MIPIM wrap-up: Mood of optimism prevails, tinged with caution

This year's MIPIM saw Germany again confirming its position as Europe's most attractive investment market, across most asset categories and geographically, across it’s A-, B-, and even smaller urban and regional markets. Prices have risen since last year, both for individual assets and for portfolios, with more money also luring more assets out of hiding and into the active market.

According to Dr. Wulff Aengevelt, CEO of Düsseldorf-headquartered Aengevelt Immobilien, this year's event highlighted another German phenomenon. The shortage of suitable stock on offer in the core investment sector has led to an upsurge in forward deals on project developments with a two- to three-year time horizon, frequently in the price range of eight to nine-digit million euro range. Putting a figure on the extent of this deal-making is difficult, says Aengevelt, but its presence can no longer be ignored.

Aengevelt points to another factor relevant for existing German property assets, namely the increasingly important role of technical due diligence, in particular energy efficiency, fire protection and the need for modernisation of older properties. The life cycle of many existing properties have been shortened drastically by the impact of environmental sustainability and the optimisation of running costs, with a direct effect on the holding periods investors are prepared to commit to.

A 20-year old office building, for example, is considered fairly old these days, whereas before it might still have been considered modern. All new leasing considerations, such as special tenant wishes which may negatively impact on an asset's future letting attractiveness, have to bear these potential future costs in mind at an earlier stage than heretofore. A roof which needs repairs or improved energy-saving insulation will no longer be patched up inexpensively "one last time", but will be prematurely completely replaced and charged against current cash flows. A consequence of this is widely diverging price expectations between vendor and potential buyer, and spurs on further incentives for new project development.

A selection of other observations by market participants at the MIPIM:

Hans Richard Schmitz, CEO of listed Hamborner REIT AG, commented on the state of the German investment market. “Real estate markets are in a boom period which has lasted for nine years. In view of the considerable upturn of prices in recent years, many market participants are now asking when the trend could reverse. In my view, the property cycle is at a very advanced stage. An unrestricted high demand level is met by a very low range of properties available. For this reason, prices remain high. However, as a company with a portfolio of commercial properties held on a sustained basis and a clear cash flow orientation, we need a specific minimum return and are thus not willing to pay any price for a property. The list of investments not made became much longer last year."

The subject of interest rates was never long in being broached in MIPIM discussions. According to Michael Schneider, managing director of fund platform IntReal International Real Estate Kapitalverwaltungsges. mbH, “In respect of interest rates, we are not worried about any larger negative effects. We are anticipating only a moderate interest rate upturn in Europe, if at all. This does not impact the funds we administer much, as long as the properties generate stable income. Debt ratios are limited on a regulatory basis and the current low level of interest rates is generally secured on a long-term basis. Thus property funds should be able to cope very well with a moderate increase in interest rates.”

His views were underlined by Francesco Fedele, CEO of Stuttgart-based BF.direkt AG: “For some time now, we have been observing a rise in long-term interest rates. This has concrete implications for the property market: Investors in residential construction are becoming more cautions. There is virtually not a single market player who is calculating a continuation of the period of rising rents and prices.”

Martin Brühl, CIO and member of the management board at Hamburg-based Union Investment Real Estate GmbH, summed up the prevailing mood of optimism tinged with caution, in describing Union's current investment strategy. "We are operating in what is generally a positive market environment for real estate investments. Economic conditions are good to excellent in all of our investment regions. However, high prices are having a constraining effect in almost all regional markets and product classes. That applies in particular to high-quality properties.

"In the 2018 investment year, we will thus continue to take a selective approach. Given the mostly advanced stage of the capital market cycle, we will focus in particular on properties with potential for rent increases through active asset management.

"In Europe, we will continue to concentrate on core and core plus properties in established and dynamic locations, and of course are not alone in that respect. We also aim to expand further in the US, where we have already completed the acquisition of two hotels and a retail property in 2018. However, increased hedging and financing costs are restricting the scope for dollar investments somewhat.

And Klaus-Peter Hesse, managing director of the ZIA Zentraler Immobilien Ausschuss, the leading lobby group for the real estate industry, put the state of the industry in perspective. “The 2018 Spring Assessment shows: Germany property markets are healthy. This is important for us. After all, ten per cent of all jobs subject to social security contributions work in our industry. We generate a share of 19 per cent in German gross value added and managed assets of €11.2 trillion including land.

"But the assessment also shows just how great the challenges are that we are facing. All market participants are investing of lot of effort and energy to contribute to an easing on residential markets. But many cities are also complaining about the lack of office space. Up to now this problem has been treated in a negligent fashion on the political front, a blatant mistake. Every third person working in Germany uses an office. The strong German economy means that many new companies are being established or existing one are expanding. If there is not enough space available, companies could be forced to put their plans on ice or move into other cities.”