Senior housing investors and operators are focusing on more than just buildings as older people’s demands change. Nicol Dynes reports.
Germany’s long-held status as a safe haven will serve the country well in these unsettled times. The political backdrop is helping, as last year’s uncertainty over the post-Merkel era has dissipated with the formation of a new coalition government.
“The negotiations’ outcome was positive and we have a stable government, which is key,” says Carsten Loll, partner, real estate, at Linklaters. “It reflects different viewpoints, brings everyone together, it takes the economy seriously and it is focused on the detail, so I am very positive.”
“In times of uncertainty there is more interest in stable countries like Germany and in core assets as well,” adds Thomas Veith, partner, leader real estate/real assets, at PwC Germany.
As the pandemic recedes and travel restrictions are lifted, international investors are set to make a comeback in greater numbers. “The active involvement of domestic capital provides a strong base for the market, but we expect more non-domestic money to come into Germany,” says Christina Ofschonka, managing director, head of core strategies, at AEW.
International interest still strong
Germany has always attracted international capital and the recent decline due to the pandemic is just a blip. “The percentage of foreign capital used to be over 50%,” explains Markus Beran, head of origination, international investors, at Berlin Hyp. “It is now lower but the interest is still strong, both from core money and from investors searching for higher returns and willing to have higher leverage.”
However, the level of overall risk has declined, he adds: “There’s a tendency for lower leverage because there is so much equity in the market.”
Higher total returns may not be easy to achieve in the current environment, so foreign investors chasing them need to find the right product, while institutional investors may struggle to find enough core assets, as demand consistently outweighs supply.
This is certainly the case in the residential sector, which attracted record levels of investment last year. In 2021, transaction volumes in the residential sector more than doubled to €51 billion, partly due to one
mega-deal, the €22 billion takeover of Deutsche Wohnen by Vonovia, an all-time record.
‘A lot of core multifamily stock will have to be repositioned – this will provide big opportunities for developers and core-plus investors.’
Rainer Nonnengässer, International Campus
The level of interest in residential is reflected in the size and cost of portfolio transactions: last year 81% of investments were above the €100 million mark, compared with 63% in 2020, according to BNP Paribas data.
The perfect example is Berlin, which has regained its status as a great capital and has become a magnet for investments, largely thanks to its large stock of residential and its attractiveness as a city to live in. “It has taken 20 years to reach its rightful place, but now Berlin is an investment Eldorado,” says Beran. “It might never be on a par with Paris or London, but there is a great positive dynamic in the market, which is good for Berlin and good for Germany. The only downside is that it’s becoming very expensive.”
The German government has a target of 400,000 new residential units, but construction costs are rising and there is less funding and subsidies from the development bank KfW as it transitions to a new system that promotes the construction of energy-efficient homes.
“Despite the setbacks in development financing we expect very strong demand for student accommodation, micro-living and all urban solutions,” says Rainer Nonnengässer, executive chairman of International Campus. “We know that Anglo-Saxon investors targeting the sector in Continental Europe have €6-€7 billion capital ready to deploy, which exceeds the sector’s value in Germany. Given such high demand, we’re extremely positive on prospects for the sector in 2022.”
The greening of portfolios is set to become a key topic in the German market in 2022. “ESG is the big issue,” says Beran. “Conversions on a massive scale are on the cards as every asset is analysed and almost the entire stock needs to be upgraded.”
The flight to quality that is happening in the German market extends beyond core to ESG-compliant assets.
Investments in certified commercial assets have been on an upward trend and green buildings now represent more than 25% of single deals in Germany, according to data from BNP Paribas Real Estate.
‘The active involvement of domestic capital provides a strong base for the market, but we expect more non-domestic money to come into Germany.’
Christina Ofschonka, AEW
“Institutional investors have a strong focus and the regulated green or dark-green funds only want certified buildings,” says PwC Germany’s Veith. “My personal sentiment is that investors are willing to pay a bit more for green assets, but the problem is not the good buildings traded by institutions and financed by banks like Berlin Hyp.”
The problem, he says, is the existing stock that is not owned by institutional investors, and that’s where the transformation effort has to focus.
“Private owners that own a few assets are not moving as fast as the institutions,” adds Veith. “But I think that’s where the opportunities lie, especially in city centres. There’s enough stock for everyone.”
The main focus is on commercial assets, especially offices being upgraded or converted to residential, but there’s plenty of work to be done in this sector as well.
“A lot of core multifamily stock will have to be repositioned in the next five to 10 years and this will provide big opportunities for developers and core-plus investors,” says Nonnengässer. “You can’t go wrong.”
Financing the transformation
Few doubt the urgent need to upgrade buildings, but one important aspect is how the transformation will be financed.
Banks are beginning to finance turnaround initiatives. Berlin Hyp, which was a pioneer in 2015 with the first green bond, is now working on creating special programmes for these situations. “We’re preparing transformation loans for this transition,” says Beran. “It’s one of our main areas of focus at the moment. Discounts or premiums will be assessed in the next few years.”
‘The percentage of foreign capital used to be over 50%. It is now lower but the interest is still strong.’
Markus Beran, Berlin Hyp
“Investors have to follow the broader trend and make sure their assets are ready for the future,” says AEW’s Ofschonka. “Occupiers have a choice whether to sign the deal or not, so assets must be compliant to secure occupation. It requires a constant effort to improve, but on the banking side there are great initiatives from Berlin Hyp and others.”
At the moment it is still difficult to quantify the ‘brown haircut’ – the discount applied to non-compliant assets. “We see more green premiums at the moment, but in the next few years it will shift to brown discounts if it will be impossible to refinance an asset,” notes Veith. “It might take two or three years but it will come, and then we’ll talk about stranded assets. ESG is a long journey that we’ve just embarked on.”
UK back in pole position but Germany is ‘in a different league’
The UK is back in pole position but Germany is rock solid, according to Inga Schwarz, head of research, BNP Paribas Real Estate Consult. “The German market is in a different league. It keeps attracting a lot of interest and there is still room to grow.”
The UK regained first place in terms of investment volumes in 2021, but its performance is below its five-year average, while Germany is in second place in terms of investment but its performance is well above average.
“The A cities are attracting most of the capital,” adds Schwarz. “Berlin alone, with €11 billion, is outperforming entire countries like Spain and Italy. Munich had a strong year, attracting €7.7 billion, more investments than Poland, Denmark or Finland. Cologne was the top performer last year and at €3.8 billion it is now bigger than Milan or Barcelona, while Frankfurt was below average at €6.7 billion.”
Last year single-asset deals dominated the market simply due to market availability, as there were no portfolios for sale. The stand-out deal in the office sector was the €1.4 billion acquisition of Tower 1 in Frankfurt by Allianz Real Estate. Offices accounted for almost half of all commercial deals, take-up of space has picked up again, growing by 27.4% last year, and resurgent demand has led to prime office yields declining to below 3%.
“Considering all the talk about the future of the office, the sector had a very good year in Germany, accounting for €30.7 billion and a 48% market share,” says Schwarz. “The logistics sector had its strongest year ever, emerging as a winner from the pandemic, while hotels are making a good comeback.”
‘Considering all the talk about the future of the office, the sector had a very good year in Germany.’
Inga Schwarz, BNP Paribas Real Estate Consult
Investment in the retail sector as a whole declined, but within the sector there was a differentiation between high-street assets, where demand was hesitant and activity muted, and retail warehouses and grocery-anchored retail, which attracted a lot of interest.
A wide range of players invested in the German market, with special purpose funds having the strongest presence, followed by investment managers, property developers, equity/real estate funds, insurance companies, REITs and property firms.
“Domestic players dominated the market with 61%, showing a strong belief in the German market and a commitment to deliver product,” says Schwarz. “Foreign players accounted for 39%, which is not a bad result given the travel restrictions in 2021.”
The majority of cross-border investors were European, accounting for 24% of the total, followed by Americans with 11%, while capital from Asia and the Middle East played a tiny role.
There are five themes that are set to dominate in the German market this year, Schwarz notes: the future of the office; the housing market; alternative assets, which are becoming a focus for many investors; ESG and its social impact aspect in particular; and inflation, which many fear will hamper the economic recovery.