Development of property crowdfunding hinges on upcoming regulation
The future development of real estate financing via crowdfunding mainly hinges on the regulation that is bound to hit this relatively new phenomenon in Germany, participants at the PIE German Residential Property Breakfast said. “Crowdfunding is a grey market at the moment and it is often unclear what is actually allowed and what isn’t,” said Peter Schorling, chair corporate & securities Germany at Greenberg Traurig, during a lively discussion. “So, more often than not, these platforms just go ahead – much like tech start-ups such as Uber – and see if it works.” He noted that Greenberg Traurig is currently advising several companies seeking to establish a crowdfunding platform. “The interest rates expected by the investors on the platforms are very low, so the money is actually cheap,” he said. Among the three panelists, Dëus-von Homeyer was not as optimistic: “I only see limited potential in crowdfunding as it is very risky and the upcoming regulation is likely to restrict it.” Halwer said that it is only a play for private investors, while Kortmann identified crowdfunding as a follow-on business model for German closed-end funds. “And it only makes sense for equity, not for debt investment, as the latter is far too regulated,” he commented. Real estate financing via crowdfunding is gaining traction in Germany as 60% of the 47 deals registered since 2012 took place this year, according to a report in October by property financing consultancy Flatow Advisory Partners. The majority of deals is struck in the residential sector. Einar Skjerven, CEO of Berlin-based Skjerven Group, said he regards crowdfunding as part of the marketing side of a project, as developers may use their crowdfunding activities to get potential owner-occupiers involved at an early stage and to form ties with the local community. In fact, most investors in crowdfunding projects are local as they can best calculate the risk involved, German crowdfunding platform Zinsland found for the projects it promoted.
Price for land hampers developments
A massive increase in plot prices is hampering new residential construction projects, despite the high demand, rising rents and prices and the auspicious financing conditions, the audience at the PIE German Residential Property Breakfast event heard. “Given the lack of product – for both investors and tenants – rents are getting higher, so that developments are actually profitable again,” Kortmann said. However, this is partly off set by the rising land prices: “Public authorities have become aware of the supply-demand mismatch and are starting to allow construction at a higher density.” Halwer interjected that many municipalities are selling their own plots at very high prices, though, to fill up empty city coffers. “They are not really providing space for the construction of affordable housing,” he said. “We had several plots in our portfolio, but decided to sell rather than launch developments ourselves, as it seems that the market for land is overheated,” Dëus-von Homeyer noted. Given the high prices, he believes that it is difficult to achieve a good margin on a development, despite the low financing costs. The fact that many municipalities only allow residential development if part of it is used for social housing (Sonderbodennutzung), “leads to a sort of cross-payment across the project as higher-priced flats partly finance the construction of the affordable housing units,” Kortmann said. “This is also pushing prices higher than they need to be.” The creation of new supply to meet demand in the largest cities will take time. “I don’t see a point where that imbalance will be mitigated. Th is gives the market stability,” according to Dëus-von Homeyer, who expects stable rental and value growth rates, though not as high as in the past few years. Looking at external factors that could impact the market, Kortmann said that the UK’s Brexit vote may increase demand in some European cities, including Frankfurt and Berlin, as banks, in particular, aim to move staff out of London. While Halwer believes that Brexit will not significantly influence the German residential market – “There simply is no supply!” – Dëus-von Homeyer is more bullish. “Germany is emerging as the largest real estate market in Europe, a fact which will, in turn, attract even more investors to the country,” he commented.