IPH Handelsimmobilien GmbH
Dr. Axel Froese and Alexander Hoffmann of IPH Transact GmbH
REFIRE sat down at the recent EXPO REAL in Munich to talk with Dr. Axel Froese and Alexander Hoffmann of IPH Transact GmbH, the investment arm of the BBE/IPH Group.
REFIRE sat down at the recent EXPO REAL in Munich to talk with Dr. Axel Froese and Alexander Hoffmann of IPH Transact GmbH, the investment arm of the BBE/IPH Group. The company advises institutionals and private individuals on German retail real estate, providing inhouse market research and advising on buy and sell transaction, generally for a minimum of €10m per mandate upwards.
Real estate investments should be viewed from a capital markets perspective as investment in fixed assets.
Given the low level of interest rates prevailing for cash investments, but also for investment in bonds, the last few years have seen unprecedented amounts of capital being invested in (retail) investments. In Germany this year €14bn will be invested in retail property alone.
Because of the shortage of core or core-plus properties on offer, the prices in 2015 have already reached – and in fact surpassed – the price level of 2007.
Are we heading into a new property bubble? Is this likely to burst, just as in 2008?
In our view a property bubble IS already being formed. However, it won’t burst like in 2008, since by contrast to 2008 a great deal more equity capital is being invested in property transactions - with still-moderate Loan-to-Value ratios of 70-75%.
But because of these high prices, IRR and dividend yield expectations based on targeted risk-return profiles of core and core-plus properties are going to be difficult to achieve. The property risks are no longer being adequately compensated by the returns, particularly in retail real estate.
Only when the location, the quality of the property and the long-term security of yield would stand up to the most rigorous testing could the current high prices for core/core-plus properties now be justified.
Property investments with obvious flaws will be marked down in relation to the assumed and recognised risks, or will simply fail to find a buyer. This might have a counter-balancing effect on the developing bubble.
The asset class of retail property is de facto operator-run property, since it is essentially defined by the tenant and the tenant’s concept of usage of the asset.
As a result of historically low inflation rates – which were 0% in September – as well as the pressure on retail margins – caused in part by online e-commerce – retail rental growth is a thing of the past, apart from in the very top locations in the biggest cities.
In part as a result of the Volkswagen crisis, we are anticipating rising interest rates on corporate bonds, which have to a large extent supplanted the traditional bank financing of corporates in the past. This might also lead to a noticeable withdrawal of capital from proposed real estate transactions.
Initial reports reaching us from fund initiators confirm that commitment of further equity capital into investment vehicles is already being turned down on the grounds that the required IRR’s and dividend payments simply can’t be achieved, or that further investment into ongoing funds is being stopped where existing investors fear a dilution of their returns.
So, what does this mean for investments in retail real estate?
In our view, we think this is likely to lead to a shifting of the risk-return profile from core/core-plus investment over to a value-add/opportunistic profile.
The reasons are the limited availability of core/core-plus assets on the one hand, and, on the other, that adding riskier property investments to a portfolioshould lead to an improved overall return. This is a typical strategy practiced by Anglo-Saxon institutional investments for decades.
Banks are being forced to react to these adjustments, or to turn off the flow of money. We don’t expect the latter, since their entire business models are dependent on them issuing loans, and on the passive side of their balance sheets – funds represent bank obligations to their investors – the banks have seen significant outflows due to the low interest rate environment.
Examples of value-add or opportunistic investments are the plentiful shopping centre refurbishments or revitalisations you can see, with foreign investors here very much to the fore. The key drivers here are the weak euro, the polycentric structure of Germany with its many strong economic centres, as well as the legal security of German real estate investments.
However, sound investment judgement is required here, as about 50% of all shopping centre concepts are actually geared towards ‘trading down’, or have already reached the end of their property cycle. Without real local and centre-specific knowledge and expertise, these sort of investments will not prove successful – and their are countless examples of misguided investments from the 2005-2007 cycle to testify to this.
IPH Transact along with IPH Handelsimmobilien and BBE Handelsberatung are uniquely focused on this area, with broad expertise in the capital markets and retail real estate investment.
