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.
We’re all familiar with distressed selling. There was plenty of it after the onset of the financial crisis. It nurtured a whole host of vulture-like financial entities, skilled at separating still-healthy flesh from stressed and decrepit bones. It’s kept many a lawyer firm continuing to enjoy the good life, while their clients thrash and flail helplessly, as they’re forced to unload at whatever price the heartless market will bear.
Well, welcome to distressed buying. It’s an open secret that competition for core real estate assets in hot markets like Germany has seen prices reach unprecedently sporting levels – but still, professional buyers are still responsible, aren’t they? At a ZIA German Property Association day-long conference on listed property companies in Frankfurt last week, Olivier Elamine, the CEO of Germany’ first REIT, Alstria Office REIT, may have disabused us of any lingering illusions we still had.
“What we are frequently seeing today”, he said, “is that there is one or more outlier bids far away from the cluster around the consensus valuation. If there is a rough valuation on a deal at, say, 100, most bidders will come in in a range between 95 and 105. Then you will have one or two bidding 140, with nothing in between. It’s not just us who’s noticing this – I’ve not seen this in the past, but many others will confirm they’re seeing the same thing.”
“Now we’re seeing this phenomenon over and over again. It looks like the distressed seller of the past has been replaced by the distressed buyer.”
We asked Mr. Elamine were any of these over-the-top buyers other listed companies, from whatever jurisdiction. No, not listed companies, he said, but certainly from a wide range of domestic and foreign buyers, including Asian institutions. Determining the nationality of the ultimate capital behind a bid can in any event be tricky, as many are hidden behind fund managers. It seems to be from across the board.
Whilst our dreams dissolved of shorting the stock of any known listed vehicle raising the bidding stakes so high, it was nonetheless a sobering moment. That the low interest rate environment is driving investors to plough their money into the market at almost any valuation comes as an eye-opener, particularly when the practice is described by a man such as Elamine whose Alstria Office with 119 German assets is a heavier seller than buyer these days.
At the same event, Professor Tobias Just of the University of Regensburg addressed the same issue of rising investment multiples in residential housing, given the lack of yield on alternative assets, especially fixed income securities. He described as “rational exuberance” current investor behaviour, including pushing up the housing multiple to nearly 30 in some markets, as against the much more traditional German multiple of 13 to 16 times annual rent. Several buyers, accustomed to Shanghai multiples of 50 at the peak, won’t flinch at Germany’s frothy ratings, he reminded us.
Professor Michael Voigtländer of the IW Institut der deutschen Wirtschaft in Cologne also noted how so many economists still expect interest rate levels to stay low for years to come. With such high levels of saving worldwide, along with a stifling of both private and public investment in infrastructure and social housing, housing multipliers can indeed go up even further, while yields continue to shrink.
Given the reluctance of the ECB to make radical changes to monetary policy, apart from intimating a slowdown in their generous QE policy from late next year, the scenarios outlined by both Just and Voigtländer have the merit of plausibility, in our view.
Still, this week saw a flurry of hastily-issued statements on the state of Germany’s housing market and the possible existence of a bubble. The trigger was comments made by Bundesbank vice-president Claudia Buch when presenting her monthly Financial Stability report. With her bank’s statistics showing a trailing annual price rise of 6.1% for housing, the bank is cautioning about earlier prognoses that the market was up to 30% overvalued – albeit in certain specific locations. The Bundesbank fear now is that price inflation has become contagious across the land, and it’s not just the big cities experiencing eye-popping price increases.
Buch sees the problem assessing the likely risk of a bubble in the lack of hard data about the quality standards of the majority of property loans outstanding. Few worry about a rich buyer paying a 40-times multiple for a posh Munich apartment in Nymphenburg or Lehel – he’s inevitably a cash buyer or has highly priveliged sources of credit. These buyers aren’t keeping the Bundesbank awake at night.
Overall mortgage lending in Germany increased over the last year by 3.9% - very modest compared to the long-term increase since the 80’s of 4.8% annually. And demand for housing, doubtless, is rising, with less than 1% of housing stock now vacant. Add to that the strong German economy, low unemployment, rising incomes for many, a slow shift to a higher rate of home ownership, and much of the price movements can be fundamentally justified, we believe.
Don’t forget, in most instances, the German home buyer is investing his own equity, borrowings, sweat and aspirations in the dwelling of his dreams. For most honest homebuyers, things tend to work out. It’s all those distressed buyers of commercial property out there, happy to shell out 40% over the odds to be relieved of the burden of holding on to their funds, that currently intrigue us.
How can we find out who they are? What potential losses lie in wait for their investors, for whom the magic ‘spread’ between a low-yielding property asset and a lower-yielding risk-free government bond is fuelling the mantra of ‘investing at all costs’? How long can all this go on for? Is it really ‘rational’, rather than ‘irrational’ exuberance?
