A small change in the direction of travel in terms of industrial output in Germany, resulting in contraction rather than growth has led to much speculation about the current state of the German economy. Whilst reports about a looming technical recession may well prove accurate, many misconceptions and clichés about how the German economy operates have once again risen to the fore, especially within the British media. I thought I would take the opportunity to address some of these misconceptions and to explore and demonstrate how Sirius’ business model is resilient and well placed to continue to drive returns, at all stages of the economic cycle in Germany.
The German economy is not experiencing a phenomenal or deep retraction
Germany’s Bundesbank says the economy might have contracted again in the third quarter, but a deep recession does not appear to be on the horizon. Instead, Germany is in the midst of a predominately industrial recession set within the context of a healthier wider economy. The reason for a small downturn in Germany’s manufacturing sector is largely due to slowing global growth and wider uncertainty, particularly in the automotive sector.
It is worth noting that contrary to popular belief, the German industrial sector accounts for around 23% of total GDP – meaning that 77% of the German economy is in fact non-industrial. So, while the manufacturing sector is seeing a technical downturn, this has not led to a meaningful recession in the economy as a whole because there is still plenty of growth in the services sector in Germany.
German manufacturing is more than the automotive industry
While the German industrial sector has seen a slowdown as a result of growing uncertainty in the global economy as well as the result of the ongoing Brexit deliberations and the unpredictability of global trade, it’s not all bad news. Despite the performance of the automotive business, aerospace is seeing exponential demand and is set to help bring the manufacturing sector in Germany back to recovery. This brings me to a key misconception that German industry is the automotive industry. The reality is, the automotive segment accounts for just 16% of total manufacturing in Germany.
The German economic fundamentals remain good
Unemployment is still at an all-time low and 75% of the economy (services sector) saw growth in the past year. So even if the economy slips into a technical recession, Germany remains the most resilient economy in Europe - owing to its positive balance of trade and strong balance sheet – the German Bundesbank has more scope to look at a financial stimulus to kick start the industrial sector than anywhere else in Europe.
How we’ve built economic resilience into the Sirius model
When I first began my journey at Sirius 10 years ago, we had over 35% exposure to single industries and 25% exposure to just a single tenant (Siemens) – putting us in a relatively vulnerable position and prone to economic shock. Today we have no more than 5% direct exposure to any single industry and no more than 3% to any single tenant. This is no accident and is a testament to the extent to which we have successfully used our platform over the years to diversify our tenant mix and plan for the medium and long term.
Today, the Sirius platform manages three key customer segments:
- Blue chip clients – large businesses, who see their output decline in a downturn, but typically hold and require the same amount of space, they merely vary the utilisation of that space at different points within the economic cycle.
- Micro SMEs – small businesses, who we see increased demand from in a downturn
- Core SMEs – small businesses, who are forced to change their cost structure in a downturn
Dealing with all three segments allows us to maintain and increase our net operating income throughout the economic cycle. For instance, when a Core SME reduces their space, we can use our platform to convert it into our SmartSpace product and offer it to a Micro SME who requires more flexibility and will pay a higher rate per square metre.
So, it’s our operation across all three customer segments together with our platform of 260 people across 60 locations that gives us the resilience throughout the whole of the cycle. Our balance sheet also plays a key role; managing loan-to-value (LTV) in relation to valuation yields is essential. Ensuring we have the right cost of capital as well as sufficient cash reserves is also very important and this is just one of the reasons why we have recently strengthened our balance sheet by €100m+, meaning that we are particularly well capitalised at this point in the economic cycle.
Germany is Europe’s biggest economy, it’s balance sheet is stronger than any other European country, it has a wider range of options in terms of financial stimulus and contrary to current misconceptions it has a service led economy. Whilst a technical recession is inevitable the underlying health of the economy remains strong.