Institutional investors see an end in rapid price increases in residential real estate investments

• Yet, investors do not expect heavy price changes
• Investors focus more on project developments and existing investments
• Institutionalists often appear as alternative financiers

• Investors expect stability and reliability from newfederal government

München/Frankfurt, 11th October 2017 – The price increases in residential real estate come close to an end and stagnate in the medium-term on a high level. Heavy price chances are not expected by investors. This is one out of the many key take-outs of the fourth expert talk of Engel & Völkers Investment Consulting bearing the title “Residential real estate – the alternative-free asset class?”, which took place at the Expo Real Fair in Munich. There, the representatives of the real estate industry discussed the investment strategies of institutional investors in the German residential real estate market.

Other than Kai Wolfram, host and managing partner of Engel & Völkers Investment Consulting (EVIC), and Andreas Ewald, managing director at EVIC, invited Martin Eberhartd, FRICS and managing partner of Bouw fonds Investment Management Germany, Francesco Fedele, in the management of BF.direkt AG, Thomas Meyer, CEO at Wertgrund AG, Thomas Hegel, chairman at LEG Immobilien AG and Arndt Krienen,CEO of Adler Real Estate AG to the expert talk.

Due to the high sales prices, many investors focus on other growth opportunities such as re-densification in the company´s own stock or entering new project developments. Thomas Meyer elaborates: “The strategic question of appropriate re-investments in the current market environment can be answered with the rule of three: project developments, forward deals and value-add approaches. Mainly project developments offer the possibility to maximize yields. The development risk can be minimized by portfolio regulation for diversified investors. ”Thomas Meyer continues: “Each investor knows about the latest price developments in the German residential real estate market. However, an end of the heavy upward trend becomes more and more plausible due to the ever increasing amortization times. Therefore, it is economically advisable for institutional players to sell fully developed projects. This way, one may generate above average returns for corporations and investors.”

Arndt Krienen adds: “By buying portfolios that match our business model we have, also in 2017, further expanded by so far seven percent. We want to continue with our growth. However, alongside this year´s acquisitions, we have realized, that our strategy, growing by exclusively buying portfolios, has its limits. This is because the market offers fewer portfolios. More often, the portfolios offered sell at such a high sales price that they are no longer attractive to us. In these situations, development projects, densification or roof structures become more attractive for growth. This is why we are thinking about these topics at the moment. This shall not be seen as a replacement of our strategy but merely as an addition.” Other than the established asset classes such as residential and office real estate, institutional investors (insurances, supply factories) discover new investment opportunities such as financing project developments. Besides, institutional investors appear more often as alternative loan capital providers. This increases the all-time high competition intensity”, elaborates Francesco Fedele.

Moreover, the so far used method to invest in B-locations instead of A-locations has reached its limits. “When it comes to bidding processes, we have increasingly realized that price dynamics in B-locations have augmented. Sales price factors of 20 and more, which we have so far only encountered in metropolises, are no longer rare in other locations either. We don´t expect an end in this regard any time soon”, comments Thomas Hegel. 

Despite the ongoing high price period, residential real estate is still asked for. “Germany, residential, stable cash flow: Barely no institutional investor would currently refrain from this completely safe triad. Especially now, with the European crises in Great Britain or Catalonia, investors appreciate Germany´s economic and political stability”, says Martin Eberhardt. Therefore, Kai Wolfram claims: “The future federal government has to make sure the investment climate remains reliable. Therefore, one may also question the cap on rent increases.” Andreas Ewald adds: “The real estate investment market in Germany is perceived as safe in this world. This is owed to Germany´s reputation as a well-organized and structured state as well as a sustainable and reliable economic power. A minority government or even new elections will harm Germany´s reputation. Therefore, it is desirable to have a stable governing coalition in place soon.”