REFIRE
Charles Kingston - REFIRE
One thing looks sure. The rise of the Greens, and the accompanying pressure on their political opponents to match their voter-friendly social outlook, will require more and more political lobbying from the array of real estate interests to ensure a fair hearing and the overdue reform of the constipated planning and regulatory structures that are in danger of strangling future growth. Not an easy path ahead.
The elections in the state of Hesse brought the result that most people expected, and with it a further nail in the coffin of the remarkable career of Angela Merkel. To no great surprise, she announced her giving up of the party leadership at the end of this year, and her role as chancellor by 2021. As the pretenders to the throne maneuver themselves into position for the party leadership role, nobody believes Angela Merkel will still be chancellor in three years time. By this time next year, almost certainly, she will be gone. Probably a lot sooner.
Her period as chancellor following federal elections in 2005 co-incides almost exactly with the publication of this newsletter, the REFIRE Intelligence Report (although we hasten to add, we have no intention of hanging up our quills, given the extraordinary development and maturing of the German real estate industry over the last thirteen years). We can’t know when she’ll go, but her departure undoubtedly contributes to the fin-de-siècle mood taking hold across Europe.
It’s not that Merkel specifically will be missed. The voters are tired of her and the constant squabbling between her party and her coalition partners. They’re not over-enamoured of what might replace her, but they are clearly voting for change. Mrs. Merkel knows she’s done more than her duty, and she’s got to be looking forward to spending more time hiking in the Dolomites or soaking up Wagner’s opera with her quantum physicist husband. There’ll be plenty to occupy her successor.
The pending Brexit, the looming clash with Italy over its budget deficit, the threatened scaling back of the European Central Bank’s program of quantitative easing, and a host of simmering resentments in other corners all suggest the remarkable – and almost uninterrupted in the case of Germany – growth record of the past thirteen years within the eurozone, may be about to cede ground to something that looks… well, not the same.
The recent sell-off in stocks across the board is suggestive of more than a minor burst of nervousness followed by wave of opportunists taking advantage of a momentary funk by swooping in to ‘buy the dips’. It feels more like a general re-rating – downwards – of investors’ views of growth prospects in the coming years.
Still, there was little of this doom-mongering at the recent Expo REAL in Munich, where the buzz among German participants was still highly positive – fueled by oodles of global capital focused on avoiding zero returns in cash or bonds – and now, maybe, stocks.
With most obvious assets already scooped up, property investors have surged into niche markets, with the result that Germany is being flooded with capital earmarked for kindergartens, nursing homes, parking houses, student apartments and other previously niche segments.
This is a double dose of luck for Germany’s creaking politics, since the government’s obsession with a ‘black zero’ or balanced budget at the national level has meant the withholding of funds for vitally-needed infrastructural investment, which Germany has been barely succeeding in papering over. This goes beyond country roads, highways and bridges – about 50% of Germany’s autobahn bridges are in urgent need of replacement - it includes chronic underinvestment in schools, teachers and digitization, in which Germany, despite its apparent modernity, is severely lagging behind many of its European neighbours.
The global economic cards are in the process of being re-dealt. Things won’t change overnight, but a reversal in fortunes can be surprisingly rapid. A shift in perspective, and the German miracle could soon become a costly adventure for those coming late to the market.
These could include large sovereign funds, who have been lapping up the German success story with relish. For German institutionals and private equity investors, any yield under 3% is no longer tolerable, given their servicing requirements. But for a large state pension fund from South Korea, Canada or Norway, with a very long time horizon, that might be acceptable.
A shortage of suitable assets has given rise to the rapidly-growing appetite for new project developments, and the branching out into the early stage of these developments by traditional investors, starved of existing alternatives.
This theme of diversification was well in evidence at the Expo REAL. NOT to be as broadly diversified as possible - either geographically or across industries - as we heard from several large investors, but rather to aim for a bigger presence in fewer markets and to understand in greater depth the tenants, lease length, building quality and business activity, and thus gain a competitive edge.
At a macro level, this is still working in Germany’s favour. Hardened investors are learning that spilling over into secondary and tertiary-type locations without a deep understanding of local conditions can be a fool’s game. Instead, accepting lower returns, but holding firm and improving their existing assets is often their most prudent defensive approach.
The smarter companies are doing this. And with huge strides in digitization in the real estate industry, it was stimulating to see how many companies are shifting their focus to the nuts-and-bolts business of improving their knowledge of the assets they own – or hope to own – rather than hurling money willy-nilly at bog-standard assets that can never fulfill their over-hyped promises.
We may be about to lose our chancellor. There are stormy clouds lurking around the next corner. But the German real estate industry is not – thankfully - in imminent danger of losing its head.
