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The Big Long: bets pile up on
German property
People & Markets Capital markets fuel exponential growth for real estate companies
BY GARETH GORE
Investors waited decades for a
turnaround in the German
property market. But when it
lNALLYûCAMEûINû ûAFTERûMOREû
than 20 years of price declines,
many couldn’t scramble together
the cash to snap up bargains.
Banks, their main source of
lNANCE ûWEREûTOOûBUSYûJUSTûTRYINGû
to survive: the trough in German
real estate had coincided with the
peak of the eurozone crisis.
AROUNDTOWN, set up seven
years earlier by Israeli banker
Yakir Gabay, who had moved to
Germany to take advantage of
rock-bottom property prices,
was one of those caught out. As
the market turned, it pushed on
with the purchase of properties
it had been eyeing. But its banks,
preoccupied with the unfolding
crisis, were unable to sign off on
loans quickly enough.
“There were many
opportunities, but the banks
were slow ... it was taking too
long,” recalled one Aroundtown
board member, who said that the
experience pushed the company
into exploring other sources of
funding. “We realised in 2011
that the right thing was to
approach the capital markets, get
a rating so you can issue bonds
and not rely solely on the banks.”
Within months, Aroundtown
had spun off its residential
business into a new company
called GRAND CITY PROPERTIES. It listed
the subsidiary the following May,
and followed up two months later
WITHûITSûlRSTûCAPITALûRAISEûNEWû
shares, equivalent to 10% of the
company, were sold for €15m.
More deals followed: €100m of
convertible bonds in October,
€36m of equity in February, and
€200m of bonds the following July.PROLIFIC ISSUER
Six years later, the deals keep on
coming. Grand City and parent
Aroundtown – which was listed
in 2015 – have since racked up
50 bond and equity deals to raise
more than €16bn, making them
TWOûOFûTHEûMOSTûPROLIlCûISSUERSû
in Europe. And the pace shows
no sign of slowing: this year
alone, they have raised more
than €2bn, including bond deals
INûMARKETSûASûFARûAlELDûASû
Australia and Hong Kong.
Proceeds from those deals
have helped transform the two
into some of the biggest real
estate owners in Germany.
Grand City now owns more than
86,000 properties across the
country, having grown the value
of its property investments 25-
fold since it was listed.
Aroundtown has grown itsempire eightfold since its 2015
listing. Together, they currently
own about €17bn of property –
and have almost €2bn of cash on
hand to buy more.
“We were very bullish and very
outspoken about it,” said Andrew
Wallis, deputy CEO of
Aroundtown. “The capital
markets backed our view and
allowed us to raise a lot of capital.
We were able to buy really strong
assets in good locations with
great turnaround potential. And
the sentiment towards that view
HASûSHIFTEDûSIGNIlCANTLYûOURûWAYv
“Now, we’re a bit of a poster
child,” he added.
Aroundtown’s use of capital
markets to fund rapid growth
has inspired many others to do
the same. Bond and equity
issuance from European real
estate companies reached a
RECORDûõBNûLASTûYEAR ûWITHû
Germany accounting for the
lion’s share, and 2018 is on
course to be even bigger.
Companies such as VONOVIA and
CPI PROPERTY GROUP are now
regular visitors to markets.
Low rates, which have driven
up demand for anything with a
decent coupon, have helped. So
too has the European Central
Bank’s corporate bond buying
programme – the ECB has bought
more than €9bn of real estate
bonds. Such conditions have been
ideal for real estate companies to
diversify funding, lock in rates –
and at the same time rapidly
expand their portfolios.
Expansion hasn’t been solely
fuelled by debt – equity
accounted for about a third of all
capital raised last year. That’s
helped keep loan-to-value ratios
down. Plus, unlike with previous
bank loans, interest rates are
locked in.
And the ratings agencies
approve: many real estate
companies have gained
investment-grade ratings in
recent years, helping attract yet
more investors.“The real estate industry in
Europe ... has grown to a point
where there are an increasing
number of companies of
SUFlCIENTûSCALEûANDûQUALITYûTOû
achieve investment grade
ratings,” said David Greenbaum,
CHIEFûlNANCIALûOFlCERûATû#0) û
which has grown its portfolio
tenfold in the past few years.TESTING THE LIMITS
There are signs, however, that the
sheer volumes of capital raising –
particularly in bonds, where
almost €20bn has been raised by
real estate companies this year –
may be beginning to test the
limits of the market. Aroundtown
had to pay a premium to get a
euro bond deal over the line in
April and many property
companies are looking to issue in
other currencies, amid concerns
the euro market may be saturated.
It has also pushed up property
prices to the extent that decent
investments are becoming
HARDERûTOûlNDû3OMEûCOMPANIESû
have begun to slow the pace of
acquisitions.
“Low interest rates create a
great opportunity for
acquisitions and further
consolidation in real estate,” said
Greenbaum. “However, the
abundance of capital also has a
downside because prices are
rising quickly. In many cases, we
see better value from investing
in our own properties, instead of
pursuing overpriced assets.”
Others are concerned about
what rising interest rates might
mean for the industry. While
many have used the past few
YEARSûTOûLOCKûINûLOWûlNANCINGû
costs and term out their debt, real
estate companies nonetheless
remain exposed to rising rates –
not least through the impact on
property prices. Prices have
doubled in some cities over the
past few years and some believe a
correction is well overdue.
A correction could be painful
Source: Thomson Reuters because of legal obligations in the
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Bonds EquityEUROPEAN REAL ESTATE ISSUANCE
BOND AND EQUITY PROCEEDS (€BN)