Rosanna Woods for React News
Time-consuming deals quickly lead to higher costs
Real estate transactions in Europe are becoming increasingly complex. Anyone wishing to sell a property today needs time. Across Europe, the complexity and, above all, duration of real estate transactions from the bidding process to closing is increasing significantly.
While in 2019 an average of only 165 days passed from the opening of a transaction data room to the closing of the transaction, in the first half of 2022 it had risen to 258 days – an increase of 58%.
This is shown by Drooms’ recent study, Real Estate Transaction Barometer 2022. For this study, Drooms evaluated more than 4,000 transactions from 2019 to 2022 and surveyed around 170 real estate professionals across Europe.
Nearly a year to close
In particular, transactions took much longer to close in Europe’s German-speaking region. In the first half of 2022, it took 273 days in Germany, Austria and Switzerland – a sharp increase from 2019, when only 167 days were needed. In the UK, the trend was similar: on average, the time taken increased to 256 days in the first half of 2022 (2019: 160 days).
A significantly lower amount of time was observed in France, Southern Europe (Spain, Italy, Portugal) and the Benelux countries (Belgium, Netherlands, Luxembourg). However, even there the number of days required to complete a real estate transaction increased, in some cases significantly. In France, the time required increased from 181 days (2019) to 198 days (first half of 2022), and in the southern European countries from 121 (2019) to 192 (first half of 2022).
“Major differences can be found, for example, in the legal systems, different approaches to due diligence or a different approach to the implementation of energy efficiency requirements”
But what is the reason for the increasing duration? Real estate professionals also had their say on this. Almost half of the real estate professionals surveyed cited country-specic issues, particularly the fragmented regulation of target markets, as a key barrier to cross-country real estate investment. Major dierences can be found, for example, in the legal systems, dierent approaches to due diligence or a dierent approach to the implementation of energy eciency requirements.
Lack of market access and local market knowledge were decisive for 28%, most likely because real estate markets are very nationalised and highly heterogenous, so it is not easy to scale up. Language skills, on the other hand, were hardly perceived as an obstacle to investment – only 1% of respondents said that a lack of language skills slowed down their investment activities.
In a country comparison, respondents from Germany (52%) and France (62%) in particular indicated that differences in country- specific regulation was the biggest hurdle to cross-border investment. It is also interesting to note that in France around 6% of the real estate professionals surveyed see a lack of language skills as a barrier to investment, which is higher than the other countries. One reason for this could be the low levels of English proficiency in France compared to other European countries.
In the UK (44%) and Spain (46%), respondents again saw lack of market access and local market knowledge as the biggest obstacle to international real estate investment. Market knowledge is fundamental to cross-border investments. Investors don’t want to put money into an asset that will not earn a target rate of return over their anticipated holding period. Making projections and decisions without the benefit of a detailed market analysis adds unnecessary risk into an investment analysis or feasibility analysis. As such, many investors choose not to invest in new markets they do not understand.
Delays caused by the Covid pandemic also played a role in the increase in time spent on transactions. During this period, many deals were put on hold. Currently, the unstable economic situation is causing many buyers to take more time when making a purchase decision. As a result, negotiations are taking longer and sales processes are becoming more complex. With risks on both sides – more and more buyers are taking advantage of delays in the sales process to further reduce prices.
Ambitious ESG targets
ESG regulation is another key factor in transaction complexity. In order to achieve the ambitious climate protection targets by 2030 and beyond, European and national policy makers are increasingly focusing on the construction and housing sector. After all, it is responsible for 36% of the greenhouse gases produced across the EU. If the EU wants to achieve its ambitious climate targets, which aim to reduce emissions by 55 percent by 2030 compared with 1990 levels, real estate must become more energy-efficient. This must be done as quickly as possible while still being able to be planned and implemented for all stakeholders.
“At the same time, it must be clear to all parties involved: the more time required to complete a transaction can quickly lead to higher costs”
As a result, there are more extensive documentation requirements with regard to the energy condition of a property and other topics relating to ESG disclosure: energy audits, technical inventories, digital collections of consumption data and CO2 emissions from buildings, to name just a few examples. The state of the documentation, therefore, becomes a decisive investment and time consideration.
In order to make all data in transaction processes transparent and to be able to present it quickly and professionally, but also to be able to comply with the necessary documentation obligations, a uniform data foundation is vital. All stakeholders in an investment process and also in real estate management need to have access to the same data at all times. Differing file formats and different contract drafts are the death knell for a fast and efficient transaction.
Based on our research, it is evident that transactions are becoming increasingly complex and time-consuming. At the same time, it must be clear to all parties involved: The more time required to complete a transaction can quickly lead to higher costs. Be it price discounts or surcharges from seller or buyer, be it increasing deal risks, missed market opportunities or just costs for the working time of consultants and employees. Real estate professionals must be aware of this risk and deal with it at the outset. Those who set up their documentation cleanly and transparently will ultimately save cash at the end of the day – a strong advantage in these challenging times.