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Investor bullishness amid COVID-19 crisis surprises German landlord Commerz Real

SNL Image
Henning Koch, board member overseeing transactions
and asset management at Commerz Real.

Source: Commerz Real

In a sector as cyclical as real estate, the ultimate success of an acquisition can have much to do with timing. Buy an asset at just the right moment and an investor can look forward to maximizing the return when it is finally sold.

For Henning Koch, who oversees transactions and asset management as board director for Germany's Commerz Real AG, finding just that right moment to enter the market amid the economic turmoil of the COVID-19 pandemic is proving somewhat more difficult than he imagined.

By this stage of the global downturn, Koch expected prices across the commercial property sector to have begun sinking by now. But the market has been more buoyant than he had hoped.

"Some investors are very aggressive and are still paying prices in line with what we saw before COVID-19," said Koch in an interview. "We thought we could take advantage of the situation in order to secure good opportunities. But, surprisingly, it was the opposite," particularly for prime property in the best locations and assets with long-term leases to large multinational companies, he added.

Given the resilience of the market, Koch does not expect to see any major downward shift in prices across the sector despite "the most negative economic outlook I've seen for the last decade," he said.

"There's simply too much capital in the market," he added, highlighting how the lowering of base rates by most major central banks to 0% or near zero in response to the pandemic has made real estate "one of the most attractive asset classes" due to the higher yield it offers compared to bonds.

"The volume of capital is countering the negative outlook at the moment, which is a little bit bizarre," said Koch.

Commerz Real is a part of Commerzbank AG, Germany's second-largest lender. The asset manager, which was established in 1973, operates primarily in the real estate sector but also manages other tangible assets including ships and power grids.

Commerz Real has €32 billion in assets under management, €20 billion of which is invested in property. More than three-quarters of its real estate investments are through the company's open-ended fund, hausInvest.

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Stronger German market

The company's real estate portfolio consists of assets located throughout Europe, the U.S. and Asia-Pacific. But its largest allocation is to its home market, which continues to attract significant interest from global property investors, said Koch.

"Germany is probably the most active market in the world right now and all the other markets are looking at us and are positively surprised at how much investment activity is happening in the country," said Koch.

Investors pumped €13.6 billion into the German commercial real estate sector in the second quarter of 2020 despite the economic uncertainty caused by government measures to delay the spread of COVID-19, according to a European property market report for the first half of 2020 by real estate services firm CBRE.

Despite a 20% drop in investment during the period compared to the second quarter of 2019, German commercial property attracted almost three times as much investment in the second quarter compared to the second most popular European market, the U.K., which drew €4.6 billion during the period, the report said. Overall investment in European commercial property during the second quarter stood at €43.9 billion, down 38% from the same period in 2019, it showed.

Germany has suffered a relatively smaller impact from the COVID-19 pandemic in terms of fatalities compared to its European neighbors and other major economies. Germany has recorded about 10,000 deaths as a result of the virus as of Aug. 24. The U.K. has had more than 40,000 deaths, while France has seen more than 30,000, despite both having a smaller population than Germany.

Sector divergence

The pandemic has had a similarly varying impact on property segments, with winners and losers across the sector. Koch is a "strong believer" that offices, which make up more than 40% of the hausInvest fund's value, have a promising future regardless of the concerns raised by the general success of homeworking in recent months. Still, there is likely to be a polarization going forward between product that adapts to current demands and product that does not, he added.

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"The top city center locations for the top buildings, which are flexible, which are sustainable, which are ready for digitalization, which are ready to fit out the space for the next generation, these buildings will really benefit," said Koch. "Other buildings will probably soften more and there will be losers in the market."

Koch described shopping centers as "the most difficult asset class at the moment." Commerz Real has significant exposure to retail and restaurants through hausInvest, with almost 40% of the fund composed of such assets.

Retail, which was already experiencing widespread turmoil in some developed markets due to the rapid growth of e-commerce, has been one of the most severely impacted sectors during the pandemic as nonessential stores were forced to close. Several large listed retail landlords have experienced significant write-downs in the value of their shopping center assets in the first half of the year as a result.

"You will still have a group of the top and best shopping centers, which have a really good reason to exist, which will survive," said Koch. "But all the mid-market and smaller centers will definitely suffer a lot."

Koch has higher hopes for other real estate asset classes badly damaged by the pandemic. Hotels, the property sector's biggest victim of the crisis and 12.5% of the total value of the hausInvest fund, have a much brighter future, he said.

"We are a strong believer that the hotel market will definitely recover again," said Koch. "You just need to see how desperate people have been to go on vacation, to travel to other countries and to go into hotels."