Deutsche Hypo boss warns on yield obsession versus quality
The Deutsche Hypo Index, which reflects sentiment in the German real estate industry, has fallen back of late – most recently by 3.7% in April – due to lack of availability of suitable investment objects and nervousness among participants about the future direction of the market.
The composite index, which includes a sentiment component based on the perceived climate as well as a component based on hard facts, such as the DIMAX, the DAX, and a variety of other current data, is telling its own story at the moment, said Andreas Pohl, board member at Deutsche Hypo and the senior decision maker at the bank for real estate financing approvals.
He was talking to a small group of journalists recently in Frankfurt, including REFIRE, to celebrate the 100th monthly reading of the index his bank sponsors (known in its early days as the King Sturge Index, when it was originally launched in 2008, and which we have continued to report on since its inception).
The index is based on a survey of an expert panel of over 1,000 market participants. It includes investors, project developers, service providers, advisors, banks and associations, 40% at CEO level. The research is carried out monthly by real estate research group BulwienGesa, whose CEO Andreas Schulten was also at the briefing (see separate article on project development in this issue).
Pohl said, “On the one side there are the hard facts, and on the other, gut instinct – and for many industry participants the situation is not normal at the moment. At the bank we are also viewing yields very skeptically. In our view, they are not sustainable.”
He added that the current preoccupation with yields, rather than quality, was masking potential weakness in the market further down the line. Just by investing more into B, C or even D-cities will not be the answer for all institutional investors, as many of those cities will be the first to bear the brunt in a future downturn, he said.
Pohl drew parallels with the gold-rush mentality that prevailed before the financial crisis, driven by an excess of liquidity forcing investors to be in the market at all costs. The difference, he acknowledged, is that the banks are much more cautious this time around.
A closer look at the different asset categories in the April reading shows the office sentiment reading fell most steeply, by 5.6%, followed by retail (-4.7%) and residential (-2.6%). Logistics and hotels gained 0.5% and 0.2%, respectively.
“Here's where we see the positive sentiment for the two asset classes being driven by demand from investors seeking higher yield on the one side, and by rising performance figures such as more overnight stays on the other,” said Pohl. He warned, however, that his bank was now seeing investors engaging in niche segments without necessarily having the appropriate sector expertise.