German resi increasingly differentiated as market heats up

Germany’s residential market is becoming increasingly differentiated as interest in the sector heats up, Dr. Konstantin Kortmann, head of residential investment at JLL Germany, told REFIRE.

‘The market is becoming more differentiated because in the classic built-to-let market listed companies have identified their respective core products in core regions and are selling off the rest,’ Kortmann said. ‘In addition, student housing is becoming a mature sub-market. If you look at large pension funds, they are buying new builds and developing their networks. Beyond the major deals and consolidation measures, the profiles of portfolios are becoming increasingly differentiated. They either serve a specific sub-segment, as shown by the micro-apartment transactions at the beginning of the year, or they have fairly homogeneous risk profiles in the way they are structurally designed.’

Forward deals have accounted for almost a third of the market so far this year, according to Helge Scheunemann, head of research at JLL Germany: ‘The importance of forward deals remains at a high level. Around 30% of deals comprised project developments sold prior to completion. On average, prices of more than €4,000 per sqm were achieved — more than twice as much as for existing portfolios and properties, which were traded at around €1,700 per sqm.’

Predictably, investors remain under enormous pressure to invest, not least because many insurance companies and pension funds are still under-invested in the real estate market. At the same time, long-term government bonds are expiring and capital is being released, which in turn must be re-invested with a focus on value retention, said Kortmann.

In terms of direct property investment, banks/insurance/pension funds invested more than €1.4b net in residential real estate in the first half of 2018, according to JLL. At the same time, indirect investments through various fund vehicles registered a stable influx of capital with net asset growth of more than €1.2b; they have already reached 70% of the average five-year inflow. In particular, fresh capital has been injected into numerous special funds by investor pools of insurance companies and pension funds. Listed residential property groups invested by far the most in residential real estate: by the end of June, their additional residential property assets amounted to a total of more than €3.2b.

And as the market matures, so do investment tactics. Pension funds are also changing investment tack, Peter Papadakos, managing director at consultancy Green Street Advisors and their lead research analyst for the Continental European region, told REFIRE: ‘Pension funds are forward funding developments and taking on leasing risk,’ he said. ‘They like to buy new stock where they won’t have to spend much for the next 10 years, rather than old, capex-hungry stock where rents are set according to the market.’

Berlin continues to attract lion’s share of investment

And while domestic investors continue to account for 80% of the market, by mid-2018, three-quarters of the capital invested from abroad was attributable to three countries: the US (€600 m), the UK (€580m) and Singapore (€350m), according to JLL. Berlin continued to attract the lion’s share of investment in the first half of the year, at 15% or €1.65b, followed by the Frankfurt-Rhine-Main area with €920m, thereby already exceeding the volume for 2017. Hamburg, meanwhile, achieved three quarters (€750m) of its 2017 volume by the middle of the year.

It’s easy to see Berlin’s attraction for investors: multi-family capital values ‘have been on fire’, according to a report published this month by Green Street Advisors, which describes the city as ‘one of the most intriguing across Europe and North America, in terms of its socio-economic transformations currently underway’. And while part of the run in German resi capital values can be attributed to collapsing corporate bond rates, Green Street Advisors’ Berlin Resi Index’s total return has outperformed an index of Germany-wide resi by 110 percentage points since mid-2012, according to Green Street.

For would-be buyers, there are a number of portfolios circling the market. Listed housing group IndustriaWohnen has reportedly mandated CBRE to sell its ‘Century’ residential portfolio comprising around €800m of residential assets in Berlin, North Rhein-Westphalia and Munich, according to those who track the market. CBRE declined to comment.

‘We don’t see many portfolios this size, so there will be international interest,’ Papadakos said. ‘After all, Blackstone bought a residential portfolio in Berlin this year. That’s an investor who expects high returns but they clearly see traction in the market.’ (In May, Blackstone’s European Core+ platform acquired a portfolio of 2,500 residential units located in Berlin, the majority of which are concentrated in prime inner-city districts, with additional units in Brandenburg and Magdeburg, from a joint venture which includes, among others, KauriCAB Management and Apeiron/Ailon for an undisclosed sum. TAG Immobilien has also put a resi portfolio expected to fetch around €100m on the market, according to market sources.

However, given the short supply of good stock in Germany, major German residential property groups are pursuing other routes to achieve growth. ‘Demand is stronger than supply, so development is increasing,’ Kortmann said. ‘Two highly sought-after sub-markets are plots of land and good, sustainable resi product with good cash flow. It’s not such an easy time to enter the development market but international players might consider it.’

Listed companies betting big on re-fits

Germany’s listed residential companies, which control around €80b of assets, are betting big on modernization, according to Papadakos. ‘These companies are taking in around €4b to €5b a year in rent and spending an additional €2b a year on modernizations. This is the clearest trend we see. It’s picked up a lot in the last three years as they tap into projected future growth, both in terms of capital values and rental growth.’

Consolidation driving sector

Property groups are also taking the consolidation route, both at home and abroad. In May, Germany’s biggest residential landlord, Vonovia, outbid Starwood Capital to offer around €900m for a stake in Swedish residential group, Victoria Park, thereby cementing the latest step in its strategy to grow the business outside Germany. Earlier this year, German-Austrian BUWOG Group acquired a residential and commercial real estate portfolio in northern Germany from several unnamed international institutional investors for an undisclosed sum. The portfolio comprised 693 residential units, 32 commercial units and 386 parking spaces in Hannover, Bremen, Kiel, Lübeck and Lüneburg. In addition, Adler Real Estate acquired 70% of the shares in the residential portfolio of Israel-based Brack Capital for around €700m in March, while also selling a portfolio to its joint venture with Benson Elliot for about €115m.

‘We’ve had a lot of consolidation in the sector, from Consus acquiring a stake in CG to Vonovia buying Austrian peer BUWOG,’ Kortmann said. ‘Big players like Vonovia are always looking at consolidation. They’re positioning themselves like a utility company: they’re providing social housing services that are less interesting to pension funds in a highly regulated environment, something that will deter some competitors,’ Kortmann explained. ‘I could see them expanding into further European markets, such as France, betting on modest but steady annual rental growth independent of the CPI– that’s their pitch.’

In total, consolidation, transactions in the micro residential segment and more than 200 smaller transaction (with fewer than 800 residential units) generated €11.3b in the first half of 2018, according to JLL, which means that more than 70% of the previous year’s volume has already been achieved after six months. The five-year average for first half-years was exceeded by 35%; the ten-year average by as much as 95%. Overall, 83,900 residential units changed hands by the end of June 2018. JLL is now forecasting a total deal volume of between €17b and €18b this year. (ssk)