By Sara Seddon Kilbinger, Senior Reporter, REFIRE
Rising interest rates, ongoing war in Ukraine and sluggishness in sector in the spotlight
EXPO REAL will take place next month against a sombre backdrop. As interest rates and the cost of materials rise, the war in Ukraine continues unabated and investor interest in some sectors remains sluggish, what topics will dominate the fair?
‘Uncertainty’ is the word most likely to prevail, according to those in the industry: As
Konstantin Kortmann, country leader JLL Germany told REFIRE: ‘The long-term issues of sustainability, digitalisation and pandemics have now been joined by the interest rate turnaround, inflation and war in Europe,’ he said. ‘The industry has never been confronted with such a constellation of challenges before - which makes the personal, trust-based exchange at EXPO REAL all the more important. In such a market situation, there are no simple truths, but many options - we just have to think more strongly in scenarios and include more factors such as inflation and indexation in the calculations. I therefore hope that EXPO REAL will again provide more orientation, clarity and optimism.’
For Einar Skjerven, CEO of Skjerven Group, this year’s fair ‘marks a milestone’: ‘After a twelve year boom, the German real estate markets face serious economic challenges again,’ he said. ‘This means some business models need to be reconsidered and some projects need to be relaunched, especially those where steady increases in value were already priced in. However, this correction also offers opportunities. Players who predominantly finance their investments with equity can obtain residential portfolios comparatively cheaply due to refinancing bottlenecks. Plus, there are now entry opportunities in project developments, in the role of a financing partner and also as a white knight, if projects are endangered by the insolvency of important partners.’
Rising inflation and energy costs – navigating a recession
Rising inflation and energy costs will be one of the biggest topics, according to Nicolai Baumann, country manager of Avison Young in Germany: ‘The main topic will be the coming recession and its impact on our industry,’ he said. ‘How will we deal with it and what are the scenarios? Despite all the challenges - such as inflation, interest rates and energy costs - I am positive. Real estate is and will remain an important asset, both from an investor's point of view and for users.’
The lending market will also come under the microscope: ‘We expect the biggest topics for this year to be the actual debt and capital markets and the future development of exit yields,’ said Curth-C. Flatow, managing partner of FAP Group. ‘The classic bank financing market is in trouble. Several banks have stopped new business activities for the time being or significantly changed their lending policies, meaning lower leverage and more or tighter covenants. On the other hand, alternative debt providers can cherry pick. Everyone is unsure about the impact on yields due to rising interest rates and inflation. This not only affects the debt markets but also causes delay or show-stops in transactions. Many investors will wait until they see more light at the end of the tunnel. ‘
Uncertainties regarding issues such as the lack of skilled workers and regulation will also be up for debate, according to Karin Barthelmes-Wehr, managing director of the Institute for Corporate Governance in the German Real Estate Industry (ICG): ‘EXPO REAL this year will certainly be characterized by the many uncertainties currently affecting the real estate industry - interest rate turnaround, supply bottlenecks, energy problems and shortage of skilled workers,’ she said. ‘In addition, there is the EU regulation, where much is still unclear, especially in the area of ESG. This makes it all the more important for the industry to engage in intensive exchange with and amongst each other. I am convinced that a crisis is always an opportunity and now is the time to realign processes and business models towards more sustainability, more social responsibility and more “togetherness”.’
Multi-crises hard to ignore
Climate concerns and the ongoing war in Ukraine will be firmly on the agenda, according to
Christian Schlicht, president of CoreNet Global Central Europe: ‘In Munich, the topic of multi-crises will be discussed: climate, war and cost,’ he said. ‘In the short term, crisis management is extremely relevant for the fall and winter in the real estate industry. In the coming year, we will be confronted with further space reductions and their effects. This requires joint responses to the various scenarios now. In general, however, we must not let the crises cause us to lose sight of the long-term goals of decarbonization and sustainability.’
Ongoing struggles in the construction industry, including the rising cost of materials and the shortage of skilled workers will also be a concern to many at EXPO REAL, according to Marcus Kraft, CEO of mezzanine lender RECON: ‘It is not an easy time for project developers at the moment,’ he said. ‘Increased inflation, high commodity prices and construction costs, combined with significantly increased interest rates, present them with challenges that cannot be ignored. As a specialist for mezzanine financing, this also brings new opportunities for RECON AG who, together with our banking partners, are already well prepared with new financing structures.’
Essentially, pricing will be on the agenda across the board, according to Jascha Hofferbert, managing partner, Silverton Asset Solutions: ‘The situation for the real estate industry is not easy to assess at the moment. Neither the market nor the associated price developments can be seriously predicted. A certain restraint is noticeable among many investors, or at least a significantly more cautious approach than in the period before the Ukraine war. I hope that the discussions and expert forums at EXPO REAL will help to assess trends with regard to a possible bottoming out in the individual asset classes, especially in office properties.’
Christoph Wittkop, managing director, Sonar Real Estate, agrees: ‘It will be particularly exciting this year to find out how other market participants assess the current situation and position themselves with regard to investments and pricing in the current environment,’ he said.
That extends to the housing market: ‘As a provider of property management services specialising in residential real estate, we need to know what the mood is in the sector, where the housing markets are particularly tight, which types of housing are most in demand and where vacancies are imminent,’ said Martin Henke, managing director of Talyo Property Services. ‘Personally, I am particularly interested in new trends in the areas of serviced living, student housing or short-term living, also in connection with ESG criteria.’
Challenges inherent in the residential sector will also be a key topic for Rainer Nonnengässer, executive chairman of International Campus Group: ‘We see challenging times for the residential sector for several reasons,’ he said: ‘The sudden death of the KFW programs for new construction decided by the German Federal Government, combined with rising interest rates and the significant increase in new construction costs already in 2021, has led to a collapse in development activities in all forms of residential construction.’ With simultaneously constantly high demand and undersupply not only in metropolitan areas but also in university cities, further increases in rents are the logical consequence, according to Nonnengässer. ‘This is diametrically opposed to the stated goals of the new Federal Government creating 400,000 new - and affordable - housing units annually. The drastic cuts in funding for energy-efficient refurbishment of existing housing are also incomprehensible in the light of the disastrous energy balance of the housing stock. The government's coalition agreement said it wanted to create a lot of new, affordable housing and that environmental conservation should be a high priority. Their actions tell us something quite different,’ he said.
Ultimately, it will be an EXPO REAL where participants are forced to reflect on how the world and industry is changing, according to Berthold Becker, managing director of TSC Real Estate: ‘The market and general conditions for the real estate industry have changed, in some cases significantly,’ he said. ‘I am convinced that this is another reason why healthcare real estate will become even more relevant in the future than it has been in the past - both as investment properties and as a socially formative and relevant type of real estate - and not just exclusively due to demographic factors. Topics such as ESG and social change will clearly bring this asset class into focus. EXPO REAL 2022 has a special role to play - there is an increased need to exchange views on possible future developments, risks and opportunities and on how the emerging wide-ranging challenges can be mastered together.’
