Opportunities in all sectors in Germany but caution needed

The German market offers opportunities in many asset classes but investors and lenders need to be extremely selective, experts agreed at Real Asset Media’s European Debt & Investment briefing, which took place recently at Groß & Partner’s offices in Frankfurt.

“If you’re an alpha player in the market you should consider financing offices to get risk-adjusted returns,” said Philipp Ellebracht, country head Germany, Incus Capital. “It could be a great opportunity, but you need to be extremely selective. No compromises on cities or locations.”

The choice of office could be seen as counter-intuitive, given the question marks over the future of work, yet rents in Frankurt have risen, albeit only in the prime segment.

“We’re heavily invested in offices and that is painful now if you are in a B or C location,” said Katja Gramatte, head of real estate financing, BNP Paribas Real Estate Investment Management. “But it is such a big asset class, and such a big part of our books, that it cannot be ignored.”

There is money available for almost all sectors but there is an increasing focus on quality.

“We finance all asset types, including modern offices or conversions to offices, but always selectively,” said Markus Beran, head of origination international investors, Berlin Hyp. “We will even finance a shopping centre if it is well established. Residential, especially for rent, is the most obvious choice because there’s such a housing shortage.”

Yet supply does not follow demand, as building permits have been at an all-time low this year.

“Resi rents for new builds have increased dramatically, often to an unaffordable point, especially in cities like Berlin,” said Ellebracht. “But for 80% of the market across asset classes rents have not gone up and there are question marks over valuations.”

Operational real estate offers opportunities, experts agreed, but has its challenges.

“Operational risk is now a fact in the market, whether it’s hospitality or self-storage, so lenders need to take it on board,” said Jürgen Helm, head of European senior debt originations, PGIM Real Estate.

Healthcare and senior housing have demographic trends and increasing demand on their side, but they are too heavily regulated. “Despite the big demand, operators are under pressure,” said Gramatte. “It is a strong asset class, but it is challenged by requirements from the government.”

Berlin Hyp does not finance senior housing for that reason, said Beran: “In Germany it is too heavily regulated, so we don’t go there.” In the case of student housing, on the contrary, it is worth taking on the operational risk, he said: “PBSA is a strong and stable market and rents continued to increase even during the pandemic.”

Development finance is challenging in the current market, with a few exceptions for residential, logistics but also data centres, the favourite niche of the moment, driven by the development of AI. “In principle we are open to all asset classes and willing to do all types of development, but always with some downside protection,” said Helm.