In today's economy, the innovation cycles are shorter than ever before. The fallout from COVID-19 continues to play a role and, at the same time, we're seeing the growing impact of all manner of different economic factors, including investment pressure and interest rates. The result, at least in the short term, is uncertainty in individual usage categories, just as we saw in the retail and office segment during the COVID-19 lockdowns.
In the current economic climate, neighbourhoods are not simply viewed as diverse and evolving urban centres for residents, workers and leisure-seekers. Instead, they are becoming the gold standard for institutional and professional/semi-professional investors. Neighbourhoods present an opportunity to invest a significant amount of capital in an area, where – in the ideal case – the risks are already diversified and the cashflow is assured through a range of different usage categories. Moreover, there is significant potential for synergies, since the different spaces complement one another and add value.
The difficulty is that, once near completion, neighbourhood development projects attract lots of interest from buyers, and limited supply is pushing prices up and putting pressure on rates of return. In the current market, classic forward deals are fraught with uncertainty. Supply chain issues mean that it's simply not possible for fixed date sales to be 'set in stone' months, or even years, in advance of completion. In addition, construction costs have risen steeply in recent times – up 14.6 percent in Germany between February 2021 and February 2022 according to the Federal Statistical Office of Germany. And the figures for Austria are just as high. These rising costs present a real challenge, particularly for fixed-price forward deals agreed early on in the project lifecycle. In times like these, what we really need is flexibility and partnership – not fixed clauses – so that we can concentrate instead on achieving the best-possible development result for the neighbourhood, rather than focussing on contractual agreements.
Option one: joint ventures – putting investors at the helm
Demand for new flexible partnership models is growing fast among investors and developers alike, but this is nothing new. In fact, joint ventures have been a growing trend for many years, long before the emergence of the current supply chain issues. According to the latest Off Market Study from HPBA – a leading German specialist in real estate transactions – around 38% of industry players that took part in the survey expect to see the volume of joint ventures increase. Less than 6% are forecasting a drop in volume.
The joint venture model gives institutional investors, such as insurers and pension funds and traditional private equity investors, the added advantage of being involved right from the point of acquisition and the opportunity to take an active role in the project. That means they essentially sit alongside the developer at the helm for the entire duration of the project. A good collaboration will also lay the groundwork early on to allow the joint venture partner to add the completed project to its own portfolio in the long-term.
Joint ventures also offer developers an enormous advantage, since this model allows them to take on large-scale projects with limited borrowing. While it's certainly true that there is a shortage of sites for neighbourhood development projects, the biggest competition is for small to medium-sized projects. In the DACH area, there are many large development areas – more akin to city boroughs than smaller neighbourhoods – that are well-known on the market, but the size of these sites means their acquisition is out of reach for most individual property developers, even the largest and most established industry players. However with a joint venture partner on board, developers can access the capital they need.
Going forward, we at 6B47 Real Estate Investors AG plan to take on more of these large-scale projects by teaming up with strategic joint venture partners. A key element of this strategy will be to ensure that we match the right investment partners with the right projects. After all, every one of our potential future joint ventures will have its own unique characteristics. This new strategic direction will have no effect on our existing 6B47 Real Estate Club, which allows us to team up with several co-investors to run small and medium-sized projects. We plan to continue to use this mechanism, alongside the joint venture model, to acquire and implement many more projects in future.
Option two: the open
Alongside our joint venture strategy, we also want to offer another investment option for institutional investors such as pension funds. Despite receiving many attractive purchase offers, we have decided not to sell the Althan quarter with its four sub-projects – the hotel, the SOPHIE and JOSEPH residential buildings and the centrepiece FRANCIS complex – to a single investor. Instead, this major project will provide the seed investment for our first open-ended real-estate special fund. This decision was motivated not simply by our desire to keep hold of the property for the time being, but, more importantly, by cold hard economic facts. There is significant demand for high-quality spaces and well-established locations in the centre of Vienna, so the project has real potential to perform well in the long-term.
For this same reason, we have also designed our regulated open-ended special fund to allow us to add more neighbourhood development projects with a high proportion of residential units in the core and core plus risk categories into our portfolio in future. This will mean prioritising investments in attractive locations in the metropolitan regions of Germany and Austria. 6B47 Real Estate Investors AG will take on the real estate asset management in collaboration with a strategic partner. However, the fund itself will be managed by an external equity management company.
A fresh approach to property investment
When 6B47 Real Estate Investors AG was founded in 2009, the real estate markets were crying out for change on many fronts. We made it our mission to bring about this change – and we succeeded thanks to our fresh development approach, combining exceptional real estate concepts and a sound investment strategy. All these years on, our fundamental approach remains unchanged. We remain convinced that innovative market access strategies and modern forms of investment are essential if projects are to perform well and help create city centres that are fit for the future. We will therefore continue to provide market access opportunities for as many different investor profiles and risk categories as possible – from the conservative core investor right through to the opportunistic investor.