For years, investing in real estate was a safe bet—most markets were heading in only one direction, and that was up. Signs are gradually increasing that the good times could be about to end—a turnaround in interest rates is not out of the question, and country-specific risks cannot be ignored. How are the professionals dealing with this situation?
At the beginning of the Investment panel discussion during the EXPO REAL Forum, moderator Michael Fabricius (Chief Real Estate Editor at WELT) asked the participants about their expectations of future interest rate developments. Thomas Köntgen (Deputy Chairman of the Board of Deutsche Pfandbriefbank AG) spoke for the entire panel when he observed that as the ECB had not raised interest rates during the good years, he was certainly not expecting any change in the foreseeable future.
As the economy cools down, he explained, this could lead to a growing gap between the real estate investment market and the real economy, reflected in tenant demand. In all honesty, he said, the prospect worries him. In many markets, purchase prices are already rising faster than rents. In fact, real estate investors have no choice but to accept either the risk of yield compression (in prime locations) or the risk of defaults (in secondary locations).
Dr. Andreas Muschter (CEO of Commerz Real) has just acquired Generali’s Millennium portfolio for Hausinvest, thus emphasizing that he is not willing to accept any risks arising from suboptimally located properties, which is why he focuses exclusively on core locations. His hope for moderate interest rate increases in the post-Draghi era has unfortunately been disappointed—“the spread [i.e. the yield difference between real estate investments and first-class government bonds, ed.] is still over 2.5 percentage points—that wasn’t always the case”, he said. Annette Kröger (CEO North & Central Europe at Allianz Real Estate) agreed: “The quality of the location is important, an urban environment is indispensable”.
According to Alexander Otto (CEO of ECE), the same proviso applies to stationary retail: Location and asset quality need to be right. “A shopping center in a B location is not sustainable!” Yes, the segment is under pressure from online retail, but he still finds it exciting and continues to buy Grade A shopping centers at competitive prices. ECE upgrades its properties by adding leisure and gastronomy attractions and relies on the interlinking of stationary and online retail: anything available at a mall can be found on the internet so that the respective availability becomes transparent. Conversely, otto.de is also on the lookout for stationary availability—this solves the problem of the “last mile” and frees cities from logistics traffic.
Thomas Köntgen does not believe the real estate market is at serious risk of overheating because real estate financiers have learned their lessons from the last crisis and are now using significantly higher equity ratios. His company pays attention to the development of credit risk as a function of market developments and also refuses some business.
Whether in preparation for a possible recession or as a precaution in exciting markets with political risks, such as Brexit or regulatory measures, the panel was unanimous: the best strategy is to hold a diversified portfolio of properties in excellent locations and to work intensively and continuously to enhance the value of each asset. This means that the old wisdom about real estate continues to apply: location, location, location.