(Bloomberg) -- The collapse of Austrian billionaire Rene Benko’s sprawling real estate empire last year was a sign that the European property boom was well and truly over.
Now, the sale of one of Benko’s most prized assets could signal a revival for the continent’s beleaguered commercial real estate. The Upper West Tower in Berlin, once part of Benko’s now defunct Signa Prime Selection AG, is nearing a sale for more than €400 million ($438 million), people with knowledge of the transaction said.
The deal would be the first time a German office building has sold for over €200 million in more than two years, according to data compiled by broker Savills Plc.
The final round of bidding for the skyscraper was the subject of fevered speculation at this week’s Expo Real property conference in Munich, where attendees hoped it would prove there’s demand for top tier properties, albeit at prices at least a third lower than the peak in early 2022.
“It will be good for the market,” John O’Driscoll, global co-head of AXA IM Alts’ €80 billion real estate business, said at Expo Real, where 40,000 property professionals gathered. “Any reference point that is created is a good thing.”
Commercial real estate valuations, which are highly sensitive to interest rates, have tumbled over the past two years as rapid hikes in central bank and market rates made funding more expensive.
The correction was swiftest in the UK, where a spike in gilt yields during Liz Truss’s brief tenure as prime minister precipitated a sharp markdown in asset values. The speed of the UK slump was aided by valuers taking into account market sentiment as well as recent transactions.
In other markets, most notably Germany where valuations are deliberately smoothed and only comparable deals are used as reference points, the reset has been slower. Buyers and sellers are still far apart on prices, and a lack of successful deals makes it even harder to appraise how far values really have fallen.
While that approach helped prevent a repeat of the widespread real estate distress caused by the global financial crisis, it lacked the clear and substantial adjustment of valuations in distressed sales that “allows the market to bounce back,” Rob Wilkinson, chief executive officer of real estate investor AEW Europe, said. “If you look at the major markets across Europe, Germany is the one with the most question marks.”
German office sales in particular are struggling to recover from the anemic levels recorded a year earlier, even as other real estate deals pick up, according to data published by real estate broker Jones Lang LaSalle Inc. on Monday.
“I wouldn’t have expected the downturn to last this long,” said Stephan Leimbach, JLL’s head of German office investment.
Upper West, a modern tower commanding top rents from blue chip tenants, is not necessarily representative of the outlook for offices. Lower quality buildings or those in less attractive locations are still threatened by increased home working and the need for costly environmental upgrades. But it does provide a helpful sign of appetite at the top end of the market.
“The reference points are always created at the prime end,” Axa’s O’Driscoll said. “It is a lesson that prime recovers the quickest and prime is a very good place to be in the market recovery.”
The list of Upper West bidders in the final round — which includes wealthy individuals and institutional investors, according to the people familiar with the sale — was also seen as an encouraging signal. In the years leading up to the pandemic, Germany surpassed Brexit-torn UK as the largest and most international real estate market in Europe, a far cry from its traditional reliance on domestic investors.
“Upper West is a perfect example which demonstrates that German offices are still a very appealing asset class for various investors,” Commerz Real Chief Executive Officer Henning Koch said.
But with Germany now on course for a second straight year of negative economic growth, the country’s appeal has been tested. Concerns around the future of its crucial manufacturing base are still “causing a lot of skittishness about investing in Germany,” Alex Lukesch, head of European investments at Madison International Realty said.
Those doubts remain a headache for Germany’s vast open-ended property funds, which are highly exposed to the country’s office market. While many are looking to rebalance their portfolios, the lack of liquidity has forced them to dispose of more desirable assets like warehouses or student housing instead. Many will now hope that Upper West helps unfreeze that market.
And while a reduction in interest rates, a lack of new development and rising rents in many sectors are important ingredients for recovery, it remains the case that many open-ended fund managers need to generate cash to pay back investors that want out.
“It is crystal clear that we still have some challenges in front of us,” Commerz Real’s Koch said. “We still have outflows, but we do see a little more light.”
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