Review 72nd Swiss Real Estate Talk: "Late-Cycle Investments in Germany?"

The initial situation seems clear: Interest in German real estate remains very high and prices have skyrocketed in many cities in recent years. However, speaker Joachim Schütz from Swiss Finance & Property AG does not see these developments as an argument against further investments in Switzerland's large neighboring canton. At the same time, he questioned the term "late cycle" for the status quo in the German real estate market. "If you look at the real property prices in Germany, it shows that we are still dealing with a low price level compared to the past 50 years," Schütz said. Germany's role as a "safe haven" within Europe remains intact, he said, especially when looking at the comparatively low debt ratios of private households, companies and the government combined. Instead of a "late cycle" or a possible recession, he sees a "roll-over" to a further economic upswing in Germany. Europe is "about three to four years behind the U.S." in terms of an interest rate turnaround, Schütz said of another important market-determining factor. It is also important to note that Germany is currently undergoing a shift from an export-oriented to a more domestically oriented economy.

More project developments

Lahcen Knapp, CEO of Empira AG, based in Zug, agreed "200 percent" with Schütz and likewise rejected the assumption that this was a real estate cycle coming to an end. "In Germany, there has been a catch-up potential that has been exploited in recent years, especially in the A and B cities." The relatively low level of urbanization in Germany, for example, has also contributed to this, he said. Whereas only about 75 percent of people there live in larger cities, this ratio is now a good 97 percent in Belgium, for example. The development shows above all a "redistribution in the German real estate market from the countryside to the city.

Mezzanine instead of bank loan

Supported by almost linear GDP growth since 2008, the volume of project development is also continuing to rise due to the great demand in cities. Empira also benefits from this as a provider of mezzanine capital, a still young form of financing in Germany, where the capital extended amounted to around EUR 2.6 billion in 2017, according to official data. Knapp assumes, however, due to the rather still non-transparent character, that the sum was "certainly even higher". Ennet of the border, including his own companies, there are currently about seven to ten relevant market participants, he said. "With mezzanine financing, we are closing the gap between equity and debt capital that is opening up as a result of the measures for bank regulation via Basel III and IV," Knapp explained. In view of the higher capital requirements linked to the extension of credit, banks are increasingly looking at the ROS (return on solvency) ratio instead of the IRR (internal rate of return). Another advantage for those seeking capital in the real estate industry is that mezzanine capital can be granted within four weeks in the best case scenario, whereas banks usually take much longer to review loan applications.

Martin Eberhardt of Corpus Sireo Real Estate also confirmed in his presentation that the German economy remains strong, promising GDP growth of 1.9 percent in the current year after a 2.5 percent increase in 2017, and another 1.2 percent increase in 2019, according to the Swiss Life Economic Reserach. "Germany has incredibly strong office markets," Eberhardt said. This applies to the capital Berlin with a vacancy rate currently below two percent, he said. There are similar reports from Munich, and even the Main metropolis Frankfurt has fallen well below the 10 percent mark again after many years with a double-digit office vacancy rate.

Core-Satellite Strategy

Furthermore, there is "great demand for residential real estate in the cities, but hardly any construction capacity left," Eberhardt said. There was enough housing in Germany as a whole, he said, "but not in the right place." Experts had already spoken of a mature market cycle a few years ago, he said, but those voices have been proven wrong. In general, he advises a similar strategy in a late-cycle market as in the low-interest environment. In his opinion, a "core-satellite strategy", in which the basic yield is generated with core properties and smaller investments are made on the periphery in "satellite investments", which involve higher risks or represent niche products ("young asset classes") such as logistics properties, student apartments, health care properties or parking garages, is a good strategy.

The subsequent discussion with the three market experts led by moderator Prof. Dr. John Davidson from the Lucerne University of Applied Sciences and Arts provided further tips and indications of the returns currently to be expected with real estate investments in Germany. While Joachim Schütz considers 2.5 percent for residential real estate and up to 4.0 percent for commercial real estate to be possible ("in niches such as logistics, there is definitely something more in it"), Martin Eberhardt reported on investments made and gross initial yields of 4.9 percent in Munich, 5.9 percent in Regensburg or, for example, even more than 6 percent for a retail property in Lichtenfels, Bavaria. Lahcen Knapp, on the other hand, impressed the participants at the 72nd Swiss Real Estate Conference with its own business figures: For the past year, Empira AG reported a BVI return (cash-on-cash) of 10.32 percent per annum with its "short-term bridge financing".