Residential real estate

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Residential real estate

Report on REFIRE / Targa Communications RoundTable – “Residential – Finding a Home for Your Money”

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Even before the outbreak of the pandemic in early 2020, the market for residential housing in Germany had been bracing itself for a soft landing after a nearly 12-year run in which prices rose steadily, year after year. For Germany, this was very unusual. The doom-mongers and nay-sayers had been gathering in force, predicting the end of the run-up in prices and arguing that purchases prices were decoupling from rents and were due a rapid return to reality – and affordability.

From 2017 onwards, the Cassandra’s had been warning that prices were 30% overvalued, and were due a sharp correction. The same professional worrywarts – the Bundesbank, the researchers at Empirica – have grown hoarse rolling out the same arguments as to bubbles and overheating. And prices have continued to rise, on fundamentals.

The good economists at the Bundesbank are paid to put out words of warning – after all, as civil servants it’s more than their job is worth to not be seen as erring on the side of caution in your public pronouncements.

It’s another matter if you are professional consultants, and your advice is proved consistently wrong – until one day, far in the distance, prices DO fall for a variety of reasons. The price of everything falls 30% at some point in a long life, if only to generally recover and carry on while reverting to an upward-tending mean.

That fall has still not happened in Germany, despite the efforts of concerted groups to artificially prevent the market finding its own level by compounding the problem of shortage and so forcing prices ever further upwards.

A large audience attended last month’s REFIRE / Targa Communications’ Roundtable discussion: Residential – “Finding a Home for your Money”. REFIRE editor Charles Kingston elicited a variety of views from the experienced panellists as to where investors were now looking to unearth value in the residential sector, which has proved the most resilient real estate asset class throughout the whole pandemic.

The highly experienced Bärbel Schomberg of Kingstone Investment Management highlighted the role of bureaucracy in Germany as one of the reasons why planning permission and excessive red tape helped keep the prices of housing up across the state. “Bureaucracy is one of the biggest problems we have. Residential prices are so high in some measure the municipal heel-dragging, increasing building costs through high land prices and excessively long processing time for issuing the relevant permits.

She believes that Germany’s constitutional courts will find that the Berlin Mietendeckel is not in conformity with Germany’s Basic Law, and will rule against the rent cap. Leaving the impediments to investing in the big cities aside, she recommends investing in growth regions in smaller locations. Her investors are increasingly expecting to invest in ESG-compliant new builds. It’s often just too difficult to convert older buildings, including offices, into suitable housing, and comply with the latest ESG taxonomy. New buildings offer hassle-free market access to investors.

Also favouring the B- and C-locations was Andreas Friedrich of Domicil Real Estate, who also sees the yields in the A-cities as now just too low. While he’s not expecting to see much further rent increases, residential properties in B- and C-cities are offering higher yields without a bigger risk than the A-cities. He still expects a moderate rate of price growth across the market, but like many observers, is keeping a beady eye on political developments. ““There IS a risk, with leftwing parties taking over, that the Mietendeckel will be extended to all of Germany,” he warned.

Thomas Wünsche, head of Germany and Austria at US private equity group Greystar, takes a selective view on German opportunities, and his group can afford to view a lot of outliers before committing. “We try to combine our investment strategies with megatrends. In Germany, that is urbanisation, service-oriented renting, affordability. There is an undersupply of this in the top 7 cities.”

“The question is, when do you enter redevelopment projects, or brownfield developments. The timeline for rezoning can take from 18 to many more months. Investors expect a certain return when entering that way.”

Mark Holz of CORESTATE Capital agreed that Berlin was less attractive now than it had been because of government policy interventions. But, as an outlier for the last 10-12 years with lower rents and prices than elsewhere in Europe, Germany was still in a catching-up phase. Sub-segments of the market, like Student Housing, were still attractive even though it was no longer the same niche product that CORESTATE pioneered in Germany over ten years ago. “But, with student housing in the core ‘swarm’ cities and university towns, you can still achieve yields of 4% to 5%. With such a polycentric country, as Germany is, it still offers a bunch of investment opportunities.