Goldman Sachs’ plan to float Spring portfolio provides hope for the country’s stalled REIT sector
The European Public Real Estate Association recently predicted that the European listed property sector could double in size over the next five years. EPRA singled out Europe’s three largest economies – Germany, France and the UK – as the ones with the biggest growth potential. Their domestic listed real estate sectors could increase by €10bn-€50bn each in EPRA’s best-case scenario.
In Germany, property professionals are loath to use such huge figures, but they have seen and expect more property companies to take to the stock market. Although the country has one of the world’s biggest property markets, only 1.5% of underlying real estate is held within the listed sector.
“In general, the window for property shares is open as it has not been since 2007,” says Helmut Kurz, project manager, REITs, at private bank Ellwanger & Geiger. Kurz cites smaller discounts to net asset value (NAV) as the main reason why real estate shares are now attractive to institutio-nal investors. “Although they are still high internationally, the discounts last year were around 30% and now are 20%,” says Kurz.
A number of succesful capital raisings by listed companies have shown that there is institutional demand for listed property. Last September, Alstria Office, the country’s first REIT, took in €49m through a capital raising, followed by IVG in February, which raised €87m, and DIC in March (€47m). Probably the biggest boost for the sector came in April, when German residential company GSW and its shareholders Goldman Sachs and Cerberus placed 24.6m shares at €19 each, raising €468m.
The pricing was at the lower end of the €19-€23 per share book-building range, for a number of reasons. Firstly, it was GSW’s second flotation attempt: Goldman Sachs pulled the listing last year when investors were spooked by the sovereign debt crisis in Greece. But when GSW floated in May, the German DAX-30 index was trading at around 7,500 points – 25% up on a year earlier.
Second, the US bank did not want to blow its chances for another planned property listing. The firm is looking at floating a REIT from a portfolio of offices, familiar to many European banks as Project Spring, and owned by its Whitehall funds. Goldman Sachs and Credit Suisse syndicated the senior debt in 2008 to banks including Hypo Real Estate and Hypo Vereinsbank.
Goldman Sachs is believed to have earmarked a €1.1bn office portfolio, acquired as part of the €2.8bn Spring portfolio in 2007. Before completing the deal then, the bank had attempted to sell this sub-portfolio and use the proceeds to fund the deal. While GSW is now listed, it is not a REIT. When Germany finally established a REIT structure in spring 2007, residential properties were excluded from REIT status. At the time, the country was governed by a grand coalition of social democrats (SPD) and Christian Democrats (CDU). SPD politicians feared that shareholders would press listed landlords to increase rents.
Government fails to fix G-REITs
The property industry expected the following CDU and free democrat (FPD) coalition government to lift this restriction and address a series of shortcomings in the German REIT regime. But nothing has been done about the ban on residential assets, despite promises to look into these issues. The coalition has also failed to sort out exit tax issues when REITs lose their status, or change the rule that individual investors can only hold 10% of a REIT’s shares. But it was mostly the turning of the stock markets in 2007 that prevented REITs from taking off.
A number of companies had plans to become a REIT or create one, but overall sentiment was affected by the unfolding sub-prime crisis. By 2007, German property company IVG had amassed a €3.5bn portfolio it aimed to list as a REIT, but shelved this plan due to bad market conditions, leaving the firm with crippling debt. IVG still has the structure, assets and licence needed to launch a REIT, but at the MIPIM conference in March, chief executive Gerhard Niesslein said markets were still too volatile. It may also feel disheartened by a stubbornly low share price.
Germany has just three REITs, with a combined market capitalisation of just over €1bn. They were to be joined by a fourth, Prime Office, but the company just postponed its IPO, citing market volatility. German REITs are too small to interest international investors, who would look at companies with a market capitalisation of between €500m and €1bn.
Steffen Sebastian, a real estate professor at the University of Regensburg, says: “Foreign investors would queue up to buy German REITs, but they are too small and size is linked to liquidity. When companies are too small they are not analysed and the sector will not get depth.” For now, the listed sector seems to be growing through small moves.
Many thought German open-ended funds would look to the listed market to solve their problems, after investors lost faith in the sector two years ago; about a dozen funds were frozen and four are being liquidated. ended Degi funds, but the legal challenges proved impossible to overcome.
Germans have long preferred funds to stock markets, as they are perceived as less volatile. But Sebastian believes the problems with open-ended funds may yet give REITs a boost. “People are slowly realising that open-ended funds are more problematic than they had thought,” he says. “The sector is turning increasingly to REITs.”