With real estate an increasingly attractive asset class for a wide range of investors, changing living patterns, a rising population and the impact of Brexit all help the German market stand out.
There are just nine top tier German cities which major listed developer, the Consus Group, is focusing on. These include the capital Berlin, the financial hub of Frankfurt and the bustling northern port of Hamburg.
So far, most investors in this traditionally safe and stable asset class have been German retail and European institutional clients, including UK, French and Swiss fund houses and pension schemes. But as equity and bond investments no longer look so attractive, modestly yielding German real estate is finding a broader audience, among family offices and a wider constituency of private banking clients across Europe, the middle east and Asia.
In order to further encourage investors, Consus is keen to help portfolio managers to be able to properly evaluate property developers, as opposed to portfolio holders. To this end, the group has worked to create new metrics with St Gallen University in Switzerland, to track developers listed on stock exchanges.
Participants
- Benjamin Lee, Chief Financial Officer, Consus Group
- Andreas Steyer, Chief Executive Officer, Consus Group
Moreover, large-scale developers such as Consus are able to take advantage of new, scientific approaches – such as building information modelling (BIM) – to optimise bulk construction of residential units to maintain quality, increase speed of building and improve profitability.
“I’m really convinced that if you are not able to implement BIM over the next few years, you will disappear from the market,” says group CEO Andreas Steyer.
Real estate, he argues, is now a progressive asset class that should no longer be relegated to outer satellite status in family or private portfolios, lodged together with other “alternative” investments. Rather, believes Mr Steyer, it should be at the very heart of asset allocations.
“I would strongly recommend that real estate should be a core investment in such a portfolio, especially if you look at the residential asset class, and if you look at affordable housing as a key part of this,” he says. “That means no matter what happens in our economy, if you have affordable housing for mid-income people, you have a sustainable product and that’s exactly what we are producing with our business approach.”
Demographic factors
There are two key demographic factors driving the rise of this asset class, which is increasingly finding its way into these core portfolio holdings for high net worth clients.
One is the marked increase in household formations, as the average household size gets smaller, fuelling increasing demand for residential properties. With the population in Germany now having exceeded 80m, including a large segment of older citizens, Consus expects this dynamic to continue.
This is aligned with growing urbanisation, particularly involving those cities embracing the new, digital economy. Renewed immigration is also giving these top cities a significant boost.
All of these trends have fed into growth in demand for apartments for the middle-class segment of German society, which has been the key focus for developments identified and built by Consus.
“This middle-income segment is where we find the biggest shortfall and where our focus is,” says Benjamin Lee, chief financial officer of the Consus Group in Berlin.
He also points to a Brexit-influenced structural demand, encouraging investment away from London towards Frankfurt and Berlin.
The business model at Consus involves using the transformative power of real estate development to influence the future of whole neighbourhoods, “cities within cities”, rather than just buying and developing individual plots of land.
“We have the scale to invest in the larger quarters, which a lot of parties don’t,” says Mr Lee. “A typical developer might be investing in the small corner plot and the competition for that is fierce. But for much larger developments, there is less competition. And because of their size, you’re able to get better margins and achieve economies of scale.”
This allows larger developers to not only spread their costs, but also build combinations of retail, residential and commercial units. Typically, the ground floor of an apartment block developed by Consus will consist of shops, bank branches and restaurants, with perhaps a wing of commercial offices. But the main purpose of the block is certainly residential. “Governments, local authorities want mixed use developments and we can provide that,” says Mr Lee.
“But residential development is our focus and our strongest area. That’s where the underlying dynamics of supply and demand are the most persuasive.”
Highlighting hotspots
In terms of hotspots attracting the most attention of international investors, Consus highlights “Europe’s undisputed political capital” city of Berlin, as well as Frankfurt’s long-standing finance hub.
“Berlin is historically under-invested and there is huge potential for redevelopment there,” says Mr Lee, pointing to the continuing benefits of the reunification process, which continues to encourage the redevelopment of factories in the former Communist east of the city into modern housing stock.
Frankfurt, however, is expected to benefit most among German cities from relocations of both people and assets after Brexit.
“Pretty much every financial firm that has a base in London and trades in Europe needs to now have a European base,” adds Mr Lee. “Frankfurt is not the only choice, but it’s the natural choice and this movement of demand to Frankfurt is causing a huge, huge support for that market.”
Consus expects demand for real estate to continue, not least due to prices still lower in German cities than comparable conurbations in other European countries.
Despite this persuasive case for investing in German real estate and the strong demand for this highly resilient asset class from wealthy and institutional investors both locally and globally, developers such as Consus are keenly aware of challenges to this long-established success story.
At the turn of the millennium, there was a huge building boom in Frankfurt and other German cities, with commercial property springing up everywhere. Yet many properties stood empty for long periods and some observers believe there is a danger of this pattern repeating itself.
This is unlikely, believes Mr Lee. “At that point in time, this huge boom was caused by massive oversupply,” he says, caused by the post German reunification building boom, allied with a series of tax breaks for construction projects. This oversupply was further aggravated by a stagnating economy until 2010.
As a result, developers pulled out of Germany, leading to the current undersupply, he says. “So we now have a scenario where there’s strong demand and limited supply, which is a good opportunity for Consus because, unlike say, the UK, where you’ve got seven or eight listed developers with a market cap of well over €25bn ($28bn), in Germany you’ve got two, with Consus as the largest, with a market cap of less than €2bn. Germany is the larger economy now, so there’s an opportunity for significant developers to grow here.”
Consus’ management believes the German real estate market is a long way from any over-heating. “The environment we have right now is amazing,” says Mr Steyer. “We have a big shortage of developments, especially in Germany’s biggest cities, and this is where we are currently delivering our key projects. More than one million flats or condos are still needed, and that is exactly the market we are in.”
