Brave new financing world: Why banks are becoming more cautious - and how ESG is becoming a performance factor
Mr Schulten, is real estate really an attractive investment option for institutional investors right now?
Schulten: We are currently seeing some significant developments that are changing the goalposts across the investment market. It's worth noting that, were if not for the high purchase prices, right now all the conditions are in favour of property investment. The current big trends – think reurbanisation, a largely robust economy, significant lack of supply and, last but not least, the largely inflation-proof nature of the property market – are all significant plus points for this investment class. I personally am much less concerned about the large amount of equity tied up in property in the DACH region than I am about other asset classes. For core property investments, I would expect to see the rate of return continue to fluctuate under the three percent mark. If we imagine a situation where an investor makes a 2% return on their purchase and inflation is tracking at 4%, then naturally the investor makes a loss – especially if they are reliant on borrowing. In that case the investment is perhaps less attractive than other alternatives; however with good asset management and index-linked lease agreements, these investments can deliver a return. A property developer or fund manager that is able to secure better returns with a high degree of security and offer the standard bond spread is sure to attract lots of interest.
Which investor groups are currently dominating the market?
Schulten: We're currently seeing a lot of caution, especially among investors. The BF.Quartalsbarometer – a quarterly barometer to assess the mood among investors, which we at bulwiengesa have been heavily involved with for many years – is at its lowest point since the COVID-19 crisis in 2021. This means that, in the short to medium-term, the market will be dominated by investors with high levels of equity. Large pension funds, for example, will continue to be loyal to the property markets, and I believe that large international institutional investors will also play a significant role.
„Were it not for the high purchase prices, right now all the conditions are in favour of property investment.“
Andreas Schulten, Chief Representative, bulwiengesa AG
In recent times, France and the UK have increasingly emerged as alternative markets to the DACH region, but Germany in particular continues to occupy a strong position as one of the key property markets worldwide.
How much are institutional investors changing their real estate investment strategies in the current climate?
Schulten: We are seeing a number of changes. For instance, institutional investors have further increased their quality standards. They want the numbers to really stack up, but not just that; in many cases they're looking to see that a property adds social value – that its ESG credentials are spot on. Today's institutional investors have no choice but to engage with these topics and adapt their strategies accordingly. No matter how prime the investment, if it doesn't meet the requisite ESG standards, it will attract virtually no interest. The same applies whether it's a modern city-centre office building or a mixed-use urban neighbourhood, the latter of which are very much in vogue among investors right now. And here too, stakeholders have become increasingly demanding. At bulwiengesa, we estimate there are around 600–700 neighbourhood development projects in Germany. In 2019, we categorised these into six groups as part of a study conducted with Corestate. Among them are many success stories – small neighbourhoods, large 'mega' neighbourhoods and even vertical neighbourhoods – but by no means do all of these so-called 'neighbourhoods' live up to that name.
So we need a more detailed analysis?
Schulten: Absolutely! I would definitely caution against a rash romanticised notion of a neighbourhood. Creating this kind of ideal neighbourhood – one where dynamic office-based businesses sit alongside owner-run hotels with microliving apartments, attracting young professionals who go for a few drinks at the local bar after work – is a long process requiring constant improvement. The management costs are also high. Without putting too fine a point on it, it's much easier to manage a single-use area. The bottom line is that mixed-use urban neighbourhoods also have to make economic sense – and that's where asset management and property management come in. These services are vital to ensure that any improvements also increase the actual economic value of the neighbourhood. For me, flexible, medium-sized businesses are perfectly placed for this, as it's impossible to plan a complete neighbourhood in advance.
Do you think there are any underestimated asset classes within neighbourhoods?
Schulten: For me, the most overlooked are modern residential concepts around serviced apartments, particularly for the elderly. And also care facilities. According to bulwiengesa's calculations, Germany alone needs to create 472,000 additional places in new and modernised care homes and 470,000 residential units for assisted living. The market for this potentially amounts to almost 150 billion euros.
In recent times, institutional investors and project developers have increasingly started teaming up on joint ventures. How does this work for each side?
Schulten: For project developers it's all about stability and having the confidence to plan ahead. Time and again, we hear stories from the market of developers having to make sometimes significant recalculations when awarding contracts to their main contractor. The financial situation I eluded to at the start can also prove very challenging. A joint venture partner alleviates this by providing the all-important capital and also – in an ideal case – allowing for more flexibility. For investors, the track record of their potential partners is becoming more important than ever. What they want to know is: Has the developer demonstrated that they really understand the location and asset class? And if the answer is yes, then this lays an important foundation for a win-win outcome for both sides.
Is the situation similar for fund investments or are there other factors to consider?
„Has the developer demonstrated that they really understand the location and asset class? If the answer is yes, then this lays an important foundation for a win-win outcome for both sides.“
Andreas Schulten, Chief Representative, bulwiengesa AG
Schulten: Of course, the track record of the fund manager matters. But, in my opinion, a stable management structure is more important. In the DACH property sector, we have seen examples of rapid, and sometimes chaotic, management change as well as examples of long-term continuity. It's also important to take a close look at the portfolios, as older funds that are managed less actively will have a certain amount of legacy assets, most of which are not well suited to current usage requirements. Ultimately, functional structures and flexibility are more important than a portfolio of impressive architecture where the underlying real estate is unadaptable. And I'll say it again, active management is king.
