90% of German asset managers want to boost exposure to residential sector

A whopping 90% of German asset managers want to increase their exposure to the residential sector, according to an asset management study published this month by Ernst & Young and Germany’s largest residential landlord, Vonovia.

In addition, 90% of the 40 companies surveyed said they are in it for the long-haul, with a view to holding residential assets for at least eight years.

‘Bond yields are down and more and more investors are looking at alternatives, such as real estate,’ Dietmar Fischer, partner at E&Y and author of the asset management study, told REFIRE. ‘The residential sector is popular because it offers the most security: you have lots of tenants, as opposed to just a few in an office – and people always need somewhere to live, even in a downturn.’

Around 72% of the asset managers surveyed want to expand their project development to boost their value chain going forward. The majority (63%) want to increase their exposure by building on brownfield sites as well as by increasing the efficiency of the space in existing buildings (67%). In addition, 44% said that want to develop new residential schemes and around 50% plan to convert other stock into apartments as well as take on extensive renovations.

‘Development is one part of asset managers’ portfolios, which is quite new for some of them – it’s not normally part of the core business of all asset managers – but it’s hard to generate high margins, so they have to look at other types of play, such as development,’ Fischer said. ‘They have to take on more risk or they’ll lose their market share,’ he added.

Digitalization is also becoming more popular because ‘asset managers need to earn money and competition is huge’, according to Fischer: ‘Digital solutions can make it more efficient to manage your portfolio. In addition, asset managers want to offer digital services to their tenants as an add-on service that they can charge extra for.’

His colleague, Christian Schulz-Wulkow, head of the real estate team at E&Y for Germany, Austria and Switzerland, agrees: ‘Customer demands are changing and the challenges of asset management are increasing,’ he said. ‘As a result, any processes that make the management more efficient, such as digitalization or a targeted lowering of business costs are increasingly in focus,’ he added.

The trend of consolidation will also continue, according to Fischer: ‘We’ve seen a few residential mergers in the last few years, including Patrizia’s acquisition of Triuva (2017) and Swiss Life’s purchase of Corpus Sireo. (2014). It’s safe to say there will be others this year.’

Germany’s residential landlords have also been hitting the headlines this month, in particular Germany’s largest residential landlord, Vonovia, which announced that it would offer a housing guarantee for older tenants, a move designed to hit back at criticism that rents have, quite simply, become unaffordable in many German cities, particularly for young families and senior citizens.

‘Our aim is to ensure that senior citizens grow old with dignity in the neighborhoods they have made their home,’ said Vonovia’s CEO Rolf Buch. ‘This includes older tenants not having to worry about their livelihoods because of rising rents.’

Vonovia has come under fire from tenants associations due to rental increases that are unaffordable for some of its tenants. In the first three months of 2019, Vonovia's operating result increased by a fifth to €303.6m y-on-y. Rental income also increased by 20% to €505m in the first quarter, with vacancies remaining low. The average rent increased to €6.56 per sqm, up 6% on the same period last year. At the same time, Vonovia invested €242m in refurbishments and new construction, an increase of around 75%.

Vonovia says it will ensure that apartments remain affordable, even if local comparative rents go up and that it is committed to‘renovating at least every third existing apartment that is newly rented to make it senior friendly’. This can include simple changes such as replacing a bathtub with a walk-in shower.

The group offers affordable homes to around one million people in Germany. More than half of its tenants have small to medium incomes and pay anaverage rent of €6.56 per sqm.The group completed around 1,100 new apartments last year and built 200 new apartments in the first quarter of 2019.

‘We must build new apartments and refurbish existing ones – making them affordable, climate friendly and senior friendly,’ said Buch. ‘Our neighborhoods, which we want to develop further from an economic, ecological and social point of view into attractive neighborhoods with real quality of life, also need attention.’

The real question is will Vonovia’s competitors follow suit by offering housing guarantees to their elderly tenants? For now, the jury is still out. Vonovia’s biggest rival, Deutsche Wohnen, told REFIRE, somewhat cryptically, that the group ‘has taken note of the news from Vonovia regarding the so-called "housing guarantee"’: ‘At Deutsche Wohnen, we have been working intensively for some time on issues relating to the housing situation of people with lower incomes,’ a spokesperson said. ‘As a result, we have implemented concrete steps and concluded joint agreements with various Berlin districts on socially acceptable refurbishment measures.’ The spokesperson declined to comment on whether rental guarantees would be implemented across for the board for its elderly tenants.