Investing in existing property becomes the norm

The current market environment poses major challenges for the property sector. Michael Bütter discusses how to actively shape the turnaround in the cycle.

Decarbonisation, digitalisation and demographic change – the property industry is facing a wide range of transformation challenges. The highest rise in interest rates in 60 years has also set a rapid cycle of change in motion.

Companies across the property value chain are being forced to rethink and reposition. Portfolio resilience, performance and sustainability will be at the heart of corporate strategies over the next two years.

These are the findings of a Union Investment and Ipsos survey of 137 property companies and institutional property investors in France, Germany and the UK.

Paradigm shift

The property market is undergoing a paradigm shift. While new construction has long been the focus, investment in existing properties is now becoming the norm, with new construction the exception. The focus is increasingly on repurposing existing properties, expanding their use and upgrading locations into attractive, high-quality neighbourhoods.

One example from Union’s portfolio is the Quartier Wandsbek Markt, one of the largest privately financed transformation projects in Hamburg, Germany.

This multi-million euro development in the centre of Wandsbek will create a mixed-use quarter. The site, which was previously used exclusively for retail, is being expanded to include restaurants and cultural facilities, a private university and more than 100 apartments.

As a result, asset management is becoming increasingly important – and much more challenging. After all, property is always part of an economic ecosystem and is largely determined by the situation of its users.

Recession, inflation and digitalisation all affect these users, their needs for property and their expectations of it and its facilities. New services and more advice are therefore needed to meet users’ changing needs for workplaces, shopping centres and hotels.

Sustainability a key strategic issue

Creativity is also needed to reconcile user needs with sustainability. Sustainability has been a key strategic issue in Union Investment’s real estate business for around 15 years. Sustainability tools are applied throughout the entire lifecycle of a property, which requires close cooperation between the relevant departments.

Like asset management, decarbonisation is a team sport. Everyone involved in the value chain and the use of a property, including tenants, property managers and facility managers, must pull together. Digitalisation is also an important building block in driving the horizontal networking of value chains.

However, it is not only asset management that is changing, but also investment management.

Overall, sentiment in European property markets is improving slowly. Union Investment’s property investment climate index for Germany, France and the UK turned positive in all three countries in the second half of 2023. However, investors remain fundamentally cautious.

Good prices still possible

Although the overall volume of transactions is falling, it is still possible to buy and sell at good prices, even in these challenging times.

In recent months, Union Investment has sold office properties in Singapore, Tokyo and Zurich at prices well above their appraised value. At the same time, the company’s purchases, including the main building of the Steigenberger Hotel in Heringsdorf on the island of Usedom and a local shopping centre in Ludwigsburg, show that there are still attractive investment opportunities.

According to Union Investment’s Investment Climate Survey, 42% of European property investors will be net buyers this year. However, 28% plan to sell more properties than they buy. For 23%, the direction is not yet clear.

When asked which type of use would offer the best conditions for investment over the next 12 months, 37% of respondents said the logistics property market, 16% voted for the hotel market, and retail, office and residential came third, with 12% each.

Changing office requirements

Overall, many investors are buying fewer office buildings and reducing the proportion of office space in their portfolios. Union Investment is currently redeploying funds into more resilient uses, such as logistics and European residential, and into smaller property sizes.

Yet the office is far from an outdated model. The economic slowdown will significantly increase the pressure to return to the home office.

According to a recent survey by real estate services firm JLL, 87% of companies worldwide are encouraging employees to return to the office. This is essential for representation purposes, for sharing information within the organisation or in the war for talent.

However, the requirements have changed: there is a need for high-quality office space that can cope with the new normal of working from home and a shortage of skilled labour. Flexibility and sustainability are high on the agenda. A central location and modern technology are also important.

Overall, there is currently a clear segregation of the office market: the segment of high-quality, ESG-compliant properties in good locations is characterised by high stability and rising rents. Rentability is expected to become more difficult, especially outside the prime segment and for older properties in need of modernisation, which will be reflected in longer marketing times and higher vacancy rates in this segment.

As a result, non-prime properties will come under greater depreciation pressure. Finally, decarbonisation, digitalisation and demographic change will have an impact on the office market. 

Michael Bütter is chief executive of Union Investment Real Estate