REFIRE managed to catch up briefly with Christoph Wittkop, CEO of asset manager Sonar Real Estate, while we felt the pulse of an array of senior managers in advance of the upcoming Expo REAL in Munich.
Like all top managers, Wittkop was in a contemplative mood as he assessed the challenges facing the industry in the face of gath- ering gloom. These senior guys have been around a good while and seen a few ups and downs, not least the great financial crisis in 2008, so they bring a certain philosophical perspective to the cur- rent situation. Some brief excerpts from our discussion.
REFIRE: What are your expectations from the EXPO REAL?
Christoph Wittkop: It’s good that, now that Corona’s not such a big issue, there’ll be a big turnout of both visitors and exhibitors. Everyone wants to go this year, the need to exchange views and re-connect with colleagues and partners is very evident. We won’t get our questions answered at the fair, but it’s a good opportunity to express our views and hear the views of others.
Most people accept that we’re heading into a recession. Is now a good time to buy?
I expect at some stage we’ll get closer to realistic price discovery. Some of our foreign investors ask us what we think about the timing aspect, but they too generally think it’s too early to get really attrac- tive deals. With Corona it still seemed possible to price in the effects of ESG-related capex, but there are so many uncertain factors at play now that it’s nearly impossible to determine a realistic risk premium. ESG, interest rates, and geopolitical uncertainty are all weighing heavily on investment decisions.
What about financing for potential deals?
There is still financing available of course, although the banks are seriously restricting their new lending. Financing for project development is off the table. For other investments, bank lending is either slower, more expensive, with more equity required, at lower LTVs, or a combination of all of these. However, we don’t have a bank crisis, as we had in 2008.
Are investors still gung-ho on Germany as a market? Is it losing its safe-haven status?
Opportunistic and value-add investors who raised their money early enough seem fairly relaxed, they’re well positioned for when the market starts to move again. We don’t hear much talk there that Germany is losing attrac- tiveness compared to other markets. But we can judge that better when the market adapts to cur- rent realities.
We’ll have to see how robust the office mar- kets are. From a landlord perspective this year and last year have been good, many of the coro- na-postponed negotiations have been caught up on, so next year should be stable. In retail, a bottom seems to have been found, investors are looking more pragmatically at their options. The big problem facing retail now is consumer behaviour, given all the extra costs they’re fac- ing. Logistics is benefitting from strong demand, although we may have seen a recent price peak in some markets.
Are we close to reasonable price discovery?
We’ve not yet seen too many of these dis- tressed situations yet, and shouldn’t for a while if the owner isn’t staring at growing vacancies and doesn’t have an immediate refinancing problem. So they’re not stressed on the cash-flow side. But of course the valuations are headed downwards, in view of the interest rates, pending refinanc- ings, and possible covenant breaches. We’re seeing this all too clearly by the listed property companies, whose valuations have plunged.
Project developments are being cancelled en masse. What are the prospects?
Developers who’ve bought the land, but haven’t yet started to build, have the option to stop, either temporarily, or permanently. In many cases it just makes sense to scrap the project. Either he keeps the land, or if he needs liquidity, tries to sell it. This will put downward pressure on land prices - after years of prices only moving upwards.
You recently bought the office building Prisma in Niederrad in Frankfurt, fully vacant. How’s that working out?
Obviously it’s an advantage to be developing a fully-constructed property, rather than starting on a building site from scratch. Of course you have many of the same hurdles to overcome as new-build developers. We were able to inject a healthy chunk of equity capital and so had favourable financing terms. We’re optimistic.
Optimistic on offices generally? What about all this Working From Home?
On the whole question of working from home, and therefore needing less space, we’re not seeing this in practice across the market. Sure, space is being optimized to improve flexibility, but if corporates come and if they thought they wanted 30% less space, maybe they end up tak- ing 10% to 15% less, because of the new work- place needs.
The trend to workplaces in the city is also intact, here in Germany. And if Germany is to reduce its dependence on industry if favour of service industries, this trend will solidify even more. So we see some quite strong supports for the argument of ongoing office demand. We also don’t believe that office satellite clusters like Eschborn or Niederrad will lose all their workers who now want to work from home five days a week. That’s not really going to happen.
SONAR set up your own development com- pany half a year ago. How’s that going?
We’re fortunate in the sense that with our Prisma project we can benefit from our own in-house development competencies. External projects will probably be delayed until the mar- ket improves, but we’re in a good position to take over if some banks need a new developer to complete a project. The crisis won’t last forever, and we feel well equipped to step in on smaller development projects or property upgrades when needed. After all, the trend for renting quality modern ESG-compliant office buildings in good locations is not about to disappear.
