By John Amram
Naturally, business plans and investment approaches of individual market players can vary greatly. Therefore, it is equally difficult to make general statements concerning an ideal ourse of action. It is now consequently even more important for participants to address the baseline of their business plan and the status quo of their assets.
For a market participant who could potentially plan an exit within the coming years, it may be best to accelerate this process as the signs of change become more pronounced. Real estate prices in some areas have plateaued, making an exit increasingly advisable for a rising number of assets. The best example being high-street retail properties in prime locations of Germany’s top cities.
In the prime retail sector, yields are reaching lows of between 3.3 and 2.2 per cent and in some cases, even lower. This provides an excellent starting point – and often the ideal opportunity – for sellers. After all, most of these assets are very well-developed. For example, in prime locations such as Konigsallee in Dusseldorf or Berlin’s Kurfurstendamm, there are barely any value-add properties left which would offer opportunities for value appreciation and an increase in returns.
These high purchase prices are unlikely to continue climbing indefinitely. On the contrary: According to a recent JLL survey, there are signs of lower rents. While rents for prime downtown locations in Berlin reached EUR 350 per sq m in 2016, the current average has decreased to EUR 330 per sq m.
Additionally, the retail real estate market is in the middle of a structural change due to increasing levels of online business. Established retailers are transferring their business to web-based platforms, while new players are looking for showrooms which can support an omni-channel concept to present their products to walk-in customers. These changes do not necessarily have a negative effect on the general demand for properties. However, they may lead to vacancy, relocation or tenant rotation. If new leases are renegotiated at a lower level, the market value of a property may decrease as a result.
Numerous experts, including analysts at Scope Ratings, have reached the consensus that German real estate markets can indeed be susceptible to external shocks. One may tend to associate this dramatic term with events such as a war or an international economic crisis – rather than an increase in interest rates. However, an interest turnaround could have a significant impact on the market, and it is precisely this kind of event which has a very realistic possibility of occurring in the coming years.
Following the decrease of the European Central Bank’s (ECB) monthly bond purchase volume from EUR 80 to EUR 60 billion in April 2017, the amount will further be lowered to EUR 30 billion per month at the beginning of 2018. This new monthly volume will then continue to apply until September 2018 – what will follow is for now unclear. If the bond repurchasing program is retracted, interest rates are likely to rise. Additionally, Mario Draghi will leave his position as president of the ECB in 2019. It is therefore unclear whether the current low-interest-rate policy will be continued in the long term.
The only certainty is: as soon as a change in course is announced in the media, movement on the markets will begin. Even though a realistic interest rate of 1.75 or even 2.5 per cent would still amount to an historic low, it would re-establish fixed-interest government bonds as viable investment vehicles. If returns in this risk-free form of investment approached or even surpassed the level of those in prime retail real estate, a turnaround in the markets would follow, without question.
An end to favourable funding conditions would naturally become noticeable for real estate financing. This could raise the hurdle for investors. The number of real estate investors who are willing – or able – to invest is decreasing. Owners should carefully consider their investments with regard to their business plans. This is particularly true when the business plan has already largely been realised.
With these considerations in mind, the psychological aspect should absolutely be considered. Once a noticeable downturn in prices sets in, potential buyers will begin to hesitate and wait for an even more favourable opportunity. At that point, the ideal opportunity for a sale will have certainly passed. In comparison, the disadvantages of a slightly early sale are relatively minor. I therefore recommend not hesitating for too long: If one is planning an exit, one should probably seize the opportunity while it is available.