Private investors upping exposure to residential development market as develop and hold segment set to grow to €40 bn

Private investors are homing in on Germany’s residential development market, with the ‘develop and hold’ segment predicted to grow to €40 bn over the next few years, according to a study published this month by Swiss-based investment manager, Empira, and German research institute Bulwiengesa.

The segment, where investors develop properties for their own portfolios, now represents a third of new construction space in Germany’s ‘Big 7’ each year, or around 1 million sqm: ‘The message is clear: the develop and hold business is no longer monopolised by public players,’ said Andreas Schulten, general representative of Bulwiengesa.

The develop and hold segment is currently valued at around €33bn in Germany, with 5.2 million sqm of projects in the planning and development stage for the next five years, according to the report. The classic trading development segment, on the other hand, amounts to around 11 million sqm.

‘The figures clearly show what the market and our investors have been indicating for some years now: project development for institutional portfolios is no longer a niche sector and in the medium term will account for the bulk of new construction volume in Germany's major cities,’ said Lahcen Knapp, CEO of Empira. ‘This trend is not limited to the residential sector either; office investments also offer great potential. The reason for this lasting change is the continuing yield compression in existing portfolios. In addition, there is a growing realisation that the development risk is clearly manageable in large German cities due to the ever-growing demand for residential space,’ he added.

Big differences across 'Big 7'

Nonetheless, there are marked differences across the ‘Big 7’. In cities such as Stuttgart, the develop and hold segment accounts for 41% of total construction, compared to 35% in Munich, 34% in Berlin, 30% in Frankfurt, 27% in Hamburg and 22% in Düsseldorf, according to the study.

Around 27% of the develop and hold pipeline is currently attributable to private investors, while the traditionally dominant public players in the segment, such as municipal and state-owned housing companies, account for 54%.

Fund managers jumping on the bandwagon

Fund managers are also jumping on the bandwagon. Earlier this month, Commerz Real acquired an existing student residence with 244 units from the private business university Frankfurt School of Finance & Management for around €226.5m. The plot of land is located next to the Frankfurt School campus; the Goethe University Frankfurt and Frankfurt University of Applied Sciences are just a five-minute bike ride away. The building will be demolished at the beginning of 2021 on the 12,300 sqm site to make way for a new complex comprising 1,133 serviced and student apartments across 39,000 sqm, which will be developed by project developer and administrator i Live, which specialises in smart living concepts. Of the 1,133 units, 995 will be student apartments. Around 537 of them are expected to be subsidised or rent-capped housing. A further 458 student apartments and 138 serviced apartments will be leased without any restrictions, meaning they can be leased not only to students but also to teaching staff and commuters.

‘With the new development, we can support the city and Frankfurt School of Finance & Management in providing as much housing as possible to meet people’s needs,’ said Johannes Anschott, a member of the board of management of Commerz Real.

According to Anschott, the number of students has risen sharply since 2010, by more than 20% at the Goethe University and by more than 85% at the Frankfurt School of Finance & Management. At the same time, the vacancy rate for apartments in Frankfurt is less than 0.5%. Following completion, the property will be divided between two real estate funds, Commerz Real Institutional Smart Living Fund and Commerz Real Smart Living Europe Fund. This marks the first investment for the latter fund.The open-ended special AIF, Commerz Real Institutional Smart Living Europe Fund, will develop a diversified portfolio of ten to 15 residential complexes in European university towns with a total volume of around €500m, with a target BVI of around 4.5% per annum.

Another investor taking this approach is fund manager Patrizia. This month, it acquired a healthcare property development in Dresden on behalf of its Social Care Fund III from HentschkeBau for an undisclosed sum. The 6,500 sqm nursing home will provide 145 bedrooms across four floors. The property is located in the Reick district of Dresden and offers good transport links to the city centre and as well as to several day care facilities. It is due to be completed by April 2020 and will be operated by Casa Reha on a 20-year lease. Casa Reha was acquired by the French Korian Group in 2015, which also owns other nursing home operators, including Curanum and Phoenix, and currently runs 234 fully in-patient nursing facilities, offering more than 28,000 nursing places.

‘Once completed, this high-quality nursing home will provide best-in-class facilities which we expect will benefit from strong demand supported by local demographics,’ said Thomas Otto, a senior member of the Germany transactions team at Patrizia. ‘The long-term lease which has been signed with a well-respected and proven operator, namely Casa Reha, will ensure ongoing cash flow that delivers sustained returns to our investors.’

Patrizia currently has more than €1bn of AUM in the healthcare sector, with around €560m invested in nursing homes.