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HPBA/Bulwiengesa throws light on gigantic German off-market

2 MIN READApril 01, 2019
Off-market transactions in Germany total more than half as much as on-market, real estate transaction volumes, according to ground-breaking research conducted by real estate advisory boutique HPBA and real estate data analysis company Bulwiengesa. Taking official German statistics on real estate transfer tax as a starting point, the study concluded that in 2017, institutional real estate transaction volumes amounted to a total of c. €110bn, split roughly €40bn off-market and €70bn on-market (the volume of transactions widely reported by brokers and professional real estate companies).

The HPBA Off-Market Study was published in September 2018 and its findings have since been challenged, as John Amram, managing director of HPBA, admits: “The study started a debate, which is healthy, because it’s important to know how big the overall transaction market is, in terms of professional investors.”

The €40bn off-market number is interesting, says Amram, “because it’s such a big number.”  And that number could have been bigger by 20%, the report suggests, if share deals were also included if the off-market estimate (i.e. sales of companies whose real estate assets are only a part of their total assets). But identifying the size of Germany’s off-market was only one aim of the study, as Amram explains: “I was interested not so much in the size of the market, more in shedding light into what exactly is ‘off-market’ - what are the differences, the advantages and disadvantages.  I’ve always told people, that with off-market transactions you will probably end up achieving a sale price of roughly 5% more than average. It’s been very hard to prove though.”

In fact, the report found that the price delta of off-market transactions compared to on-market transactions was an average of 5.05%. The report also found that 96% of respondents had pursued an off-market transaction in the previous 12 months - “practically everyone,” says Amram.

Off-market versus on-market

So why is everyone and anyone prepared to pay that delta? The report found that discretion came top of the list, with 90.6% of respondents agreeing with the statement that in the case of off-market transactions, a suitable degree of discretion is to be found. High probability of the transaction being concluded, together with the quality of matching buyer and seller, were next in importance.

On the other hand, 46.9% of respondents agreed either generally or entirely with the statement that off-market processes are significantly less transparent than open, on-market, structured bidding processes. This perceived lack of transparency remains an issue with the off-market, coupled with the argument that an on-market deal, based on a structured bidding process, should in theory drive prices up.

Amram, with the support of the study, challenges this thesis: “Our study shows that 96% of investors have pursued off-market transactions, but 50% of our customer base categorically decline to take part in structured bidding processes. So there’s a huge chunk of investors who do not take part in the on-market, and I know they would have paid a little more.”

Trends and opportunities  in Germany’s commercial and residential real estate markets will be discussed further at Deutsche GRI 2019 on 8-9 May in Frankfurt.
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