According to Alexandre Grellier, Drooms' CEO, data rooms are increasingly becoming the industry standard in the holding phase of property
Data room provider Drooms shows clearly in its latest survey just how much longer transactions are taking to complete, with Germany among the countries taking the longest time to wrap up transactions.
For its second annual Real Estate Transaction Barometer, Drooms analysed all European transactions processed by itself for the full year 2023, as well as a further two supplementary surveys of 150 real estate experts. Of these, 70% were real estate transactions, while corporate finance, energy and legal deals accounted for the remaining 30%.
The Drooms platform and its customised services are used by more than 30,000 companies, with the company having handled transactions worth more than €500 billion.
For the latest Barometer, around 51% of respondents stated that they intend to increase their international property investments in 2024, while 34% are aiming to invest at the previous year's level and around 15% would like to reduce their transaction volume. Notable - but perhaps not surprising - is that across all European markets, more than 70% of respondents stated that the average transaction duration of a property deal has increased in the last twelve months. The analysis of the extensive Drooms database revealed a new record value of 342 days (previous year: 335 days) across Europe. In Germany, the figure even reached 374 days. Within the largest European property markets, only the UK (391 days) and the Netherlands (375 days) were even higher, while France (302 days) and Italy (242 days) had significantly shorter transaction durations.
According to Alexandre Grellier, Drooms' CEO, data rooms are increasingly becoming the industry standard in the holding phase of property, well beyond the transaction itself, and are the smart way to reduce deal durations. "Modern data rooms, especially using AI tools, increase efficiency and deal security. They simplify both the secure management of constantly growing data volumes in the wake of regulation and developments in the area of ESG, as well as seamless collaboration with internal and external stakeholders. This is a real relief, especially in times of skills shortages and shrinking margins.
The Barometer shows that the most attractive asset classes for 2024 in the respective home country are, in descending order, logistics/industrial (34%), residential (20%), healthcare (10%), office and hotel (approx. 9% each). Around 33% cited different national regulatory requirements as the biggest obstacle to cross-border property investments, followed by a lack of local market knowledge (around 30%) and the current interest rate level (around 26%). Respondents cited the DACH region (65%), the UK (40%) and the CCE (Central and Eastern European Countries) region (30%) as the most promising markets.
New tightened disclosure rules strengthen buyers’ rights
In a significant judgement in September last year, with serious implications for sellers using data room platforms, Germany's Federal Court of Justice in Karlsruhe (BGH) considerably tightened the disclosure obligations of sellers and strengthened the rights of buyers. The judgement has wide-ranging implications not only for real estate sales, but also across a broad range of corporate transactions.
In essence, the judgement will now require sellers of property to provide much more comprehensive information about the property for sale than has been the case to date. This is particularly critical where a buyer may not be in possession of all relevant facts that could affect upcoming renovation costs, or the information has been delivered at too short notice before notarisation. The decision will also require sellers to proactively inform potential buyers about the inclusion of new documents in a virtual data room, for example, without placing the onus on the buyer to discover these for himself.
Christian Osthus, legal adviser to the German Real Estate Association (IVD), said the ruling would require sellers to more carefully prepare all relevant material circumstances and information, and provide it earlier and in a very clear manner, rather than in the hitherto frequently common practice of providing, at short notice, bundles of disorganised documents which are often designed to discourage more thorough due diligence. The new onus is on the seller to point out any possible defects to the potential buyer.
Onus on seller to point out possible defects
The case arrived in Karlsruhe via Hannover, where a buyer had bought several commercial units in the prominent Ihme Centre complex in the city for more than €1.5 million. It subsequently claimed it had been fraudulently deceived in respect of future high costs for the maintenance of the complex.
The seller had posted the minutes of an important owners' meeting in a digital data room only three days before the contract was signed. From the plaintiff's point of view, this happened "clandestinely" and was thus "foisted" on her. Because it was a Friday, it was also the last working day before the planned signing. The case ended up in court.
The Celle Higher Regional Court dismissed the case, taking the view the responsibility was largely with the buyer. The BGH took a different view and largely overturned the Celle decision, determining that the seller had an obligation to disclose information about the scope of the likely costs, put at about €50m, which it said was "undoubtably of considerable significance".
In legal terms, this is referred to as "circumstances subject to disclosure". Justice Bettina Brückner, in explaining the Court's decision, did point out that the duty to disclose all circumstances could be waived if defects catch the buyer's eye during an inspection, or if an expert opinion has already been obtained in connection with such defects. By contrast, a seller should no longer expect that a buyer will automatically scrutinise financing documents or a folder handed over to him outlining defects in the property. He must explicitly draw attention to these defects, the ruling states.
Justice Brückner added that the new case law applies equally to cases involving data rooms. "The mere fact that the seller sets up a data room and allows prospective buyers to access the data does not always allow the conclusion that the buyer will take note of the fact subject to disclosure." Rather, it depends on the individual case, and how the data room and the access to it is structured and organized.
