Charles Kingston
Charles Kingston, CEO & Editor, REFIRE Ltd.
The sudden halt to construction of Hamburg’s Elbtower project last week is not a good sign. Not a good sign at all. The spectacular tower, being built by Austrian tycoon René Benko’s Signa group, has reached a height of 100 metres of its proposed 245-metre magnificence, where it now remains truncated while its owner tries to figure out a way to pay the general contractor on the site.
This might not be so easy. Signa is involved - in Hamburg alone - with up to eight major development projects in prime locations, many of whose realisation is in part dependent on the success of the other projects. Chancellor Olaf Scholz, since his time as Hamburg’s mayor, has his personal fingerprints on a number of the projects, including the most high-profile and prestigious property, the Elbtower. This is destined to be the tallest building in northern Germany, and the third-tallest building in the country, after the Commerzbank tower and the Messeturm, both in Frankfurt. To say that Hamburg’s civic identity is deeply invested in the success of the Signa projects in the city is an understatement. The interdependence of Benko’s buildings within Hamburg itself is a key element of the city’s vision for its own development. This spells real trouble for the city of Hamburg.
It’s a racing certainty that the enormous empire of top-end properties and ambitious developments built up by the erstwhile Innsbrücker Wunderkind René Benko is imploding, and may not be salvageable. The fallout will have widescale repurcussions. His Signa group has had a number of remarkable achievements, and Benko himself has never lacked imagination or ambition in putting together an extraordinary collection of prestige addresses, on both sides of the Atlantic. All the more assets does Signa now have to dispose of, in a mad rush to take from Peter to pay Paul, in an all-out bid to raise enough money to keep those plates spinning in the air. We are not confident about the outcome.
Benko’s problem (actually, let’s make that ONE of his problems) is that the mathematics across his industry are now working against him. In fairness, he shares this dilemma with thousands of other developers and commercial property owners, who’ve been caught napping by the surge in interest rates. But the scale of Signa’s operations will cause complications for wide swathes of people.
At least his problems are emerging into the open air, and will be increasingly subject to closer scrutiny by his creditors and bank lenders. Benko’s critics accuse him of puffing up his balance sheet by liberally inflating the valuations of his holdings, abetted by malleable valuers - not an unjust ciriticism, in REFIRE’s view - against which he could take on more debt. While this works well when prices are rising, - well, now that prices are falling, such friendly valuers may be harder to find.
Or, in the meantime, they may be working for Germany’s open-ended funds. These big funds are notoriously averse to marking assets to market. It’s a point of pride that differentiates them from their more mercantilist cousins in the UK, and is designed to protect their investors from something as unsavoury as volatility, such as they might experience on the stock market, for example. But even the European Central Bank is getting a little uncomfortable with the German reluctance to face up to realities and the need for appropriate mark-downs on commercial property holdings. The ECB has recently been pushing property valuers to explain the methodologies they use, in a clear effort to get lenders to wake up to impairments on their books.
The valuation of collateral is “clearly a blind spot for many of the banks”, says the ECB. Some banks, including the Landesbankem, have been taking steps to acknowledge this reality. The big mutual funds, by contrast, have traditionally been much slower.
This ought to be surprising, as it’s barely ten years since the German fund industry was faced with a similar crisis. A steady 3.5% annual pay-out to investors was deemed the ‘proper’ German way, with a smoothed-out graph showing steadily rising fund valuations from year to year. All went well, for a while. Until they fell off a cliff.
In the aftermath, several funds were subsequently wound up, giving themselves a number of years to find buyers and avoid having to offer their stock at immediate fire-sale prices. Others crashed, with write-downs of 50% or more. New regulations were introduced, including a minimum two-year holding period and a 12-month notice period to sell units, in order to help funds better manage their liquidity. Things improved - or at least stabilised - for a while.
But - just over a decade later - here we are again, with most office properties facing an uncertain future, and certainly lower valuations for the fund holdings. Still, if the funds are slow to act, their German investors are showing that they’re more nimble. For the first time in more than six years, investors in August withdrew more money out of open-ended funds than they paid in, in a significant trend reversal. Inflows have been just about positive so far this year, but rating agency Scope says they’ve been notably lower than in previous years. And while Scope says the open-ended funds are conservatively valued at an average factor of 21, this may not cover all their holdings of laggard offices or struggling retail centres.
Austria, which only now is introducing similar legislation to Germany in respect of holding and notice periods, has seen its first big fund, LLB Semper Real Estate, close for redemptions, locking out investors. In London last week, St. James Place, Britain’s biggest wealth management group, suspended trading in its property unit trust. Since Brexit, half of Britain’s property funds have had some period of being suspended or “gated” while they raise liquidity. While these don’t have the same protections as investment trusts, which make no promise that you can sell your holding immediately, fund houses in the UK are seeing the inherent constraints in the open-ended model and are winding them down, or converting them into long-term asset funds (LTAF’s) that have much more restricted entry and exit points. This does not augur well for Germany’s funds, who are subject to largely the same pressures.
The German funds model has stabilised since the introduction of the new regulations, now accounting for €287bn of real estate assets - compensating for the lack of capital market exposure. In most respects the funds act responsibly, have low borrowings, good-quality tenants with index-linked leases, and are sensitive to ESG compliance. If their investors are heading for the exit, it’s partly because they can see where office valuations are headed. And that for the first time in many years, there are alternative investment vehicles out there that provide the same or a better return, with less risk.
