Investors see end approaching for rapid German resi price increases
As has now become almost tradition, Engel & Völkers Investment Consulting hosted a lively discussion at the recent Expo REAL in Munich – this time dealing with the German residential market, and how investors are approaching the market after nearly seven years of steady price rises.
The discussion title - “Residential property – the asset class without alternatives?” – set the tone for a provocative debate among representatives of six institutional investors on the market. Alongside hosts Kai Wolfram, Managing Partner of Engel & Völkers Investment Consulting GmbH (EVIC), and Andreas Ewald, Managing Director of EVIC, the panellist included Martin Eberhardt, Managing Director of Bouwfonds Investment Management Deutschland, Francesco Fedele, Management Board member of BF.direkt AG, Thomas Meyer, CEO of Wertgrund AG, Thomas Hegel, CEO of LEG Immobilien AG, and Arndt Krienen, CEO of Adler Real Estate AG.
With prices now as high as they are, investors are examining other growth options such as project developments. Thomas Meyer of Wertgrund identified three common investor approaches: "Project developments, forward deals and value-add approaches. Project developments in particular provide an opportunity to maximise returns. The associated development risk can easily be minimised by means of variation within the portfolio, particularly for diversified investors.”
He added: “Every investor knows about the recent price development on the German housing market. However, an end to the strong upward trend is becoming increasingly likely in view of the ever longer amortisation periods. It is therefore economically advisable for institutional players in particular to sell fully-developed properties. In this way, above-average revenues can be generated for companies and investors in the current seller’s market.”
Arndt Krienen, CEO of listed Adler Real Estate, which has just sold off its privatisation subsidiary Accentro to UK private equity group Vestigo Capital Advisors LLP, also added to the impression that German residential may be coming to an end of its run of rapid price increases.
Krienen said, “We have expanded further in 2017 – by a good 7% overall so far – by purchasing portfolios that fit with our business model. We want to continue growing, too. However, in the course of this year’s acquisitions we also gained the impression that our strategy of growing solely by means of purchasing portfolios is now reaching its limits: Fewer and fewer portfolios are being offered on the market. And more and more often, the prices demanded are so high that they are no longer attractive for us. In a situation like this, development, densification and roof extension projects are gaining appeal. We are therefore considering these topics now – although only as an addition to, not a replacement for, the existing business model.”
The oft-cited strategy of delving deeper into Germany's B- and C-cities to look for unexploited value was also scrutinised, with LEG Immobilien boss Thomas Hegel saying that this is no sure-fire strategy. “In bidding processes, we are increasingly observing that the price momentum in B cities has increased, especially in the past few years. Purchase price factors of 20 or more, which previously only tended to be seen in the metropolises, are no longer a rarity in the B locations either now. The end is not yet in sight here,” he said.
Bouwfonds' Martin Eberhard stressed that good residential properties remain in high demand, despite the high level of prices. “Germany, residential property, stable cash flow: This trio full of security is something that very few institutional investors want to do without at the moment. Particularly now in view of the European crisis areas in the UK and Catalonia, investors value the economic and political stability in Germany,” he concluded.