Germany: Everybody's Darling...
29 March 2011
As long as you'd brought a woolly coat with you, and perhaps even a scarf and a muff, this was the best MIPIM ever. No, not because the champagne corks were flying as new lucrative deals were being inked on every yacht in the harbour, or in the beachside restaurants along the Croisette. Nor because the banks are turning on the spigots of finance again for speculative developers or adventurous buccaneers to take pot luck in the hot, up-and-coming markets - there was precious little evidence of that. There was good cheer all right, and no shortage of the hospitality that greases the wheels at MIPIM, hopefully fosters serendipity, and cements the event's reputation as the meeting point par excellence for initiating new contacts and enjoying some moments of fun with ongoing business friends and partners.
No, there was something else about this year's event that we found gratifying, and it took us some time to put our finger on what it was, exactly, that was giving us this upswell of encouragement. We felt at the same time, paradoxically, a slight sense of unease at the unanimity with which everyone was giving their douze points to the one country, the one market that was Everybody's Darling... Germany.
Gratifying, of course, because this is the market that consumes our working and waking hours, engages our modest analytical faculties, and continues to pique our commercial curiosity. We derive some comfort, too, from grappling with the vagaries of a market which, for all its apparent contradictions, is still the one least likely to be flattened by an oncoming headwind. As we all know, the checks and balances in German commercial life are designed to buttress steady and stable forward progress, and iron out volatility. So, now that the market has shifted to seeing these attributes as a major strength, Germany has become a magnet for international capital - but for reasons much less swashbuckling than in more recent bygone days of derring-do. In our view, that's fine, and just as it should be.
The shift in focus to Germany from this new wave of institutional investors is a welcome move, since both investors and local asset managers do indeed understand each other much better nowadays. Without doubt, there is now a spill-over effect from the bubbling German economy into the real estate market and this is being felt at many levels. Transaction volumes, turnover, prime rents, asking prices - all are moving upwards, seemingly across all real estate sectors. Optimism abounds.
To describe certain markets as close to overheating would be perhaps to overstate the case, but it is true that a great deal of money is chasing a limited amount of investors' first-choice assets. This is creating upward price pressure on second- and third-choice assets in pockets of the economy - while similar assets in other pockets are braced to cause yet more heartache for their erstwhile investors. There is still plenty of shaking-out to do in this market.
Helping with the shake-out are experienced hands like Dr. Wulff Aengevelt, of the Düsseldorf-based Aengevelt brokerage house. He tells us that from his perspective, the quality of business discussions at this year's MIPIM was again noticeably more serious and 'real', held with more genuine 'dealmakers', while the absence of the 'freeloading' and 'tyre-kicking' contingent was warmly to be welcomed. That's a pretty good summing-up, we think.
Despite the demand, though, the issue of financing will continue to plague the markets in the medium-term. The extent of toxic assets lurking on German banks' balance sheets is still shockingly high. The hangover of state-owned Länderbanken acting as a drag on the system persists, and in a year as full of state elections as this one in Germany, lack of political initiative to grasp the stinging nettles will cost billions extra. For the taxpayers, of course.
The state of North-Rhine Westphalia, as just one example, still holds a large chunk of the stricken WestLB, whose imminent break-up has still so far failed to materialise. The nominal value of the state's holdings through its development bank NRW Bank is €2.2bn, although internal appraisers recently assessed its worth at a mere €300m. Who's going to plug that gap in the state budget? Several senior bankers suggested to us at the MIPIM that, far from rescuing WestLB, heels will be dragged and the bank will just, sort of, wither on the vine. That should encourage lots of new lending, we're sure.
The giant maw of the German state owned banks needs to be constantly fed, as they line up with the Greeks, the Irish, and soon others to feed at the teat of the European Central Bank. Everybody is playing pass-the-parcel, with the poor dumb taxpayer just beginning to cotton on to the fact that the music isn't going to stop playing UNTIL he's holding the package. The Irish and the Greeks have figured that out already. The German consumer hasn't quite joined up the dots yet, he can't quite see how all this buck-passing between banks and politicians, fostered by billions in domestic bailout funds, is leading to an inevitably brutal impasse. Everybody's Dar ling... Now why does something just still not sound right about that?
Charles Kingston, Managing Editor, REFIRE