Dec 21, 2012

Life Insurance

The say on the street is that there is a funding gap in the European property market. The say is also that new players are coming along to fill, or benefit from this gap. These new players are called debt funds, or insurance companies. Reports are piling up announcing the raise of new funds, or the billions that this or this insurance company is planning to invest in the new yield Eldorado. Advisors are warning about banking regulation risks looming on the new sector, and offering advice… And journalist have been writing about it (for instance here, here and here )

I have been wondering how much of all of this is actually for real, and how much is there to help us sleep at night. The white knights are coming to save our industry from its own cliff.

The fact is that there are a number of high profile loans which have been put together by insurance companies (not so much by funds so far). The Deutsche Bank and the Silber Towers in Frankfurt, some prime assets in London… So there is some action going in there. But is that really new? In the syndicated facility of alstria back in 2007 we also had AXA as part of the consortium with one of its debt fund (alongside with 25 banks). Today we do have a fund from Deka as part of our banking syndicate.

We also hear that unlike in the US, insurance companies have never really be involved in the financing of real estate in Europe. This is not exactly true. The lion share of the Pfandbrief bonds (the German cover bond market which finance real estate across Europe) are actually sold to insurance companies (although we could not identify any statistic in that respect). According to the Vdp, the total amount of Pfandbrief loan outstanding in Europe at the end of 2011 was around EUR 297 billion. The pfandbrief banks granted EUR 90 billion of new real estate loan in 2011. This compares with, for instance, Allianz target of EUR 5 billion loan book by 2015 ( )or the total EUR 2 billion of new loans by insurance companies in 2011…

From my perspective, the key question in this debate is not really whether or not insurance companies will step in the lending business. But are they going to do this with new capital, or is the lending business just part of the existing real estate allocation. GE Real Estate for instance (which I appreciate is not an insurance company, see here ) is stepping out of equity, and coming back into debt. Net net, the move is neutral… No new capital.
There is clearly something going on in the field of new debt providers. It is however too early to say if this is going to be a game changer, or just a capital reallocation, which will leave us as naked as we were before. The only certainty I still have is that there is still too much leverage in the system. It will take us more than just a life insurance to secure the future of our industry

Nov 20, 2012

Adding the numbers

A short mathematical problem for my eight years old son to solve:

·       At 30/09/2011, the total NAV (Net Asset Value)of the German open ended funds was 85.151 mEUR.
·       At 30/09/2012 (a year later) the total NAV  ofthe German open ended funds was 83.173 mEUR

Assuming that over the period the asset value is only influenced by net flows, can you calculate how much theses in(out)flows are ?

Here is my son’s answer (and any other kid for that matter):The total flow for the period is equal 83.173 – 85.151 = - 1.979. Given that this number is negative, this is an OUTFLOW.
You think this is obvious. Well it is not. At least not for the Bundesverband Deutscher Investment-Gesellschaften or BVI. For the German Funds Association which states that “it enforces improvements for fund-investors and promotes equal treatment for all investors in the financial markets. BVI`s investor education programs support students and citizens to improve their financial knowledge”, the simple math above do not work.
According to the BVI the correct answer to the question above is a net INFLOW of EUR 2.766 mEUR. In other words 83.173– 85.151 = +2.766…
This is not an isolated mistake. If you look for the BVI net inflow publications for real estate open ended funds from 2007 to 2011 theses are the numbers you will dig out:

While “NET inflow” for the period was around EUR 13.7 b, the total NAV of the funds grew by a little less than a 10th of that. How does this work? 
In order to understand the forces at work, you need to take a look at the same set of numbers, published this time by the Deustche-Bundesbank. The Bundesbank publishes two additional numbers. One is the total outflow, and the second one is the total distribution paid. The Bundesbank also make it crystal clear that the NET-inflow numbers disregard any distribution.
The previous table looks like this in the Bundesbank report:
With this additional information the numbers make sense (the reason why the numbers do not add-up exactly is because of the underlying performance of the funds which impacts the NAV). The so called Net Inflow, is for the most of it, not more than a dividend re-investment scheme. It has NO influence whatsoever on the amount of money available to invest in real estate.  
The information which is has been provided by the BVI to the market for years is highly misleading. The vast majority of the market participants believe that the net inflow which is publish is what it name says it is: Net inflow, ie. new money that is coming into real estate.  Here are a couple of example of some investors/advisors that have been across the years willingly or not mislead by the BVI communication.
Google will provide you with dozens of other examples. Since the publication of the last BVI figures last week, I have received at least 5 daily emails of investment banks mentioning the fact that open-ended funds had EUR 2,7 b of inflow year to date. All of them were hinting to the fact that this money will need to be invested (at least partly), therefore driving demand. This is just not the case. In actual fact, the total amount of money available for investment in real estate went DOWN.
The BVI recently published an analysis where it found that there are significant deficiencies in the corporate governance of German listed companies. That might as well be true. But assuming the BVI really cares about the topic, I would strongly encourage them to start cracking at their own issues first.
NB: all the numbers quoted in this post are sources from:

May 23, 2012

Green Lanterns

IPD has started an interesting new index in the French market, called the IPD Green Real estate index. It basically analyses the performance of Green buildings and compares it with both recent non-green buildings as well as with the general IPD index (  
As far as I know, this is the first time such an indicator is put together. This is more than welcome initiative as it might once and for all stop the rhetorical debate about whether or not Green adds value to the asset.
On the face of it, it looks as if it does add value. Total return last year for the green building stood at 7,4%. That is 1,1% higher than equivalent non green building which showed a total return of 6,3%. However devil is in the details.
Here is how this performance is broken up:

The green building performance is solely driven by a (theoretical?) capital value improvement. It relative performance is very poor in turns of Income Returns with assets yielding around 2% less than the rest of the market.  More interestingly the IPD data reveal that there is no rent difference between Green and non-green buildings (average ERV is at 356 EUR/sqm/year for non-green vs 361 EUR/sqm/year for green building).
These data allow for an interesting (theoretical) analysis about the benefit of investing in the green building.   Let’s assume a green office building which is worth 100. According to IPD data, this asset will generate around 4,2 of rent. Let’s now assume a non-green building asset generating the same rent. According to IPD this asset is yield 6,3% ie. is worth 66,7. From there you can derive the actual value as described in the following table.
As a result of the IPD data, you can determine in a few minutes that the market offers a 71% premium for the value of a “Green” construction over a non-green construction.  At this stage it become clear what you want to build if you are a developper. The only economical explanation for such a premium would be that a green building will depreciate much slower than a non-green building. It would therefore deserve a premium as it would deliver returns on a longuer period of time.  
The table below, summarizes the number of years needed to collect enough rent in order to pay for the construction cost at a given unlevered expected return (the NPV of the cash flow is equal to zero).

What the previous table show is that If you expect a 5% return from a non green building, assumes no terminal value, no rental growth, no capex... you need to collect the rent for 16 full years. For a green building for which a 71% premium was paid, you need to collect rent for 54 years. Another way to say this is that the premium reflect the belief that the green building life will be 3,3 times longuer than the non green building.   

So now, here is the question: Which assets do you think is going to generate the most sustainable returns over time? I am not going to take position. However I have lost faith long ago in Hal Jordan and the believe that “Green is the color of will”

Apr 26, 2012

It's a wonderful life

An interesting development in the life of the open-ended fund industry has hit the news today. 

In a press release published today (, SEB ImmoInvest is trying to achieve what none of its peers dared to try before. Move from a bank run situation back to a stabilized situation.  They are doing so by pointing on to shareholders the actual consequence of the run. 

The last sentence of the press release that quotes current SEB Asset Management CEO goes as follow: 

Barbara A. Knoflach: “We are asking our investors to consider the alternatives and, by staying invested, to commit to a future of the fund that could very well live up to its successful 23-year track record. The only chance to avoid the liquidation of the fund with all its consequences is not to take advantage of the exit offer.”

I would like to state clearly that this is a very brave move, and indeed, in my view, the only way to put any of the closed funds back into action. 

I have discussed in a previous post the interesting game theory issue that the closure of open-ended fund closure was posing ( Any one who took the time to run this game would have figured out that this could only work out positively if players increased COOPERATION. This is exactly what SEB is trying to do. Again that is the right thing to do. 

However, I need to point out to one major weakness in the way this is done. There is a lack of clarity on the potential outcomes for each scenario (going concern or liquidation). For cooperation to work and players to see a benefit in cooperation they need to understand that cooperating in the game will lead them to a higher benefit (payout) that acting individually (which in this case end up in a run). While to some extend this is suggested by the press release (the liquidation of the fund AND ALL ITS CONSEQUENCES) it is not explicitly said that a run will probably end up in a much lower payout… To the contrary its insist on the quality of the underlying portfolio as an argument to keep the fund running.  If holders believe that they will get the same value in liquidation than in a going concern, than the cooperation will simply not work. 

I do not know any real life example of any thing like this being done before on such a scale (but would be interested if anyone have any knowledge of this). I can however recall James Steward managing to save its bank with 2.000 dollars in the 1946 It’s a wonderful life movie. Looking back at the scene of the bank run might be a good idea, to understand how he got people to cooperate…

Apr 20, 2012

Forward looking statement

An interesting white paper published recently by Collier International went un-noticed, while I believe it deserve some attention and reading by anyone who is interested in the European office market.
The white paper is the third issue of a series called “Generation Y: Space planning and the future of workplace design”. Below this (un)inspiring title lies an interesting tentative calculation of the future demand for space in Europe (full document:
Collier equation is quite simple. They consider office workers population trend considering population growth, and remote working trends, as well as new workspace design trends, and add up the numbers.
The result of this analysis for an office hosting 200 employee in 2012 is summarized in the table below:

Colliers come to the conclusion that between now and 2030 it is likely that we will need 2% more office space than today. This is not an annual growth number; this is the total growth expected between now and 2030. The annualized growth rate would be around 0.07%. Let’s round it to ZERO.
The methodology used by Colliers can clearly be questioned. It is rather simplistic, and I am sure any academic can come up with a much more sophisticated econometric model in order to try to assess the need for office use in the future. However, the mere fact that it is simple does not means that it is pointing into the wrong direction.
In fact this analysis fit relatively well in the empirical evidence we have been gathering for years from the market. The existing building environment for commercial office space is sufficient in all the advanced economy. We do not need to build new space, but need to improve the existing one to fit better standards. Local government will have a significant responsibility as by granting building permits to build new office space. If in parallel they do not act to remove the same amount of space elsewhere, they are slowly but surely planting the seed for future vacancy. If in doubt you can have a look at the Nederland, or certain cities in Eastern Germany…
We have also argued in the past that this trend should not necessarily be considered as a bad trend for listed real estate company. Business models will surely need to adapt. Just being there is likely not to be enough anymore. None of the existing office property company anywhere in Europe has such a dominant market share, that it actually needs a growing market in order to pursue it own growth. It is however very likely that capital alone is not going to do the trick anymore. Emphasis is going to move slowly but surely from capital to operation. Listed companies are usually better prepared to face these challenges, than any other player in the market. They usually integrate the full real estate value change and can therefore identify change earlier than others and react faster.
The move is happening as we speak. As usual in our industry it is happening slowly. Don’t be mistaken by the lack of wave on the surface, this change is fundamental. I do not know whether or not Colliers is right in estimating the numbers of sqm of office space that will be needed in the future. However I do know that whoever will do my job in 2030, will be facing a completely different industry. With hopefully a number of more professional and bigger listed real estate companies.

Apr 17, 2012

Point of view

Following the publication of our latest annual reports we had a number of discussions with some analysts and investors (as we did last year for that matter) with respect to the write-off in value that we have published on our short leased assets.
We usually argue that from our perspective we would offer a lower price for a vacant building than we would for the same asset with a one year lease, which in turn should be cheaper than the same building with a two years lease … We always felt it makes a lot of sense to reflect this into our valuation process, and thus devalue every year the short dated assets to reflect the shorter lease term.
A recent article published by property magazine international ( is bringing a new perspective to the subject, based on a recent IPD analysis (this is the IPD Press release  
According to IPD (as quoted by the article), UK landlords who give tenants five years leases immediately wipe out almost 2% of the value of their building.
Quote: “IPD lease length analysis shows that signing a new five year lease leads to a fall in value of around -1.8%, despite the property being let.”
Let’s all take a deep breath and step back for a minute to look closer to what IPS is suggesting here? If I read this correctly, the valuation of building which have signed a new five year lease (so which obviously were vacant or closed to be vacant) have LOST value because of the new lease. In other word, if investors would have paid 100 for a vacant building, they would only pay 98 for the same building with a five year lease. In essence, you would be better off keeping the asset vacant, rather than signing a short term lease. I don’t know about you, but this does not pass my smell test.
I might have a very twisted mind, but I would like to suggest another explanation for the whole story. What if the initial valuation of the building was wrong? What if the asset was never worth 100 in the first place? What if the new lease has shown beyond dispute that the assumption to get to the 100 value cannot be hold on to? Can it be that if the building was initially worth only 90 or 95, then the 5 year lease did increase the value to 98?   
From where I stand, in 99% of the cases, a cash flow producing asset is going to be worth more than the same asset vacant. Regardless of the length of the cash-flow. As such, we do devalue our assets when they are close of becoming vacant and we do show an increase in value when leases are renewed.
Where do you stand?

Apr 10, 2012

To go please !

I have been trying to figure out how to improve the utility management process of the company for quite a while now. This topic is important for us for a number of reasons, and I am deeply convinced that we need to find the right way to address this while time is still on our side. Not only managing utilities is the main way to improve sustainability credential of an asset, but utilities represent the bulk of our tenant costs. Any extra cents going to utility providers is a cent that we cannot use to increase the rent. On a longer timeframe consideration, I do believe that the future of leasing will be (as it is already in some Nordic countries) in the full service rent were utility costs will be borne by the real estate owner, rather than by the tenant. 

The existing “In Use” certification systems remain relatively weak and rely on little evidence of operation excellence. We have recently acquired a Bream in use certified asset, and I still struggle to see, what was better in this asset than in other non-certified assets. As far as I can tell (and I do not pretend to know all of these certification tools), having an “In Use” certification, could compare to changing the regular windshield cleaning lotion of your 4x4 SUV (18 liters/100 km) into an environmental friendly lotion, and argue that thanks to this new lotion on your SUV is “Green in Use”.

One of the bigger hurdles commercial real estate is going through with respect to improved utility management is in my view the “short” average ownership/management continuity that drives of industry. As I have argued before, real estate time is much slower than capital market time. Short ownership for a real estate is in my view anything between 5 to 7 years. Most of the investment that would be needed in order to measure and understand what is going on with a building would have a longer payout period. Without such measurement, and understanding, there is little you can do. More importantly, it is very unlikely that any buyer of the asset would pay for this specific piece of technology. The likelihood that a new owner system would be compatible with yours is very close to zero. The result is that most real estate owners underinvest into modern tools that would allow a better grasp on utility bills of building, as they will not capture enough benefit of the investment over its holding period. I am still confused, that I am able to know instantly that Lady Gaga changed its dress (@ladygaga on Twitter), our buildings are not able to communicate real time data. Not that the technology is lacking, but the cost of the technology is prohibitive within our potential ownership timeframe.
What we would need is a technology that would allow us to plug something into an existing metering system, and then be in position to take that something away with us whenever we would sell the asset to someone else. This would ease the investment decision, as the lifetime of the investment would not be tied up to a single asset but to the “plug and play” device itself. The good news is that there are a bunch of start-up companies out there that are developing just that. It is early development stage, lot of progress to be made, but definitively going into the right direction. We will be looking into that closely to see if it can really work. Monitoring “to go”, is what we really need.

Feb 16, 2012

More than a thousand words

This is probably not really worth a press release, but i though I could take a few minutes to write about it on our blog. Our AltePost development project has been selected to run for the MIPIM award in two categories this year. As the best Refurbished Building, and the Best German Project.

It is a very nice recognition for what was a five year hard work for our team as well as our partners (although for them it was only three years work). This development is one of which a young company like alstria can be proud of. It demonstates that you can acheive eventually please a lot of people with divergent interest, as long as you have the right approach and the right asset.

The first stakeholders of this development where the citizen of Hamburg which were concerned about the look and feel of the area shaped around this asset. This concern was convayed to a certain extend by the Monument Protection authorities that insisted on a number of things to be done. As a developper you usually hate this, but as a citizen, they did a great job. Just looking at the people wandering around the asset, and looking at its new design is a testimony of the successful repositioning of this lamdmark asset in the heart of both the City and its citizens.

Tenant are also by definition large stakeholders, and the challenge of bringing this asset to modernity while keeping it 170 years old soul, was acheived successfully as testified by the fast leasing success of the asset and the unique quality of its tenant base.
And last but not least, our shareholders and the one of our partners also had a vested interest in this project. In essence you can easily acheive to satisfy the first two stakeholders above, if you spend enough money on the building. In the case of AltePost, the result yielded to our shareholders where also outstanding.

Theses results where only acheived through the work of the project team of this development which involved us, and our partners Quantum and Stenham. Market movements had nothing to do with the success of this project. It is also a testimony of what we stand for and what we believe in. Real estate is about work. Do not expect market to help you to grow. Growth only comes through hard, usually long, and alway exiting work.

All in all this project explains more than a thousand words how our approach to real estate management.

For the first time this year, the MIPIM is offering the public to vote for their prefered project. If you feel like it, you can vote for AltePost here (