Charles Kingston, CEO & Editor, REFIRE Ltd.
Residential and logistics. There was plenty of excitement around these two asset classes at the recent MIPIM, if you were lucky enough - as REFIRE was - to frequently fall in among the company of players who are focused on transforming their businesses with innovative residential and logistics strategies. For us, this was the most stimulating MIPIM for years.
Not necessarily, as we all know, because of the heady deals being transacted, nor because there's plenty of evidence that some sort of 'bottom' has been reached, and we can expect the good times to soon start to roll again. No, certainly not for that. In fact, there's scant evidence of those hoped-for 'sunny uplands' appearing on the horizon any time soon, with plenty more misery to be confronted yet. But there were serious players in abundance at the MIPIM, along with plenty of pencils being sharpened and strategies being fine-tuned for bold new approaches, and that made this year's event for us memorable.
What's encouraging about the renewed interest in both asset categories is the manner in which investors are zooming in, laser-like, on the type of assets which truly meet their current needs, and not just spending money on properties which they can afford to buy. The role of technology is now to the fore in investor strategies, more so than just the availability of capital. Operational efficiency is the byword, along with a growing recognition that AI tools are already starting to play a role in uncovering unmet needs in the market, helping to identify potential clients before they've even started looking for space. This opens up enticing possibilities - and companies are beginning to grasp the potential of AI to transform their businesses.
This applies most evidently across the spectrum in the logistics sector, which will benefit from increased domestic manufacturing and near-shoring in Europe in the coming years. The demand for smaller units, of up to 300 sqm, is also likely to surge, following years in which "big box" sheds were most in demand. A recent Savills report highlights how logistics performance has become increasingly nuanced over the past year. It expects occupiers to seek to pay less to reflect the gloomy economic environment, but to be prepared to pay more for operationally efficient buildings, taking up less space but paying higher rents per square metre. This sounds realistic.
The logistics sector has recovered much faster than offices or retail over the last few quarters. Prime yields were 4.5% at the end of 2023, and price declines in 2023 were only at 7%, compared to anything up to 25% for offices, thanks to healthy rent increases in logistics.
The collapse in the volume of residential planning permits issued over the past 18 months tells its own sad tale about the gruesome gulf opening up between housing supply and demand - and the certainty that rents will only continue to go up in the coming years, causing real pain in a nation weaned on moderate rents. Not surprisingly, the frightening vista opening up for consumer housing is attracting the attention of lots of sophisticated investors, drawn to the sector like moths to a flame. The misery of many German housing developers in finding themselves unable to create new housing is a very real phenomenon, and turnaround will take time.
A start to the turnaround has been made with the recent guarantee by the Federal Government of 6 years of the so-called 'degressive AfA', which is designed to give developers a boost and help revitalise new construction. The government had tried to wriggle out of its commitments by playing the industry off against the equally vocal farmers' lobby in their recent dispute over agricultural diesel, but a watered-down version finally clinched its approval by the Bundestag in February. This version allows developers and investors to write off 5% of their declining cost levels for 6 years on houses meeting certain minimum efficiency standards. It's a significant step, albeit one of many things that HAS to happen to get the cranes to start turning again.
Estimates from the leading researchers of the true extent of Germany's housing shortage range from 700,000 to 900,000 units by 2027. Whatever it is, it will take enormous building activity to make even a dent in the missing numbers, and current conditions such as financing and building costs are mitigating against such a speedy recovery.
Not surprising then, that with such a debilitating shortage of fresh housing supply now taken as a certainty, investors see plenty of opportunities in new housing rentals - if they existed. Many of the existing incumbents will be prevented from benefiting from the slow recovery because of the higher prices they paid and the hefty write-downs they're already taking on their books, as witnessed recently by the big listed players like Vonovia, LEG and Aroundtown. For them, refinancing at higher rates is unattractive - if anything they're keen to lighten their load to help pay down debt. But new players (and experienced firms like Greystar, as we report in this issue) with deep pockets and their own funding, are pacing up and down the sidelines keen to enter the fray - at the right price.
In fact, we had so many valuable discussions at the MIPIM about the nature of German housing, now and in the future, that we left the fair convinced that we're going to see a host of innovative approaches shaking up that rigid inflexible old monster in the coming years. It's still all about a roof over your head, of course, but there are many more ways of providing that that aren't now readily available.
Whatever forces us to think more about the provision of affordable housing has to be a good thing. And social housing - the promise of whose delivery of 100,000 units a year was a cornerstone of the coalition government's manifesto - has effectively become an afterthought as Germany's building sites lie still. If you're looking to invest in affordable housing in the economically stable state of Bavaria, read our interview with industry veteran Dr. Tilman Hickl in this issue to explore a government scheme to collaborate with German project developers and enjoy consistent demand, lower entry prices and strong yields. As we've often demonstrated in these pages, Germany's regional markets are often even more rewarding than the well-trodden paths of the BIG 7.
