Le mie ricette per la real estate communitydi Charles Kingston, Editor, Gruppo editoriale REFIRE – Real Estate Finance Intelligence Report Europe, Berlino
As the real estate industry gathers for the MIPIM in Cannes, attendees are bracing themselves to “Survive until ‘25”, in what now feels like the deepest crisis in the industry in ‘modern’ memory. Forgotten are the warm, unsure, fuzzy feelings that characterised last year’s event, before the full horrors of the impending market paralysis muscled aside the optimists, keen to return to ‘business as usual’. Such wishful thinking is unlikely to hold sway at this year’s event.
We now know there’s still plenty more trouble ahead. At the recent Quo Vadis conference in Berlin, the traditional season-opener for the industry, delegates heard from Professor Lars Feld, one of the so-called “Wise Men” and a personal adviser to Finance Minister Christian Lindner, that the onrushing waves of building cancellations and falling incoming orders would get worse before they get better. He told us the ‘uncertainty index’ for Germany is higher now than it was during the COVID pandemic; not just that, it’s currently the highest in the world. Any expectations of rapid interest rate cuts are misplaced, he believes. Residential and commercial property prices are headed further downwards, and lending will become even more restrictive. Don’t expect much respite until 2026, he cautioned. The audience gulped. What about “Survive till ‘25”? The president of the German Property Federation ZIA, Dr Andreas Mattner, told the 400 or so delegates that, under current conditions, “anyone who tries to build housing will go bankrupt”.
With a shortfall of 600,000 apartments this year, rising to 830,000 in 2027, the numbers facing housing developers simply do not stack up. The builders’ minimal rental income at current costs has to be €21 per sqm – an impossibility for anyone but the highest earners. The audience nodded, uncomfortably. This rang true. Professor Tobias Just of the IREBS school told us we’re facing a negative yield curve, which means we’ll be stuck in a recession for a good while yet. Tectonic shifts on the transaction markets are underway, in which a new energy-efficient core of buildings will emerge as the victors, with the rest condemned to a highly uncertain, definitely more miserable future.
Given the collapse in values of US offices, our worries will not be so much of a financial nature, but of a rental nature, said Just. This is where AI will play a decisive role, he forecast. Many in the audience looked a little baffled. But they could sense that Just was right – the US holds the key to our own European future, and the way things are shaping up across the pond offers little comfort to those hoping for an imminent ‘bottoming out’ and rapid recovery. So far, so grim. For whatever happens to interest rates – and at this stage, interest rate cuts for later this year are already well priced into the market – investors are facing higher average rates than in the pre-pandemic era, with much thinner bond-property yield spreads.
Borrowers will enjoy less favourable terms, and will have to inject more capital. There will be more distressed property, forced sales, and ongoing downward valuations. It’s a gloomy scenario. And that’s before truly considering the structural shift in the demand for offices, which is becoming ever more apparent, even to the untrained eye. The great unloading of unwanted office space has barely started, in REFIRE’s view. It’s a Herculanean task for employers to really figure out how much space they need, where and when. But they’re slowly building some sort of a picture, in a world where hybrid working is becoming the norm. The truth is that, apart from the highest-quality offices – with their implications for peak rents, so beloved of the broker community – your average bog standard office building, with its steadily rising vacancies, is headed for the slaughterhouse.
If that view is unduly pessimistic, consider the threat to the recovery in capital values which DOES loom in the shape of ESG and fresh capex investment, all acting as a damper on valuations. Look at Frankfurt, for example, where one elegant new skyscraper vies with another to be the new headquarters of an investment bank or an international law office. But it’s largely musical chairs, professional firms moving across town to the latest high-spec offices after their ten-year lease in last decade’s hottest building runs out. Even the Anti-Money-Laundering Authority, landed recently by Frankfurt in a welcome coup for the city, is likely to move in to space recently vacated by others downsizing and moving a few hundred yards across the CBD. To be greeted there by developers, welcoming them with a juicy package of incentives.
This ‘flight to quality’ will benefit the greenest, best-located, most prestigious buildings. It will help keep average rents up in compact business centres like Frankfurt. But we struggle to see what could drive rents up overall in the coming three to five years, as the German economy struggles to establish a newer, firmer footing. This publication has always striven to bring German real estate ideas to foreign investors – acting as a bridge between German property and global institutional capital. Recently we’ve become very conscious of a new, more insistent edge coming from German players, with their local knowledge and expertise, keen to partner up with foreign investors in exploiting new German opportunities. Plenty of foreign capital is lining up to take advantage of ‘special situations’ – as soon as we can get these pesky prices aligned.
Investor interest in German real estate remains intact. The extent and depth of the market across all asset categories is still unrivaled, offering scope for those with deep pockets to develop and execute entirely new investment strategies. That’s why investors with plenty of dry powder are sniffing around alternative asset classes, including retail and its close cousin, leisure. An emerging concept for Germany, branded family entertainment centres, has yet to officially debut on the scene, but looks promising. Traditional logistics, such as warehouses, is breaking down into sub-sectors like urban logistics, light industrial, self-storage, and even garage parks, which we feature in this issue. Germany’s demographics offer ever-widening scope in new residential concepts in hotels, healthcare, student and even affordable housing. Data centres, life sciences and other newish sub-sectors are advancing to mainstream in ever-shorter cycles – attracting local partners hungry to team up with investors looking to make a fresh approach. Barring any nasty surprises on interest rates over the coming months, some inevitable rapprochement between buyers and sellers, driven by necessity, is drawing nearer. We have reasonable expectations of this year’s MIPIM becoming a fertile breeding ground for new deals for… well, let’s say 2026 at the latest.