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EXPO REAL
EXPO REAL
Global politics, from the US-China trade war to the ongoing misery of Brexit, are likely to be on the agenda at EXPO REAL this year. REFIRE talked to industry experts to find out what other issues are likely to dominate the trade fair this time.
Micro living and senior housing leading the way
For Timo Tschammler, CEO of JLL Germany, resi is likely to be a key topic at EXPO REAL this year: ‘There are four main topics in my bag, including ‘living’ in all of its components, so traditional resi, student housing, micro living and homes for the elderly because it’s fuelled by the wider trend of urbanization,’ he told REFIRE, ‘Big institutions are trying to grow their exposure to resi in a more granular way.’
Jens R. Rautenberg, founder of Conversio Gruppe, agrees. ‘One trend that has exploded and which will continue to grow is micro living,’ he said. ‘In 2015, the micro living project volume was just €350m. Last year, it was €1.7bn in Germany. However, it is very expensive relative to regular new builds. In Berlin, micro apartments of 20 sqm to 35 sqm have been built next to a new block of regular flats. The micro ones cost between €22 and €25 per sqm. The regular ones, which are around 80 sqm, cost €11 per sqm. It’s a question of how small people are willing to go and how much they are willing to pay for it.’
Dr. Thomas Wiegelmann, managing director of real estate at Schroders in Munich agrees: ‘We’re interested in micro-living, it’s become huge,’ he said. ‘There’s strong demand for it, with some developers rezoning from commercial to resi.’
However, Germany’s residential market is not prepared for demographic shifts, according to Rautenberg, which exacerbates the problem: ‘There has been a massive shift away from living in the countryside and moving back to the bigger cities over the past 10 years. This means that parts of the countryside are empty. People are getting much older but the resi market doesn`t cater to them. According to studies, just 1.7% of existing resi stock is suitable for older tenants, in terms of mobility. By the end of next year, around 30% of people across Germany will be older than 60 and by 2035, 44% of all households are expected to be single person households. We have the double problem of not providing enough housing units in general and not enough fit for purpose housing. A lot of existing apartments are too big for senior citizens (who may be looking to downsize), do not fit their standards in terms of mobility and/or are not energy efficient,’ Rautenberg added.
Old age and what that means from a resi perspective is also becoming a big trend. To meet demand, Germany needs 400,000 new apartments to be built every year. Last year, 270,000 were built and that was a record but it`s still not enough. and this year, it’s likely to be closer to 250,000.
‘The government is making the situation more complicated in its attempts to freeze rents in cities such as Berlin because that makes development less interesting to developers,’ Rautenberg said. ‘The mood at the moment is very negative. No-one understands the government’s attitude - instead of making resi development more attractive they are making it - intentionally or not - harder for developers. In addition, there’s not enough manpower to get projects finished on time - most are behind schedule. Politicians keep saying they want to build an additional one million council flats but there are just not enough workers to build them! We need less bureaucracy, more building permits and a quicker process to get them because at the moment it can take years.’
Gerhard Meitinger, head of real estate finance Germany at pbb Pfandbriefbank, agrees: ‘Will rental caps be the new norm for residential and how will regulation change residential as an asset class?’, he asks.
Low-interest rate environment and retail challenges up for debate
For Christian Kadel, head of capital markets Germany at Colliers, our current low interest rate environment will be a discussion point, especially given that the ECB cut the key rate this month (The ECB lowered the interest rate on the deposit facility by 10 basis points to -0.50%. The interest rate on the main refinancing operations and the rate on the marginal lending facility will remain unchanged.)
‘This means that yields could fall further, particularly for sub-sectors such as offices and logistics and long term leases, so it will be extremely interesting for pension funds to invest in them,’ Kadel said. ‘Will there be further pressure on occupational markets? I don’t think so, at least not in the Big 7 and in the next two years, because supply is very tight. Besides, office rents in Berlin have grown by 11.4% in the last year, which is amazing.’
Tim Horrocks, head of real estate for Continental Europe at Nuveen Real Estate, expects interest rate policy at a macro-level to inform discussion at EXPO. ‘With the ECB cutting interest rates again to further stimulate the economy, we are in a lower growth environment,’ he said. ‘With negative rates on bonds, the spread to real estate will continue to be attractive to investors. This will create pricing pressure in certain sectors, so discussions will return to accessing and sourcing investment opportunities.’
Meitinger also expects ECB policy to be a big topic: ‘Interest rates seem to be a never ending story,’ he said. ‘For a few years now, market observers have echoed concerns about the real estate cycle coming to a close. Then the ECB further reduced interest rates, which seems to have even turned back the clock. I am sure we will have lots of conversations about the future ECB policy under its new president and about profitability consideration for real estate investments in a possible prolonged low interest rate environment.’
Retail is another interesting topic, according to Kadel: ‘The real question is how much will Amazon continue to eat away at high street retailers?,’ he said. ‘We`re seeing some high street rent renegotiations where the tenant is asking for a rent reduction of between 25% and 50% and, in some cases, they’re getting it. Many investors won`t look at retail but it’s a mistake to exclude it completely. Value-add players can still find some bargains, especially if they use clever remodelling strategies.’
Horrocks also believes that there are still opportunities in the retail sector: ‘The logistics and residential sectors continue to be the top picks, while retail is more challenged due to the rise of e-commerce. That said, there will be opportunities to identify in the retail sector as pricing softens.’
Sustainability firmly on agenda
‘Sustainability will inevitably be at the forefront of many conversations throughout the conference,’ Horrocks said. ‘At Nuveen Real Estate we’re delighted to report that we are on track to reach our target of reducing our energy intensity 30% by 2030. I am sure that many of our counterparts across the industry will also have examples to share of the steps they are taking to create more sustainable property portfolios.’
Wiegelmann agrees that sustainability is likely to be a major discussion point: ‘We live in an urbanizing world and real estate accounts for 40% of energy consumption. With every investment we undertake, we look at sustainability. There is also the challenge of upgrading older stock to be sustainable. I hope this is one of the themes at EXPO REAL and that property owners take it seriously. It is becoming more important – more lenders are offering green loans, for example, and it’s possible that properties could lose value in the future if they’re not sustainable. Tenants and listed companies like to disclose their efforts on this front, as do tech companies.’
His colleague Jeff O’Dwyer, a fund manager, continental Europe at Schroders, agrees: ‘We've really ramped up our “impact investing”,’ he said.
‘Sustainability is another mega trend,’ Tschammler agreed. ‘We are committed to our own sustainability targets. For example, starting this year, our regional managers have CO2 targets for their buildings. Sustainability has many faces but now it’s also about behaviour, from bicycle leasing, which we offer, to heating and thinking about many desks you really need. I think we’ll see more lenders offer green loans, it will definitely grow, also when it comes to reviewing behaviour and investor allocation.’
Tier 2 cities garner attention
For O’Dwyer, investment outside Germany`s Big 7 is likely to be on the agenda: ‘We look at it from a macro perspective,’ he said. ‘We like Tier 2 cities, such as Cologne and Munster that have similar characteristics to A cities, such as diversity, strong tourism etc. We’ll take on a lower return profile in cities like this rather than look at cities with less attractive fundamentals offering a potentially higher return. We like university cities with fresh ideas and a good workforce. This is really meaningful to us.’
Brexit – the elephant in the room
One topic that no-one relishes discussing is the ongoing mess that is Brexit: ‘Brexit is pretty tiring,’ said O’Dwyer. ‘The Brexit debate helps us because we’re in cities such as Berlin, which could benefit from Brexit. Brexit is old news and getting murkier by the day. On the office side, it’s incredible that take-up in continental Europe is so high. The question is, will rental growth continue? In cities such as Berlin, Hamburg and Stuttgart, we think it will.’
Nonetheless, ‘Brexit is going to be on everybody’s mind, as is the possible recession in Germany,’ said Yvo Postleb, head of Germany at C&W. ‘The jury is still out on whether it’s just a dip but I’m not overly worried.’
Late-cycle concerns
‘We’ve been talking about late cycle concerns for as long as Brexit,’ said Postleb. ‘The interest rate environment is going from low to another record low and real estate yields are attractive compared to that. I think that people have priced in Brexit and US-China trade wars by now.’
Other investors are concerned at the slowdown in the market, according to Weeth: ‘For some time now, and especially leading up to EXPO REAL, we have heard increasingly from concerned developers, realtors and investors worried about the broader economic slowdown and what this may mean for an already late-cycle real estate market in Germany,’ he said. ‘However, what we find lacking from this narrative are the opportunities that come with such a slowdown and a potential limited market correction: a climb-down from historic heights in terms of acquisition costs and lower prices for construction projects and redevelopments. EXPO REAL will offer a platform to exchange ideas on how to best capitalise on market developments, particularly in the value-add segment and smaller locations beyond the Top 7.’
