Press Article

German Residential Breakfast: Value still exists across risk profiles, assets

PIE’s German Residential Property Breakfast in Berlin assembled five experts to discuss the theme: Does German rental housing still offer value? Is Berlin the best regional market? Held at the offices of law firm Olswang, PIE welcomed (left to right) Nikolai Dëus-von Homeyer, Managing Partner at Berlin’s NAS Invest; Marcus Eilers, Head of German Asset Management for Round Hill Capital, based in Berlin; Andrew Groom, Head of Valuation & Transaction Advisory, JLL, based in Frankfurt; Michael Schleich, Managing Director at Frankfurt-based Corestate Capital Advisors; and Peter Schorling, Olswang Partner and Head of Corporate/M&A Germany, based in Berlin. Cornelia Yzer, Berlin Senator for Economics, Technology and Research, welcomed the PIE Breakfast to the German capital.

The housing market in the German capital Berlin is set to remain among the most attractive as demographic and economic fundamentals are strong – even if it will be one of the first city regions to introduce the government’s new rental cap.

Yzer, who welcomed the PIE Breakfast to Berlin, said some 40,000 new jobs were created in the German capital in 2013. With more and more international companies choosing the city as their EMEA headquarters, the population grew by 45,000 last year. It expects 300,000 new inhabitants in total over the next decade. “We will need 10,000 new flats each year to tackle at least part of the new demand,” she said. “What is more, these people want to live in the inner city, not the periphery, close to their work places.” A project where this trend has been recognised is the technology park in Adlershof, with apartments right on campus.

But the panel noted that pricing in Berlin is still very attractive in international comparison, as well as against other large German cities. “The only thing that has become very expensive are plots,” said Dëus-von Homeyer. “They are changing hands, but not a lot of developments are started as the new owner is speculating on even higher prices.” Added Groom: “Looking at prices in an international comparison, Berlin prime housing only costs one quarter of that in London, half of that in Paris, and is cheaper than Madrid or Milan.” He predicts that Berlin housing prices will steadily increase for a while as the city only started to attract international capital 25 years ago.

The introduction of the new rental cap, which stipulates that rents for new leases in existing flats can only be raised 10% above the officially measured market rent (Mietspiegel) in a given city or area, may impact yields in Berlin but will not excessively hamper investment, the panel agreed. “Berlin will be one of the first cities to implement the measure, as the city saw the strongest rental growth over recent years,” said Schorling. He noted that the draft law comes with a 45-page appendix which outlines why the introduction is necessary. But he added: “the argumentation is weak and faulty.” The panel agreed that the introduction will in any case do little to hinder rising rents over the longer term.

Some private equity sellers start to buy back

As German home prices have steadily risen, most private equity players were net sellers last year, but a lot are now looking to build new portfolios focused around new investment strategies, the PIE Breakfast heard. Round Hill is one of these.

The UK firm co-owned the 30,000 unit Vitus portfolio until selling to Deutsche Annington earlier this year. Eilers told the panel: “We sold most of our German stock in 2013 and 2014 and now only have 1,600 units in Berlin left… But we are buying again, with a different set of investors with different yield expectations now.” IRRs of up to 20% were possible until fairly recently, but investors settle for far lower yields now, he added. Round Hill is also increasingly moving into refurbishments and secondary cities, including in Eastern Germany, seeking higher yields than those available in the large conurbations.

“Another possibility to create value is privatisation,” added Eilers “And we see people buying in districts or cities where no one would have thought about owning a home just a few years ago.” The German home ownership rate is still the lowest in Europe but has been rising, mainly boosted by the low interest rate and rental growth environment. “Berlin’s home ownership rate is the lowest in the country at 14%-15%, but this has grown from 11% just a few years ago,” said Dëus-von Homeyer, who identified this as a long-term trend.

Breakfast delegate Einar Skjerven, founder of the Skjerven group which brings predominantly Norwegian investors into Berlin, said his firm has also changed tack toward privatisation, as rental growth, the value driver over past years, has stalled. “That’s how to best earn money in Berlin now,” he told the seminar. Schleich however cautioned that home ownership has not grown as much as expected in recent years and demand may soon let up. “Germans want to be flexible and with these strong tenant rights in place, the rate will remain low compared to other countries,” he said. He sees privatisations falling once the crisis has fully blown over.

Schleich said Corestate is also in a disinvestment phase. “We only have one unit in Berlin left, for example,” he said. The Zug-based firm decided to divest in the current favourable environment to achieve high returns even though the funds has not yet reached intended maturity. “Our investors are com-ing back with new money to invest in Germany but want to focus on cash-yielding assets now as there are not a lot of distressed opportunities out there,” he told the panel. For value-creation, Corestate will focus more on student housing development and high street investments in secondary cities. “Residential in general is difficult to source at acceptable prices now,” said Schleich.

Groom identified hype and investor scepticism in the prime segment in the largest conurbations, while at the same time secondary locations are catching up, especially strong regional centres and university towns. Dëus-von Homeyer also finds the prime segment too expensive. NAS Invest concentrates on Berlin but will also look beyond this, especially into strong secondary cities in the East such as Dresden or Leipzig. “Infrastructure in these cities has been massively updated; the quality of life is very high, and jobs are being created as well.” His new firm started with a family-owned portfolio of mainly Berlin assets, which it is merging with co-investors, mostly European high net worth individuals. “We are looking for assets with value-add potential in the €2m-€20m bracket – a niche where competition is not too high from private investors on the one and institutionals on the other side,” he said.

Schorling noted that the private equity players are certainly cashing in now. “What we also see is that buildings still under construction are sold in forward deals and the like,” he told the panel. “Overall, buy-ers are taking a longer-term perspective, focused on cash-flow rather than high yields.”

Senator Cornelia Yzer (last imagetop left) welcomed the Breakfast to the German capital. Marcus Eilers and Andrew Groom (top right) still see opportunities in the top seven cities. Delegate Einar Skjerven (bottom) said the way to go forward in Berlin was privatisations.

German housing still cheap for overseas investors

While many domestic investors are worried over high prices in the largest German cities, fearing a decoupling from fundamentals as rents fail to keep pace with value rises, a lot of overseas investors still perceive German housing as a bargain, the panel agreed.

Groom identified a hype in the prime segment in the largest cities. “At the top end, we certainly see a lot of scepticism in the market now,” he told the Breakfast. “Capital value growth needs to take a breather.” At the same time, secondary locations are catching up, especially strong regional centres and university towns. “The question is how high rents can rise to sustain these capital values,” he said. Even at low yields, investments may be attractive for investors looking for a low volatility environment and stable cash-flows. “It all depends on investment strategy but opportunities for each type of strategy are still out there,” he said.

“Some assets are certainly overpriced in the top cities but not necessarily overvalued,” Dëus-von Homeyer told the panel. “Overall economic funda-mentals are strong and will continue so in the foreseeable future.” Eilers said a strong element in favour of the buy side for German housing is the floor price, which is still very cheap in international comparison – as well as the low share of income the average German spends on rent. “If you are a very long-term investor, looking for stable 3%, the top seven still are a good investment proposal.”

Another important element to consider is demo-graphics, the panel agreed. While the nationwide population is set to shrink over coming decades, large conurbations will win further citizens. Munich, for example, is set to add 15% to its population by 2030, Dresden 12%, Leipzig 9%, Hamburg 7% and Berlin 6%, according to the Bertelsmann Foundation.

One opportunity that has become scarce however is the large portfolio. “Housing companies that want to expand are now looking at portfolios with 500 units or less,” said Groom. No further sales from the public sector are planned either. Added Schorling: “The political will is certainly not given to privatise these assets. What we see is actually a reverse trend, with municipal housing associations buying private stock.” These associations are certainly the market driver in Berlin, also in development. “And they have wholly different rental and return targets,of course,” Schorling added.