REFIRE in discussion with: Christoph Wittkop, CEO, SONAR Real Estate

REFIRE took the opportunity recently to catch up with Christoph Wittkop, CEO of investment and asset manager SONAR Real Estate GmbH. The company has grown to €3.3bn in assets under management, 142 properties, 1,000,000 sqm of rental space, and 57 employees across 5 German locations. Some excerpts from our discussion:

REFIRE: Despite the deep gloom in the real estate industry as we prepare for the Expo REAL in Munich next week, you've not been letting the grass grow under your feet at SONAR Real Estate. You've been active on many fronts, even since the downturn began more than eighteen months ago. What's driving SONAR forward?

Christoph Wittkop: In the absence of a functioning transaction market, SONAR has been focusing on strengthening our core competencies of real estate, financial and building expertise. As investment and asset managers, with project development competence, we can get up close and personal with all the main asset categories, and can take a measured view on what to avoid and what opportunities are worth looking at for our investors.

Earlier this year we took over CILIX Asset Management in Berlin, bringing SONAR's assets under management to over €3.3bn with 142 properties, including a portfolio of apartment buildings. With CILIX's and our assets both spread across Germany, this also gives us a further toehold in Berlin, where CILIX is headquartered, as well as building on our new property management offering.

You boosted your assets under management by 20% over the last year, as well as launching SONAR Development as a subsidiary to handle your own and third-party projects. Did you see the current troubles in the market approaching?

We could see that low interest rates and low inflation could not persist for ever. But like others, we couldn't anticipate the momentum that the war in Ukraine and the sudden huge rise in interest rates triggered. This resulting adjustment phase is painful - undoubtedly - but it still presents opportunities.

We've re-balanced our focus now to undertaking new developments and refurbishment projects, and - what's becoming increasingly important - the redensification of existing buildings.

Particularly in the areas of ESG and digitalisation, we're taking decisive steps to position and future-proof ourselves as a company and the properties we manage, including THE SQUAIRE on Frankfurt Airport, (Germany's largest mixed-use commercial property). The focus of our asset classes is still on the office sector, although we have been expanding our investments in the logistics and light industrial areas as well over the last couple of years.

Hence the need to broaden SONAR's competencies and resources beyond the beleaguered office sector?

Of critical importance right now is having the right combination of technical skills and financial skills. This so-called 'Bauen im Bestand' will be happening more and more, with existing owners of properties needing to transform their buildings for ESG-compliance, rather than swooping in for spectacular transactions. And completely new developments are clearly off the table at the moment, with numerous projects having ground to a standstill. Building costs are still high, but the exit yields aren't there to make new development feasible.

Our goal is to help bigger owners get the best out of what they've got. We've been building up our own development capacity internally to enable this.

Has the shine permanently gone off offices?

There are certainly still opportunities there, both at the top end where rents are holding up robustly, and at the bottom end, where at the right price assets might present themselves which could be refurbished and repositioned, or in some few cases, could be candidates for conversion to hotels or residential, for the very brave, or imaginative.

But even for the most experienced investors, the sector is currently being penalised, for better or worse, by the almost toxic ambiance surrounding the 'Office' asset class. We're still some way away from clear price visibility, but we're getting closer, as evidenced by a few recent transactions.

Unlike in the USA we're still not looking at a real disaster here in the office sector or a huge oversupply of space. Demand for office space may have reduced, but it hasn't collapsed. But how likely are we to end up handing back our keys and walking away - are we not in danger of over-exaggerating the scale of the downturn here?

There ARE structural issues surrounding offices, no question. But the asset class will still remain relevant. Even when buying an office might deliver a yield that's still lower than bonds. But there's no rock-solid guarantee surrounding bonds either - who's to say all those bonds will be repayable in ten years at the price I thought I was going to get for them? There's risk there too.

As a landlord, what are you seeing with your tenants - are they all taking advantage of what they see as a falling market?

It is true that tenants are taking a tougher stance on negotiation, and in many instances they are looking to reduce their space, for all the widely-known reasons. And the bigger the problem for the landlord, the more opportunities the tenant has to hammer out a good deal.

But we've been surprised at the overall strength of the market, at the level of genuine demand for good-quality space, despite the recessionary climate. Phenomena like the war for talents, and working from home, really are present in the marketplace. Tenants are still ready to pay for quality office, it's not only about the price per square metre. They might take less space, but they'll still pay high rents for a top-quality building in a good address.

There are still good opportunities for investors who are prepared to act counter-cyclically and can price in all the downsides. But the days of buying inexpensive offices to rent out cheaply are over.

So what other asset categories appeal at the moment?

Yes, we're certainly looking closely again at residential, including student accomodation. This is partly as a diversification out of offices, but also on its own merits. We're picking up on the renewed interest being shown by foreign investors, mainly Anglo-Saxon, in the housing sector. They're being drawn by falling multiples, rising rents, steady cash flows, and doubtless too, a degree of diversification. Perspectives are still fundamentally good, if no longer being driven by price appreciation.

You've also got experience in the hospitality sector, and you're building a hotel in Kelsterbach near Frankfurt Airport, to be marketed under the Zleep Hotels brand for Deutsche Hospitality. What is it you like about the sector?

In the hospitality sector, we're doing more than just dipping our toes into the water, we want to develop our expertise further. Hotels have recovered faster than we expected, rising somewhat like a phoenix from the ashes. The Kelsterbach hotel is set to profit from a number of recovery scenarios - the return of business travel and trade fairs, the proximity to the airport, and the ongoing buoyancy of the logistics sector and chemical production.

From an investors' point of view, the hotel business can offer a decent inflation hedge, depending on how the contract with the operator is set up. Since the pandemic, room rates have recovered strongly - occupancy of 80-90% at the higher room rates is more interesting than100% at dumping prices - and in many cases we're back at turnover levels of 2019. We're expecting a return to full normality. We won't be investing blindly, but we're looking to do more.