Interview - Sonar Real Estate

Sonar Real Estate is an owner-managed investor, asset manager and developer, founded in 2020. The company recently founded Sonar Development GmbH, which will undertake its own projects and act as an internal development partner as an extension of Sonar's existing activities, and to participate in joint ventures with German and foreign investors and Family Offices on development and revitalisation projects.

REFIRE caught up recently with Sonar Real Estate's CEO, Christoph Wittkop, to learn more about the venture, and the company's plans, as it builds on its well-established asset management competencies to round out its service offering. Sonar has traditionally had mandates from international investors, while more recently embracing new mandates from German investor groups consolidating their domestic portfolios.

REFIRE: You've come a long way since your founding two years ago, albeit you were able to bring plenty of projects into the new company from earlier mandates Is this a significant step for you?

Christoph Wittkop: From the outset, having the competence to realise even major construction projects in-house has been one of the cornerstones of our business model. By founding a separate company for these activities, we are accentuating the importance of this area to us, as well as responding to the already mounting demand for this type of service. We view it as a 'Competence Centre' within our operations.

The need for refurbishment and compliance with ESG standards is becoming increasingly apparent in more than a few existing properties. What's more, for our clients pursuing a value-add or opportunistic approach, we can offer concerted expertise and dependable quality in the implementation of their projects. The division will be headed up by the highly-experienced Daniel Jäde and Steffen Wittwer.

REFIRE: All the talk right now is of difficulties facing developers. Is this the time to be beefing up your development capacities?

CW: Right now, many classic property concepts are having to be rethought, while new asset classes are gaining in importance. So the new division is designed to play to our strengths. With Sonar Development, we're seeking out new trends and opportunities, taking advantage of our existing organisational structure to implement these projects. This also ensures that development projects across Germany can be managed directly, by our local staff.

This is not to deny that there are real problems being faced by developers right now. Banks are getting nervous. General contractor contracts were for a fixed price in the past. That's no longer the case. Projects will still go ahead, but at perhaps different rent levels for prospective tenants. There'll be a lot of renegotiation, a lot of transactions will become more difficult, and they’ll be fewer.

REFIRE: Sounds grim.

CW: It's certainly a changed situation from six months ago. But It will also throw up certain new opportunities. And don't forget - demand for housing, offices and logistics has not changed significantly over the period, so from the user's perspective, risks have not increased.

It's a different matter for developers and refurbishers, for whom everything is now more expensive. And when at the same time multiples are going down as a result of rising interest rates, then margins at the very least will suffer. Not every developer, nor all projects, are going to survive this. Prices are unlikely to be going back to their old levels. One overall likely effect is that office rents will tend to be pushed up.

REFIRE: Last month you bought from Commerz Real a revitalisation project, a landmark office building in Frankfurt Niederrad, close to the S-Bahn station in the popular Lyoner Quartier. Will you be faced with all these issues there?

CW: The Prisma building has a great location, has 42,500 sqm of lettable space, and is currently vacant. We bought it in a joint venture with Patron Capital Advisers, with the objective of modernising it with a focus on sustainability, and repositioning it in the market.

Firstly, we'd say there's now been a shift in the relative attractiveness of an existing building versus a new-build project development. It's easier to adapt it to new future specifications in respect of ESG compliance than with new-build. This was not previously the case. Being able to do this gives us a definite advantage. For investors, too, a completely refurbished existing building checks more ESG and sustainability boxes than a new-build with all its extra CO2 baggage, and many will opt for the former, we believe.

This very likely makes our Prisma project even more attractive than previously - although we too will have the headache of dealing with uncertain future material prices. If we don't have enough buffer in our calculations, then we will either have to raise the rent, or take a smaller margin, meaning less profit. That's what we're all facing.

REFIRE: As you look for a tenant, what immediate steps are you now taking to ready the Prisma building for new occupation?

CW: We can immediately start on certain works, including the lobby and some communal areas. But we'll have to wait with the actual office layouts, so that we can work on these with the future tenant or tenants. Actually, we're surprised how strong the interest is in what is a large, interconnected office space, although we haven't even really started marketing it yet. That's the power of a good micro-location and a quality asset. Despite the phenomenon of Working from Home, there are still corporate tenants who need more or better space than where they're currently located.

REFIRE: How much are companies like Sonar Real Estate really being affected by the much-touted 'shortage of labour' or 'Fachkräftemangel' in the industry?

CW: It's true that the industry may have been talking this up a bit in the past, but that's certainly not the case now. It's a burning issue - finding the right technically-qualified people, and the right people for jobs on site, is becoming acute. Even for some commercial roles, there's a growing shortage - not as critical as for more technical jobs, but noticeable. It's becoming an employees market, where employers are more likely to accede to employee or new candidates' demands.

REFIRE: What key threats do you see facing the German real estate industry at the moment?

CW: Certainly the role of interest rates, as these affect every real estate asset and have an immediate impact on all transactions. Secondly, the rise in building material costs and limits on the availability of supply, and how long this will go on for. Certainly also the shortage of labour. And of course, the unpredictable negative effects of a longer drawn-out war or an escalation of hostilities in Ukraine.

REFIRE: And for Sonar, and other asset managers, any other wise words...?

CW: Certainly I would say that the old motto of "being local" is about to return with even greater importance, particularly in respect of the technical adaptation of buildings to their localised needs. Also, we'll need even closer communication with our tenants to get a feel for what their plans are - expansion, reduction, a higher quota of working-from-home employees. Gradually, too, we'll have to watch out for core investors looking to shift away from real estate in favour of other asset classes. A certain reduction here due to rising interest rates wouldn't be the worst thing in the world, given how much capital has been chasing the limited supply of available assets. It might bring us all down to earth a little, not necessarily a bad thing.