosses to their family’s crown jewels might prove to be timely. We will see.

In the wake of Brexit, there has been much speculation about Germany benefiting from investors’ shifting of resources away from London and the UK. Whether this will happen or not also remains to be seen. We do know that the pressure on Frankfurt – both for office space and residential – has been noticeably relentless over the past couple of years.

Given the city’s growth rate, Frankfurt would at least be capable of absorbing any overspill from London-based banks should they follow up on their stated plans to move several thousand of their staff to a Eurozone financial centre. Rival Dublin,by contrast, would find its already-stretched housing market overwhelmed by the arrival of thousands of Morgan Stanley or JP Morgan staff.

Here at REFIRE we’ve done our bit to vacate some space for the potential new arrivals in Frankfurt. We’ve moved our German operations to that other great German city – Berlin – and look forward to carrying on as usual, exchanging the river Main for the Spree, the banking capital’s skyscrapers for Berlin’s elegant boulevards, and the U-Bahn for the bicycle. Brexit throws open so many questions, to which there are no facile answers, we can only remain on high alert for genuine fallout over the coming months. When there’s any real news, we’ll let you know.