ZAR on a mission to green Germany’s residential

This year, ZAR Real Estate is investing €300 million in the acquisition and refurbishment of residential portfolios in the country.

ZAR Real Estate, a Munich-based company founded in 2018, focuses on the acquisition of attractive properties in major German cities at an early stage and residential properties in German A, B, C and D cities. The aim is to create sustainable, liveable residential and working spaces by developing modern and attractive urban neighbourhoods.

ZAR’s new ‘Manage to ESG’ strategy provides for the nationwide acquisition and serial refurbishment of existing residential properties with significant potential for value appreciation. The company has a proven track record in enhancing the value of assets through this strategy, combined with expertise in project development. ZAR’s first sustainability report will be published next year.

This year, the company is investing €300 million in the acquisition and refurbishment of residential portfolios and it is currently in discussion with a number of UK and international institutional investors and partners about the potential offered by the German residential market.

IMPACT asked Martin Hofmann, chief executive, and Daniel Argyrakis, chief financial officer, about ZAR’s strategy and their views on the German real estate market.

What is your strategy when it comes to residential development to make sure it is sustainable?

Hofmann: We have two strategies: a focus on planning permission and building rights as a developer, and a focus on existing resi stock in Germany. For new-builds, we rely on timber construction. We have experienced partners and can guarantee high energy efficiency, with photovoltaic systems and heat pumps.

Construction costs have been an issue for a long time. How do you square the financial circle, given that recycling materials, using sustainable materials and so on, is more expensive?

Hofmann: The increase in construction costs has stopped now, so at least it’s not getting worse.

Timber is 5%-8% more expensive than concrete, but we can get higher rents for a sustainable timber construction, so it is definitely worth it over the life cycle of the building. You get payback. At the moment, there is no problem sourcing German timber, which is what we use.

Real estate is struggling in Germany, there is not much new building going on, so there is no problem in sourcing materials. That will change as building picks up, because timber is a limited resource.

Argyrakis: You need a strong equity base for development, and we have ongoing discussions with banks to proceed with some developments. We find that banks are happier to finance green assets, even if they are more expensive to build. Our focus is on cashflow-producing assets.

You have a good track record in enhancing the value of assets through your Manage to ESG strategy, and refurbishment and upgrading of existing assets are hugely important in reaching net zero. How do you go about it?

Hofmann: Our Manage to ESG strategy applies to the residential units we are buying. Usually, they are 40-50 years old.

The first part of the strategy is that we refurbish them, insulate the roof and the entire building, using state subsidies of up to 50% of the cost.

The second part focuses on the heating system, and we seek to improve the Energy Performance Certificate (EPC) rating up to A. It involves a total change from oil or gas to heat pumps. We focus mostly on energy efficiency. The buildings are usually let, and the tenants are happy for the work to be carried out, because they know they will be saving on energy costs. They appreciate the fact that the landlord is investing in upgrading the building.

Can you provide examples of projects you are working on – development or refurbishment or both – that demonstrate your ESG credentials?

Hofmann: We are refurbishing a residential portfolio in Cologne that we bought at the beginning of the year. Work has just started, so it’s an ongoing project. There are 350 units in the building and we are shifting from gas heating to heat pumps.

We focus on resi rather than conversions, because change of use is expensive and complicated, as it takes time to get permits. The wait is three to four years, which is a financial risk we are not prepared to take.

What are the main obstacles to implementing an ESG strategy in Germany?

Argyrakis: We rely on the EU Taxonomy. The requirements are getting more stringent, there are too many regulations already and they are changing too fast. Keeping up with them is becoming more demanding. We don’t expect a change of strategy until the European Green Deal has been signed, and the requirements will keep getting tougher.

Looking at the three elements of ESG in turn: first, the environment. Is it all about investing in renewable energy? What are the main challenges?

Hofmann: The main challenge is bringing EPC ratings to Band A, which is crucial, otherwise you cannot sell the asset down the line. We’re investing a lot in this and it’s our main focus. We choose buildings from the 1960s and 1970s with solid foundations in good locations and we choose cities with more than 30,000 inhabitants. We never buy 18th or 19th century buildings, because upgrading them is too much of a challenge.

On the S of ESG, how do you integrate social aspects into your projects? Are they difficult to evaluate and quantify?

Hofmann: We avoid unacceptable terminations or tenant evictions in our portfolio. The contracts are complicated, as they need to change from city to city, because regulations vary.

We only increase the rent by as much as people can afford – in line with inflation, never above the rate of inflation.

Finally, the G of governance: you have corporate volunteering in place, and a goal of 50% women at management level. How are these initiatives working out?

Argyrakis: Having 50% of women at management level was a goal, but it is now a fact – it has been achieved.

Corporate volunteering is now voluntary, but we plan to make it mandatory. We will be regulated in the future, so internal procedures will change.

We’ll turn to the capital markets, probably issuing a green bond. We’re in discussions with banks that have already issued sustainable bonds. So we will need to be regulated and will need to meet all the relevant criteria and have a longer-term strategy, which will imply a change to our resi portfolio.

Your main focus is residential, but you have expanded into offices, logistics and hotels. What sectors do you think offer the most opportunities in Germany?

Hofmann: We focus on existing resi because we see many opportunities. Prices have dropped in the last 24 months, but tenant demand continues to rise. It is, and will remain, a key asset class. In terms of workload, 75% of our focus is on resi: 50% existing assets and 50% development.

On the development side, we also do hotels, logistics, offices and mixed-use areas.

Would you say the top seven cities are still the best bet in Germany, or are you willing to go to secondary cities as well?

Hofmann: In resi, we focus on B and C cities in Germany. As mentioned, we recently bought in Cologne because it was a good deal, but, in general, A cities are too expensive. Munich and Frankfurt are out of reach.

We look at vibrant, healthy cities with a good socio-economic context. We’re also willing to look at D cities, provided they are economically and socially vibrant.

The German real estate market has had a very difficult year. You are in talks with international institutional investors. What do you say to persuade them now is the right time to invest?

Argyrakis: The German market is attractive. We are talking to companies from the UK as a channel for international capital to be deployed in Europe. Demand for living assets is high, but prices have come down and there are interesting entry points into Germany.

The market has changed from a debt market to an equity market. Many institutional investors are looking at the moment, but they are focusing on lower-risk products like bonds.

Prices are unlikely to go down much further. We believe we’re close to the bottom, but we don’t expect a quick rebound either. Interest rates will not be lowered as much as expected.

I am optimistic on the German market, but growth is still lagging behind and developments are a challenge. But cashflow-producing assets like resi are easier to finance. You need to prove that you have the knowledge and the skills needed to meet the criteria, and be in line with EU and German regulations.

We’re in a strong position because of our proven track record. We have equity to invest, financing partners to work with, an established network and the right team in place with the right solutions.