2020 Germany roundtable - GARBE Industrial Real Estate
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October 2020 • perenews.com
2020 Germany roundtable
Analysis Analysis
Christoper Garbe
R O U N D T A B L E Managing partner, GARBE
SPONSORS Hamburg-based GARBE Group is best known as a developer, owner and
ARDIAN • EUROPA CAPITAL • GARBE • GLL operator of industrial and logistics buildings. But it also comprises property
management business Fontenay, a development arm focused on constructing
residential and office properties in Germany, and investment manager GARBE
Institutional Capital. The group employs around 230 people, manages around
€5.5 billion of real estate assets and is currently carrying out €1.5 billion of
development.
Germany stays resilient,
but future worries persist Bernd Haggenmüller
Managing director, Ardian
Frankfurt-based
German real estate has ridden out the pandemic, so far. Haggenmüller, who
has more than 20 years’
But managers are keeping a wary eye on the impact of experience in the real
economic distress still to come. Stuart Watson reports estate industry, joined
Ardian in 2016. The firm
is the largest European Andy Watson
W
private equity house
hile other Eu- scope for an effective fiscal stimulus – six with total assets under Fund manager, Europa Capital
ropean real months into 2020, Germany’s response management of around
estate mar- amounted to 13.3 percent of the coun- €100 billion. Its 30-strong Paris-based Watson is a partner at manager Europa Capital
kets have try’s GDP, compared with 8 percent in real estate division was and fund manager of its core Europa Diversified Income
foundered in the UK and 4.4 percent in France. formed five years ago Fund. The firm, which is 75 percent owned by Japanese
the wake of the But government support will not and manages around institutional giant Mitsubishi Estates, manages around
pandemic, covid-19 appears only to continue indefinitely, and the econom- €2 billion in core-plus €4 billion of European real estate assets. The firm employs
have sharpened investor appetite for ic consequences of the pandemic, in and value-add funds. 65 staff and mainly raises capital for value-add investment
Germany. Real Capital Analytics calcu- Germany, as elsewhere, are likely to be strategies.
lates that the German market account- far-reaching. One of the most press-
ed for more than a quarter of European ing questions facing the four managers
dealflow in June, and the country out- participating in PERE’s 2020 Germany
performed in absolute as well as relative Roundtable is how long, and to what
terms. Deal volumes for both the first extent, will the hitherto relatively ro-
half of 2020, at €35 billion, and the sec- bust performance of German real es- Florian Geistmann
ond quarter, at €16.2 billion, exceeded tate assets be maintained?
those for the same periods last year. Head of asset management and regional DACH and the Nordics, GLL
RCA explains this as a consequence Low visibility of virus impact (a Macquarie Group company)
of three factors: the size, scale and so- “That is a difficult question to answer
phistication of Germany’s domestic in- because at the moment it is a bit of a Geistmann joined Munich-headquartered manager GLL four years ago.
vestor base, which accounted for more black box,” muses Florian Geistmann, The firm was acquired by Macquarie Infrastructure and Real Assets
than half the activity in H1 2020; a head of asset management at Mu- (MIRA) in 2018 to act as its European real estate equity platform in
more successful response to the pan- nich-headquartered manager GLL. Europe and the Americas. GLL manages around €8 billion of assets and
demic than rival nations; and strong “Warren Buffet said it is only when employs more than 150 people globally.
public finances that have increased the the tide goes out that you see who was
42 PERE • October 2020 October 2020 • PERE 43
Analysis Analysis
swimming naked, and at the moment Haggenmüller says that while Ger-
the government is holding the water many’s short-time work scheme, under
back.” which the state tops up the wages of
The participants’ assessments of
their success in collecting rents since “At the moment, we workers whose hours have been re-
duced, has functioned very well so far,
the onset of the virus appears to vin- the economic impact of the pandemic
dicate the government response and
speak to the relative health of the Ger-
man economy. Bernd Haggenmüller,
do not see it. But the will be significant nonetheless. “We
will still be affected by this in all aspects
of our economy, just as we were in the
next 12-18 months
managing director at private equity financial crisis. We hope this crisis will
firm Ardian, pegs the collection rate not go on too long and the impact will
across its office portfolio at 96 percent, not be too hard. But if you look at what
with the delayed 4 percent expected to is happening in the US, there is reason
be repaid with interest. Geistmann says
GLL’s figures are similar in the office
will show what the to be pessimistic.”
A major economic downturn could
segment, while 100 percent of logistics even impact the popular logistics sec-
rents have been paid.
Christoper Garbe, managing part-
reality is” tor, says Garbe. “At the moment, we do
not see it. But the next 12-18 months
ner of GARBE Industrial Real Estate, will show what the reality is. Car indus-
which oversees a €3.5 billion portfolio CHRISTOPER GARBE try suppliers are under scrutiny. Every-
GARBE
in the segment, adds that in a survey of body expects manufacturing to suffer
its tenants only 18 percent said it was most. But, in reality, manufacturing
possible that they might ask for a rent tenants are still signing leases at the
reduction. “About 10 percent did ask
if they could reduce the rent. But only
“We have had a bull moment. There is no clear picture of
what is happening. We will observe the
half of them actually did it. So, 3-5 per- market closely and talk to our tenants,
cent took the opportunity of reducing
the rent under the government restric- ride in German offices keeping a close watch on rental collec-
tion rates.”
tion. But most of them were SMEs and Demand for office space has already
start-ups. Not one of our larger estab-
lished tenants have done it,” he says. over the last 10 years. diminished, says Haggenmüller. “Take-
up in the first half of 2020 was about
Andy Watson, fund manager at Eu- one-third below the 2019 figure. But,
ropa Capital, has been favorably sur-
prised by the resilience of the German
market. “There were some real worries
That is coming to an if you look at the second quarter in iso-
lation it was 50 percent down on 2019.
We have had a bull ride in German of-
end now”
about tailspin in March that have not fices over the last 10 years with tenants
come to pass. The resilience of our Buy sheds, or hold fire? catering for their expansion programs.
core fund, in particular, has been pleas- That is coming to an end now. Occupi-
ing, with tenants paying over 99 per- Your last euro – would the participants ers are asking themselves twice if they
BERND HAGGENMÜLLER
cent of the rent,” he says. Ardian
invest theirs now, and if so, where? want to expand or not.”
However, he concedes that gauging
the impact of the pandemic on occupier Geistmann: City logistics. Domestic capital winning
stability over the longer run is difficult. the day
“We have no visibility. So we adopt the Garbe: Logistics development. Reflecting on continued demand for
common sense asset management ap- German real estate, Geistmann says:
proach of talking to the tenants.” Watson: Last-mile logistics is a good 10-year bet. “With only low interest available on
He reveals that Europa has also fixed-income, we are still seeing inves-
adopted a proptech tool designed to Haggenmüller: I would wait for opportunities in tors expanding their real estate portfo-
provide an early warning when tenants the next 12-18 months in value-add offices. lios. Return spreads have been main-
default on payments to their suppliers. tained through the crisis, and, as such,
44 PERE • October 2020 October 2020 • PERE 45
Analysis Analysis
there is a lot of equity chasing deals, suggests Watson. “There is often a reluctant to back something labeled as
particularly on the core and core-plus need for a certain group of decision retail.”
side.”
He notes that demand in Germa-
makers to visit the real estate and, for
the moment, they cannot always do
The pandemic has created sharply
contrasting demand dynamics between “Return spreads have
ny and France has been more resilient that. There is an obvious trend of do- core and value-add office investments,
than in central and eastern Europe.
“That is driven by markets which have
lots of domestic capital being stronger
mestic capital winning the day at the
moment.”
observes Haggenmüller: “Core offices
in Germany are extremely resilient. So
far, the few transactions we have seen
been maintained
through the crisis, and,
through the crisis than markets that Value-add transactions falling are at similar yields to before the cri-
do not have as much,” he says. “We While Germany is attractive compared sis, and if you have exceptionally good
currently see less international capital with other European markets, strong tenants you can even command higher
looking at those markets.” capital demand is not evenly replicat- prices now because everyone is looking
Travel restrictions have played a
role in dampening overseas demand,
ed across all segments and strategies.
The participants agree that although
for that kind of product. On the val-
ue-add side, the impact of weaker leas-
as such, there is a lot
logistics and low-risk office invest- ing markets is beginning to show. That
Germany outstripped other major European markets in H1 2020
ments retain their popularity, retail and
value-add office strategies are a much
will eventually have a price impact. But
sellers and buyers have not yet adjust-
of equity chasing deals,
Germany UK France Netherlands Sweden harder sell to investors. ed to that new dynamic and, therefore,
40
Monthly cumulative volume (€bn)
“For logistics in Germany we are
inundated with money at the moment,”
we see value-add transaction volumes
dropping. I wouldn’t say the value-add particularly on the core
35 says Garbe. “We see a real run on the market has come to a standstill. But it
30
asset class, with multipliers we have not
seen before and record pricing because
has slowed significantly.”
and core-plus side”
logistics has been seen as a safe haven The office debate
25 among asset classes, while Germany is While the participants agree that slow- FLORIAN GEISTMANN
seen as robust, too. The rental growth ing economic growth means short- GLL
20 in logistics in the last two years has been term pain for office markets, there is
low compared with offices, so I still be- less consensus over whether structural
15 lieve there is some potential for increas- trends accelerated by the pandemic will
es and therefore some justification for cause permanent disruption and reduce
10 higher pricing. the need for space.
“We also raised a discount food re- Geistmann notes that the tech in-
5 tail fund, and those assets have been dustry was driving a “voracious” hun- Pre-covid returns in Germany were highest in the office and industrial sectors, while retail returns
were already falling away (%)
very robust in the Covid crisis. Fund- ger for offices before the pandemic.
Retail Office Industrial Residential Hotel Other
0
raising for that was a bit more diffi- But, since then, examples from the 16
Jan Feb Mar Apr May Jun cult, however, because investors were US present a mixed picture, with app
14
Pinterest paying to relinquish a lease
in San Francisco, while Facebook has
Monthly cumulative volume by sector (€bn) 12
taken a huge new building near New
0 5 10 15 20 25 30 35
York’s Penn Station. “More people 10
Apartment may work from home. But you could
H1 2019
Development site argue that, to have more flexibility, ten- 8
Hotel ants will need more space so that the
need will reach a sustainable level. Af- 6
Industrial
Office
ter six months of working from home,
4
we think people are really seeking the
Retail
social element that is enabled by offic-
H1 2020 Seniors housing 2
and care
es. As a result, we still believe there are
strong fundamentals underpinning of- 0
2015 2016 2017 2018 2019
fice as an investment class.”
Source for both charts: Real Capital Analytics Haggenmüller also takes a bullish Source: MSCI
46 PERE • October 2020 October 2020 • PERE 47
Analysis Analysis
The pandemic led to falling office take up in the top five German markets in Q1 and Q2 2020 Prime yields in the German top five office locations maintained their Q1 levels in Q2, while the yield gap with bonds remains attractive
(square meters)
1.0 Yield (%) Prime yield office top five Yield on 10Y Bund Yield gap Capital value index office top five
6 700
5 600
0.8
stance on offices. “This reminds me
somehow of the situation after 9-11 4 500
when there was a big debate over
whether companies would still want to 0.6 Munich
3 400
locate to high rises. Humans tend to ex- Frankfurt
aggerate from their current very signif- Hamburg
2 300
icant and dramatic experience how the 0.4 Dusseldorf
future will evolve. It is clear that office Berlin
1 200
use will have to respond to new needs.
But the need to bring people together 0.2
for a creative process will not go away. 0 100
Whether there will be a shift in the pro-
portion of flexible space and long-term 0
-1 0
space that big corporations occupy I do Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q4 2001 Q2 2020
Source for both charts: CBRE
not know. But nothing will make office
buildings obsolete,” he argues. deeper pool of potential occupiers, and
However, Garbe offers a dissenting Lenders favor core offices, not just for offices, but for residential
perspective. “The true question is not, and restaurants as well.”
‘Do we need offices or not,’ but, ‘How logistics development Will economic pain create invest-
much office space do we need?’ We did ment opportunities in Germany? “Not
a survey of our employees and the clear
result was that they do want to come “We are in no hurry In some segments, real estate finance remains plentiful and
the rates low. But German banks are wary of higher-risk
yet,” is the response from the panelists.
“In the sectors we are actively target-
into the office two or three times a week investments, say the roundtable participants ing, beds and sheds, both for value-add
to meet their peers. But they also want
one or two days at home. In Germany,
that will not have as much impact as
to get that dry powder Geistmann: At the beginning of the lockdown, we saw the risk margin
on lenders’ interest rates expand. But that was just a blip and they have
and core, we see very little distress,”
says Watson. “Europa has raised €600
million of equity for our latest val-
out of the door.
it will in cities like London where you compressed again already for assets with strong income. ue-add fund. But we are in no hurry
have packed open-plan offices and long to get that dry powder out of the door.
commuting times. But it will have an Haggenmüller: Banks are fighting for the few core transactions that you Sticking around for another six months
Sticking around for
impact. When economic growth re- see. But value-add is difficult to finance at the moment. We have seen is not going to hurt. There is still plen-
turns, it may not have as great a posi- margins increase by at least 100 basis points in Germany for the speculative ty of time on the clock.”
tive impact on office take up as it would repositioning of offices with no income, and more in other countries. “It is still early days,” agrees Hag-
have done before, so we need to think genmüller. “Price adjustments have not
about the office in a new way.”
Some analysts have suggested that
another six months is Watson: We are going to take modest leverage of 25 percent on the seed
portfolio for our core fund and the margins for that are probably 50 basis
yet happened to the extent necessary
to make investments attractive again.
increased home working will provide a points higher right now than they were six months ago. We expect that to It will be interesting to see how much
boost to suburban office and residential
locations. However, Watson dismiss- not going to hurt” compress a little, so we are in no massive hurry. On the value-add side some
assets are unfinanceable and that is translating into a repricing of secondary
price adjustment has to happen before
we and our peers are back in the mar-
es that as a “fashionable” idea. “Right deals in that space. ket, because there is a lot of liquidity.”
now, and perhaps for the next year or ANDY WATSON With German real estate still at the
two until we get a medical solution, the Europa Capital Garbe: In the logistics market banks are quite concerned about the steep top of many investor wish lists, there are
de-urbanization discussion will contin- increase in capital values because 60 percent LTV at the new values would likely to be plenty of buyers waiting to
ue. But the long-term trend is to con- have been 90 percent at the values of three years ago, so they are reluctant pounce upon any re-priced opportuni-
tinue with urbanization,” he argues. to lever up to rates of over 50 percent LTV on market values as they stand. ties that emerge. Meanwhile, existing
“It is expensive for governments to However, and this is a specifically German trend, for development we are owners will undoubtedly keep a sharp
put infrastructure out of town, and the getting extremely aggressive offers from lenders, sometimes 80-90 percent eye on the stability of their income as a
other factor that speaks in favor of the LTV, even for speculative development, at highly competitive rates. fuller picture of the economic damage
downtown office is that there will be a wreaked by the virus begins to emerge. n
48 PERE • October 2020 October 2020 • PERE 49You can also read
