Some 96% of institutional investors pursued off-market transactions in Germany worth some €40 bn last year, according to a new report by Berlin-based advisors HPBA Off-market Solutions and Bulwiengesa.
This is equivalent to 60% of the total volume of transactions reported by brokers and financiers over the year which amounted to €70 bn.
'For the first time ever this study creates transparency in the off-market segment for real estate transactions in Germany,' said Andreas Schulten, board member at Bulwiengesa. The conclusions of the study are likely to be of interest not only to investors, but also to German urban development planners, business development agencies, as well as financiers and credit institutions, he added. 'Ultimately this means, among other things, that the market liquidity is significantly higher than has been assumed to date,' says Schulten.
The conclusions are based on a survey of nearly 700 representatives of professional and institutional real estate markets. Including deals registered by the Working Group of Senior Valuation Expert Committees, commercial real estate transactions in Germany totalled some €110 bn last year. In that case, the percentage of off-market deals would be somewhat smaller but still a hefty 36%.
One of the prime benefits of an off-market transaction is its exclusivity, the authors claim. ‘The analysis of the questionnaire shows that a much greater chance of success can be observed compared to on-market transactions.’
Greater certainty of execution
Thanks to the greater certainty of execution with off-market models compared to classic on-market procedures, many investors are also prepared to accept a price delta of as much as 10%, the study found.
Other important benefits are a greater degree of discretion, speed and a more efficient matching between the buyer and the seller. And if a suitable buyer cannot be found with an off-market process, there is still the possibility of an on-market process. ‘The switch from the on-market segment to the off-market segment is considerably more difficult. In that case, the property faces of the risk of being publicly perceived as "damaged goods" – for example, if the desired price is not achieved in a bidding process and the seller opts not to conclude the transaction.’
If the property has already been on the market for a long time, the interest of potential buyers declines drastically, the report adds. ‘If a buyer can be found, a significant reduction in the purchase price is often to be expected.’
In addition, the study rebuts a number of common preconceptions and potential fears on the part of market participants. For example, it did not categorically confirm that off-market transactions are likely to be associated with a possible loss transparency in the course of the process. Moreover, off-market transactions are only inconsistent with the in-house compliance rules of the participants in a limited number of the cases.
