German residential proves to be resilient through the crisis

Holger Schmalfuß, Senior Originator, International Investors, Berlin Hyp

Residential was the sector that attracted the most investments in Germany last year and it is likely to repeat the positive performance this year, experts agreed at Real Asset Media’s Germany Investment Briefing, which was held online this week.

“The investment market, especially for core residential, has kicked back into life,” said Holger Schmalfuß, senior originator, international investors, Berlin Hyp. “The financing market has been surprisingly stable. Banks are flexible and have adapted as needed.”

Both investors and lenders have shown a strong belief in the residential sector and a willingness to look beyond short-term challenges to the long-term opportunities.

“We’re lucky in Germany because most investors take the long view and can see the upside ahead,” said Christian Scheuerl, partner, Antoni Real Asset Holding. “Student housing for example has taken a hit in the last year because universities closed down and investors can see that cash flow and occupancy rates are not what they expected, but they know that’s going to change. There’s no prospect of fire sales.”

A crisis always leads to more demand for education as a route to finding a better job, said Philipp Ellebracht, group head of sales, Corestate Capital Group: “That’s why mid-term to long-term we expect demand for student housing to increase. Another positive factor is that it can be turned into serviced apartments or co-living spaces, providing more stability and cashflow during a crisis.”

Student housing and senior living have built up a track record in Germany, but the situation is different for co-living.

Early days for the coliving sector which has low liquidity

The jury’s still out, said Scheuerl: “Many operators and investors believe co-living will be a strong trend, but there is some concern because there’s not enough product in the market and not enough transactions to be able to divest if necessary.”

Volume and liquidity give investors confidence, but at present the market leader in this segment has 500  beds, he said: “It’s still an asset class in a start-up phase, with great ideas and great potential but it’s too early to say.”

Institutional investors are split down the middle, with half avoiding operational resi altogether and the other half eager to invest because they see the demographics and the likely increase in demand.

“International capital, even Asian institutions, are looking at creating big platforms and they are comfortable with it, provided they find an operator with a good track record’, said Thomas Veith, partner, real estate, PricewaterhouseCoopers.

In this election year politics could interfere with the more traditional resi market, especially on the sensitive subject of rent controls, with more cities following Berlin’s example in imposing them.

“Rent controls are here to stay because they are too popular with the electorate,” said Schmalfuß. “It’s a real issue for the resi sector.”

Investors are concerned and will be looking closely at the outcome of local and national elections this year. “Every single investor asks us about rent controls,” said Veith. “With the wrong coalition in power, resi would be under discussion again.”