The real buyer is credit

The market is once again dealing – sporadically – with larger real estate portfolio deals.
And to a certain extent, this is out of necessity: the vintage funds from the peak phase of the last cycle are heading for the end of their term. This brings to the fore the question of how portfolios can be sold in a market that is far from having reached the absorption capacity of previous years.

The classic exit via individual sales remains rather arduous: protracted, selective – and with the well-known risk that the less attractive assets remain in the portfolio or can only be sold at significant discounts.

The sale of the portfolio, on the other hand, seems like the more elegant solution: faster, more complete and, as an intended factor, close to the market value. The big but: It currently does not work under all conditions.

Where such transactions are currently successful, a striking pattern emerges:

• They are large-volume.
• They are particularly structured.
• And they are – above all – very highly leveraged, in some cases very well beyond 60%.

This high leverage is not a fine-tuning, but it creates the prerequisite for bringing the price level close to the seller's idea in the first place.

However, this is not a broad market observation, but it is still an informative one. This is because it makes visible what otherwise often remains abstract: With current yields, portfolio purchases at this level can hardly be calculated without significant leverage if the purchase price has to sufficiently satisfy the real estate values on the sellers' balance sheets.

And it is precisely this leverage that is not available at will. Many classic institutional investors are thus eliminated as buyers, not exclusively, but already due to regulatory and accounting restrictions. Debt ratios well above 60% often simply do not fit into the framework. This narrows the circle of potential buyers considerably. What remains are specialized structures, clubs or constellations that can represent exactly this lever.

Such transactions can then arise not as an expression of broad market liquidity, but as a result of a very specific constellation:

• Sellers who are aiming for an exit at portfolio level that is as close to the market price as possible
• Buyers who can only track their returns via very high leverage
• Debt investors who are under pressure to place large volumes – and thus enable exactly this leverage required by the buyer

These are isolated cases, but they reveal a structural point: the market currently only works for large portfolios, especially where it can be leveraged sufficiently – liquidity in the market is still tight.

Large portfolio exits are currently not an expression of market breadth, but of the ability to finance them strongly enough.