A clear trend is emerging in the German residential real estate sector for private investors to increasingly pursue a “develop and hold” strategy, according to the second annual study carried out on project development trends in the Top 7 cities by investment manager Empira Group and researchers Bulwiengesa.
The study shows a continuation of “the absolute and relative trend towards develop-and-hold”, where instead of the developer delivering the finished properties to an investor, the developer is keeping the properties in its own portfolio. The evidence in the study suggests that the COVID-19 pandemic and its likely effect on public budgets will only accelerate this shift in favour of private developers.
According to the study, over the space of a year, the share of private investors in the whole develop-and-hold segment of the Top 7 housing markets rose from 26.9% to 30.6%, giving it almost a third of the market. At the same time the share of public-sector developers shrank from 53.7% to 51.5%, and is still falling. The remainder is made up co-operatives, churches and other investors.
At the same time, the develop-and-hold segment is growing significantly in terms of both surface area and investment volume. A total of 5.4 million sqm with a market value of €34.8 billion is being developed by 2024 - an increase of almost 4% and 7% respectively compared with the first survey. And after 30% of total residential project development business in 2019, that share has risen to 33%.
Lahcen Knapp, CEO of the Empira Group, said: "The numbers show a clear picture - Develop-and-Hold, the development for own stock, is clearly and structurally on the advance. Institutional investors appreciate the combination of high value creation and stable rental cash flows, especially in the top 7 housing markets."
The study shows wide divergences depending on the city, as well as in the structure of their biggest developers. As with last year, Stuttgart tops the list in first place with a 43% develop-and-hold share (2019: 41%). Berlin and Munich continue to follow in second and third place with 39% and 37% respectively. The shares are still lower in Frankfurt (35%), Hamburg (29%), Cologne (26%) and Düsseldorf (24%).
According to Knapp, interested institutional investors include investors from the Depot A sector as well as pension schemes, pension funds and insurers. The three largest private investors in the develop-and-hold development business in the top 7 cities are BUWOG (third place with 3,400 residential units under development), Deutsche Wohnen (ninth place with 2,000 residential units) and the Empira Group (13th place with 1,750 residential units).
Bulwiengesa’s CEO Andreas Schulten speculates in his comments that the growing interest in develop-and-hold in the cities has to do with the re-emergence of PPPs, or public-private partnerships. Corona and its financial consequences are putting municipal budgets under huge pressure, which Bulwiengesa estimates will result in a shortfall in public investment of at least €10bn annually from next year, based on figures from the German Association of Cities and Towns (Deutscher Städtetag).
Badly needed new housing also urgently needs new infrastructure, including roads, schools and kindergartens to sports facilities. Many urban development contracts already include such partial services from the private sector, which could, if expanded and newly regulated, lead to a "PPP 4.0" for the future, Schulten suggests. Several other researchers also think Corona is likely to spawn several new trends in urban development.
While Empira itself does not have such a pure PPP infrastructure in its own pipeline, Empira’s head of research Steffen Metzner said he does see potential for a comeback of the PPP, which he sees as “neighbourhood development thought through logically”. But there’d also have to be a re-think of the long and complicated planning process, so as not to drive away potential investors. ESG criteria could also help to readjust the balance between public and private investment, he thinks, while the huge amount of international capital looking to be invested could also be tapped to raise the level of infrastructure in cities.
