Investing in German Real Estate E-Book

• Herausgeber: Haufe Lexware
• Kategorie: Fachliteratur
• Serie: Haufe Fachbuch
• Sprache: Englisch

Seitenzahl: 566

Veröffentlichungsjahr: 2021

Beschreibung

Investing in one of the most promising real estate markets in Europe offers enormous opportunities. And as with every real estate market, in Germany too, the local framework conditions must be understood and their particularities must be adequately taken into account. The authors are renowned senior executives, real estate advisors and academics, who share here their extensive experience and real life insights from countless real estate investments, covering all aspects of a successful investment process in Germany. Includes: markets, the regulatory framework and investment guidelines. Contents: - Essentials for successful real estate investments in Germany - Macro-economic structure and dynamics of the German real estate market - Real estate investment, trends and strategies  - Diverse submarkets: residential, offices, retail, hotel and nursing homes - Real estate legal, tax and audit frameworks - German REITS and ESG in real estate investments - Real estate M&A, financing, due diligence and valuations

Leseprobe

[5]Table of Contents

Hinweis zum UrheberrechtImpressumForewordForeword from the EditorsI. Fundamentals – Basics of the German Real Estate Market1 Macroeconomic Structure of the German Real Estate Market1.1 German Macroeconomic Key Indicators1.2 Geographic Structure of the German Real Estate Market1.3 German Real Estate Indicators1.4 German Real Estate Investment Structure1.5 Conclusion: Attractiveness and ComplexityBibliography2 Real Estate Investment Trends and Strategy2.1 Introduction2.1.1 Germany’s stable investment framework2.1.2 Polycentric real estate markets2.1.3 Foreign investment2.1.4 Demand shift towards niche markets2.2 Real Estate Investment Strategies2.2.1 Risk profiles with current yield expectations2.2.2 Strategies for existing estates2.2.3 Earlier entry into the real estate value chain2.2.4 Countercyclical investment strategy2.3 Deal Sourcing2.3.1 Major buyers and sellers2.3.2 Acquisition strategies2.3.3 Local partners: investment managers2.3.4 Collaboration: joint ventures and club deals2.4 ConclusionBibliographyII. Markets – German Real Estate Market Sectors3 The Housing Market in Germany3.1 The Provider Structure in the German Housing Market3.2 Rental Accommodation in Germany – The Most Common Form of Housing, High Quality and Stable Demand3.3 Housing Construction in Germany and Demand for New Housing3.4 German Rent Control3.4.1 German capping limit ordinance (Section 558 (3) of the German Civil Code (BGB))3.4.2 Rental price brake (Mietpreisbremse)3.4.3 Berlin rent price cap3.5 Price Developments in the Sale of Residential Real Estate3.6 ConclusionBibliography4 Investing in German Offices4.1 Introduction4.2 Germany Is Not Paris4.3 Smaller Is Liquid4.4 GDP Growth Is Not Alone4.5 Low Yields: Small Margins of Error4.6 Co-working Revisited4.7 Sustainability Matters4.8 The World According to Covid 4.9 SummaryBibliography5 Retail Property Investment Market5.1 Introduction5.2 Definition and Types of Retail5.2.1 Large-scale retail5.2.2 Small-scale retail5.2.3 Commercial buildings5.2.4 Retail area definition5.2.5 Structure and aspects of rental contracts5.3 Retail Property Market Structure5.3.1 Economic framework and consumer markets5.3.2 Purchasing power index5.3.3 Retail locations and location factors5.4 Development of the Retail Property Investment Market5.4.1 Development of retail rents5.4.2 Development of prime yields5.4.3 Transaction volumes5.5 Challenges for the Retail Sector and Changing Shopping Behaviour5.6 Summary and Outlook Bibliography6 The Logistics and Industrial Property Investment Market6.1 Introduction6.2 Definition and Types of Logistic and Industrial Properties6.2.1 Transhipment centres6.2.2 Distribution properties6.2.3 Fulfilment centres6.2.4 Corporate real estate warehouse and production6.3 The German Logistics Investment Market6.3.1 The logistics market6.3.2 Structure of the German logistics market6.3.3 Investment market6.3.4 Development of logistics rents6.3.5 Rent contract conditions and durations6.4 Trends in the Logistics Real Estate Sector6.5 Summary and Outlook Bibliography7 Hotel Investment Market7.1 Introduction7.2 Supply and Demand in the German Hotel Market7.3 German Hotel Investment Market7.4 Types of Hotels7.5 Definitions of the Most Important KPIs for Investors in Hotels7.6 Hotel-specific KPIs and German Market Characteristics7.7 Operator Models7.8 Summary and OutlookHotel Data and AddressesBibliography8 Nursing Home Investment Market8.1 Introduction8.2 Types of Care Provision and Properties in the Senior Housing Segment8.2.1 Inpatient care/nursing homes8.2.2 Assisted living8.2.3 Selected aspects of rental contracts8.3 Demographics8.4 Market and Location Analysis for Nursing Homes8.5 Structural Requirements for Nursing Homes8.6 Regulatory Framework8.7 Consolidation and Concentration in the Nursing Home Operator Market8.8 Transaction Market and Prime Yield Development8.9 Opportunities and Risks of this Asset Class8.10 Summary and OutlookOrganizationsMarket Reports DatabasesBibliographyIII. Framework – German Regulatory Real Estate Framework9 Legal Real Estate Investment Framework9.1 Introduction9.2 Accessibility9.3 Acquisition Structure9.4 Relevant Legal Aspects for Risk Assessment9.4.1 Property9.4.2 Public law9.4.3 Leases9.5 Acquisition Process10 Tax Aspects of Real Estate Investments in Germany10.1 Overview10.2 Income Tax (Einkommensteuer) and Corporate Income Tax (Körperschaftsteuer)10.2.1 Resident companies and individuals10.2.2 Non-resident companies and individuals10.3 Withholding Tax Regime10.4 Trade Tax (Gewerbesteuer)10.4.1 Extended trade tax deduction (Erweiterte Gewerbesteuerkürzung)10.5 Real Estate Transfer Tax (Grunderwerbsteuer)10.6 Value-added Tax (Umsatzsteuer)10.7 Land Tax (Grundsteuer)10.8 German Anti-hybrid Considerations10.9 Mandatory Reporting of Cross-border Tax Arrangements10.9.1 General remarks10.9.2 Reportable arrangements10.9.3 Reportable persons10.9.4 Procedures and deadlines for reporting10.9.5 Sanctions for breaches of the reporting obligation10.10 Tax Summary11 Real Estate Accounting11.1 Introduction11.2 Components of Accounting and their Functions11.3 Accounting and Valuation Principles11.3.1 Allocation to fixed assets or current assets11.3.2 Acquisition or production costs11.3.3 Depreciation and appreciation11.4 Conclusion and Meaningfulness of the Valuations Bibliography12 Real Estate Investment Trust (REITs) in Germany from the Perspective of Investors12.1 Introduction12.2 Two Major Types of REIT Investor12.2.1 Specialists’ (dedicated real estate investors’) view12.2.2 Generalists’ (equity funds managers’) view12.3 Investors’ View on the German REIT12.3.1 Qualifying activities12.3.2 Residential real estate constructed before 2007 does not qualify for REIT status12.3.3 Trading of properties: Disposals limited to 50 % of the average investment portfolio within five years12.3.4 Gearing: Limited to 45 % of the immovable property (valued at IAS 40 Fair Value Method)12.3.5 Payout ratio12.3.6 Taxation of profit at REIT level12.3.7 Taxation at shareholder level12.3.8 Possible double taxation for investors paying corporation tax12.4 The German REIT Sector12.5 Case Study: Hamborner REIT AG12.5.1 Abstract and outlookBibliography13 ESG in German Real Estate Investments13.1 Political and Regulatory Background13.1.1 Sustainable development goals13.1.2 EU Action Plan on Financing Sustainable Growth13.1.3 The European Green Deal13.1.4 EU Taxonomy Regulation13.1.5 EU Disclosure Regulation13.1.6 German energy regulations13.2 Market Trends and Value Drivers13.2.1 Stakeholders’ demands13.2.2 Market tools and industry initiatives (i.e. voluntary requirements)13.3 Overview of ESG Measurement and Key Performance Indicators (»KPI«)13.3.1 Measurement methodology of ESG criteria13.3.2 Environmental, social and governance criteria13.4 Implementation in Investment Processes (ESG due diligence)13.4.1 Transactions and project development13.4.2 Capex investments13.4.3 Challenges13.4.4 Best practice guidance13.5 Implementation in Contracts and Legal Documentation13.5.1 General considerations13.5.2 Common understanding of the parties13.5.3 Clauses on data exchange13.5.4 Adaptation to new regulatory requirements and/or market trends13.5.5 Recommendations for different life-cycle phases13.6 OutlookIV. Management – Guidelines for Investing in German Real Estate14 Real Estate Mergers & Acquisitions14.1 Real Estate M&A Processes14.1.1 Introduction14.1.2 Auction and off-market process14.2 Best Practices14.2.1 Avoid NDA breaches14.2.2 Understand buy-side transaction costs14.2.3 Pay attention to potential broker fees14.2.4 Understand the transaction and communicate with the sell-side14.2.5 Avoid exiting the process right before submitting indicative offers14.2.6 Stand by your indicative offer14.3 ConclusionBibliography15 Financing Real Estate in Germany15.1 Sources of Capital15.2 Types of Security15.2.1 Land charge and mortgage15.2.2 Other security15.3 Long-term Debt Financing15.3.1 Characteristics15.3.2 Mortgage loans15.3.3 Linear-payback mortgage loan15.3.4 Interest-only loans15.3.5 Building societies15.4 ConclusionBibliography16 Real Estate Valuation in Germany16.1 Introduction16.2 Basis of Valuation16.2.1 Value definition and concept16.2.2 Purpose of valuation16.3 Valuation Framework in Germany16.3.1 Immobilienwertermittlungsverordnung 16.3.2 Committee of valuation experts (Gutachterausschuss für Grundstückswerte, GAA) 16.3.3 Standard land value (Bodenrichtwerte, BRW) 16.3.4 Valuation experts and organizations16.3.5 Valuation process16.3.6 Fundamentals for determining the value of land16.4 Valuation Methodologies16.4.1 Market approach16.4.2 Income approach16.4.3 Cost approach16.4.4 Non-standardized valuation methods16.4.5 Derivation of the market value16.5 Fundamentals for Determining the Mortgage Value16.6 Practical Valuation Aspects to Consider in the Investment Process16.6.1 National vs. international valuation methodologies16.6.2 Use of the valuation report and related requirements16.6.3 Clear definition of valuation subject: asset vs equity16.6.4 Qualifications of the valuer16.6.5 Plausibility of the valuation and reasonable valuation assumptions16.7 ConclusionReal Estate Data and AddressesBibliography17 Financial Due Diligence in the German Real Estate Market17.1 Introduction17.2 Definition, Timing and Goals of FDDs in Real Estate17.3 Context of FDD Services17.3.1 Buy-side financial due diligence17.3.2 Vendor financial due diligence17.3.3 Vendor assistance17.4 Financial Due Diligence in an Asset Deal – Analysis of the Property Net Operating Income17.4.1 Subject and goal of asset deal FDD 17.4.2 Considerations regarding the type of use17.4.3 Assessment of data17.4.4 Analysis of rental income17.4.5 Analysis of service charges and service charge leakage17.4.6 Analysis of quality of earnings17.4.7 NOI projections17.4.8 Obligations in an asset deal17.5 Financial Due Diligence in a Share Deal – Supporting the Deal Considerations and SPA17.5.1 Considerations for real estate deals17.5.2 Assessment of database17.5.3 Review of the balance sheet – quality of net assets17.5.4 Impact of the FDD on the sale and purchase agreement17.6 ConclusionBibliographyThe Editors and Authors

[1]

Hinweis zum Urheberrecht

Haufe Lexware GmbH & Co KG

[4]Bibliographical Information of the German National Library

The German National Library lists this publication in the German National Bibliography. Detailed bibliographical data can be accessed on the internet at http://dnb.dnb.de.

Print:

ISBN 978-3-648-14657-6

Order no: 16078-0002

ePub:

ISBN 978-3-648-14658-3

Order no: 16078-0100

ePDF:

ISBN 978-3-648-14659-0

Order no: 16078-0150

Florian Hackelberg/Dirk Hennig (eds.)

Investing in German Real Estate

1st Edition, February 2021

© 2021 Haufe-Lexware GmbH & Co. KG, Freiburg, Germany

www.haufe.de

[email protected]

Picture Credits: © Eisenhans, Adobe Stock

Product Management: Bettina Noé

Editorial Office/Copyediting: Stephanie Shellabear

[13]Foreword

Dear Reader

As is probably the case for every industry and every country in the world, 2020 has been without doubt an exceptional year for Germany and its real estate industry. With almost 833,000 companies and around 3.3 million employees subject to social security contributions, the real estate industry is not only one of the largest economic sectors in Germany, but also one of the most dynamic growth areas with an increase in employment and value creation. The sector accounts for over 25 per cent of all companies and almost 10 per cent of all employees. With over 600 billion Euros, the real estate industry contributed 19 per cent of total gross value-added in Germany last year. It is thus considerably larger than the automotive industry, whose value-added in 2017 was 156 billion Euros.

The figures make it clear: this sector, which contributes to Germany’s economic performance like no other, is experiencing severe cuts due to the Covid-19 crisis. The virus has hit the industry hard at its core and created a two-tier real estate country. The retail, hotel and catering sectors currently have to survive the heaviest blow in the real economy, and this is directly impacting the real estate companies behind them. The housing sector, on the other hand, has only been marginally affected.

And yet, the existing crisis is also an opportunity. Where gaps have been created in the city centres, we have to think about new ways and concepts for city centre design and real estate use together with the city society. The monostructure of consumption must be broken up – there must be room for other asset classes to prosper alongside retail.

We also have to think much more deeply than before about neighbourhoods – this will create opportunities for many types of use. Because the city of the future is a city of quarters. The way we develop and build cities needs to be rethought. What counts are measures of a modern and contemporary urban development policy. These encompass the inclusion of the neighbourhood approach in energy-saving legislation, the revision of the Technical Instructions on Noise Protection (TA Lärm), an adaptation of the Building Utilization Ordinance (Baunutzungsverordnung), the harmonization of state building codes, the creation of housing for the elderly, the establishment and maintenance of a digital land register and an environmental database, and the development and expansion of cooperative instruments for inner urban development. Modern mobility concepts, climate protection, the preservation of regional identity, building culture and green spaces are also part of a modern neighbourhood assessment.

[14]All of this will play a role in the coming years, when we, ZIA, will stand up for the interests of this sector in politics and the public. All this will help us to emerge from this crisis stronger. And all this will ensure that it will continue to be worthwhile making investments in the German real estate market.

I hope you enjoy reading this book and that it will be an interesting and informative experience.

Yours sincerely

Dr Andreas Mattner

President of the German Property Federation ZIA (Zentraler Immobilien Ausschuss)

[15]Foreword from the Editors

The German real estate market continues to be viewed as one of the most lucrative investment destinations in Europe. It offers great opportunities for investors seeking the security of a European economic powerhouse combined with a real estate market that has both stable core assets and hidden gems for those with a higher risk profile. Although Germany is a popular location among investors because of its stability, it is far from being static. Due to Germany’s federal structure, there is no single predominant major city as, for example, in France with Paris or in the UK with London. What makes the German market interesting is that Berlin, Hamburg, Munich, Dusseldorf, Frankfurt, Cologne and Stuttgart – known as the Big Seven cities – are all compelling places for investment, and there are also many more.

Interest rates have remained low and cities such as Berlin, Munich, Hamburg and Frankfurt have strong local micro-economic climates that have helped ensure stable and attractive yields for investors looking for safe-haven investments. Consequently, both direct and indirect real estate investments in Germany are now more popular than ever. The investment markets have been in global competition for several years, so local market and industry expertise is essential in order to make optimal investment decisions in the race for targets.

Urbanization and internationalization, demographic changes and migratory movements, sustainability and energy transition, technology and digitization, internationalization and competition from new entrants are already having a significant impact on the German real estate markets. Real estate investors, tenants and operators, owners and stakeholders are all driving the change and building on opportunities in one of the world’s strongest, most transparent and safest economies. The power of the German economy and the confidence that exists to solve important issues are the basis of the high rank attained by the German investment market.

Like any other real estate market, the German real estate market has its own dynamics and local regulatory framework that must be understood before investments can be successfully made. Therefore, the aim of this book is to provide a solid overview of the German real estate market and to be the first step towards making a successful investment. In contrast to the market reports, many of which publish key figures every quarter or more, the first two parts of the book will show the general conditions and long-term macroeconomic developments in Germany, along with the real estate trends in the individual real estate submarkets. The third part of the book deals with the regulatory framework of the German real estate market. Particular focus is drawn to the framework from legal, tax and accounting perspectives and with close attention to real estate. Each of these areas is crucial for an international investor to consider [16]when purchasing real estate in Germany and in line with international ESG standards. The last section of this book outlines general procedures and transaction steps when carrying out an investment in the German real estate market. Particular attention is paid to the M&A process as a whole but also to major areas including due diligence, financing and the valuation of an investment. Valuation has been extended to cover regulatory practice concerning tax valuations and mortgage lending valuation. Each of the individual chapters can serve as a practical starting point for delving into the specialist areas and should not, of course, be understood as the final say on the topics.

This book was largely written during the emergence of the Covid-19 pandemic in spring and summer 2020. The uncertain development prospects of the pandemic and its impact on the economy as a whole, and the real estate markets in particular, presented the book’s authors with various challenges. This applies especially to the first two sections of the book, which deal with the general economic conditions and sub-sectors of the German real estate market. The authors have anticipated the subject of Covid-19 and its long-term effects on their respective areas of expertise as far as possible. Conclusive statements on the impact of the Covid-19 crisis on the German markets are not possible at present, though Germany appears to be getting through the crisis comparatively well in international comparison. This is also reflected in the situation on the real estate market. While the shares of the German housing associations have already stabilized beyond pre-crisis levels in autumn 2020, the impact on the commercial sector seems to be more sustainable. Developments such as changing consumer behaviour, flexible working concepts and virtual meeting solutions seem to have been accelerated by the Covid-19 crisis. This is having an impact on the commercial real estate sector and will need to be considered in a successful investment strategy.

Our special thanks go to all the authors who contributed to this book by sharing their knowledge and in particular their practical experiences in real estate investment in Germany. They are all highly recognized specialists in their respective fields and we are particularly grateful to them for taking the time during an exceptional period to make this book happen.

We hope the book will provide you with an exciting read and, in particular, support you with your real estate investment projects.

November 2020

Florian Hackelberg

Dirk Hennig

[17]I. Fundamentals – Basics of the German Real Estate Market

[33]2Real Estate Investment Trends and Strategy

Harald Heim, Benjamin Germin, Benjamin Schrödl

2.1Introduction

2.1.1Germany’s stable investment framework

Germany’s character as an attractive investment market is mainly a function of its Central European location, size, economic strength, stability, and the diversification benefits of its real estate market. For multiple decades, Germany has been among the world’s five largest economies (based on GDP) and is projected by the IMF to retain its position.1 Germany has been the EU’s leading economy both in terms of GDP (approx. 29 %)2 and of population size (approx. 18 %) for over two decades.3 For over 10 years, it has also had one of the EU’s lowest harmonized unemployment rates (approx. 3 %).4 The country’s historically moderate inflation rate has led to consistent price trends.5 For these reasons and particularly for Germany’s resilience during the 2007/2008 financial crisis, it is commonly referred to as Europe’s economic powerhouse. Over the course of the crisis and the years thereafter, Germany reduced its unemployment rate, became the world’s second largest exporter in 2011, and experienced one of the highest GDP per capita growth rates of the industrialized countries. Meanwhile, other countries such as the US have struggled with increasing unemployment.6 Of great importance to real estate investors is Germany’s reliable legal framework, since ownership rights protected by law are a necessary precondition for the acquisition of properties. Germany allows sufficient flexibility in this regard – sole, co- or joint ownership.7 The German economy is embedded in a parliamentary democracy which is characterized by individual liberty and an extensive social system. The Economist Intelligence Unit acknowledges it as a »full democracy« and ranks it among the top 15 countries worldwide, based on categories such as functioning of government, civil liberties, and political participation.8 This leads to a steady and rather predictable political environment. All of these factors working together over a prolonged period of time, combined with a further professionalization of the market in recent years, have [34]earned Germany a reputation as a safe haven for global capital. This is reflected in historically lower but also less volatile returns compared to real estate markets in other European countries.9 Germany’s stable character is well summarized by Just and Maennig as »the embodiment of a core and conservative European market.«10

2.1.2Polycentric real estate markets

Germany’s real estate market is polycentric with a main focus on the »Big Seven« and various promising medium-sized cities. Accordingly, Germany offers more opportunities for geographic diversification than many other European markets. Both urbanization as well as international migration reinforce this development and ensure that diversification effects last and continue to strengthen in the future.11 While other countries such as the UK, France, the Netherlands and Denmark experienced steady price increases from the 1990s until the financial crisis in 2008, prices in Germany remained comparatively constant, mainly due to high real interest rates and low GDP growth. Particularly the search for stability after the financial crisis has sparked new investment in the country.12 During the crisis, the German real estate market was much less adversely affected than the markets in many other countries and even served as a stabilizing force for the domestic economy.13

Fig. 2.1: Eurostat house price index for selected countries14

[35]Over the past decade, investors have increasingly invested in the country as they expect Germany’s real estate prices to increase alongside its positive economic performance. Commercial real estate investment volume in Germany has increased to the highest level in Europe.15 As a result, prices have been rising steadily throughout the past years with yields decreasing accordingly.16 Within the EU, Germany is embedded in a stable, international framework featuring common political institutions and a common market. Noteworthy of the latter is particularly the free movement of goods, people, services and capital.17 Like most other European countries, Germany has also adopted the Euro as its currency. The latter has provided various advantages for the participating countries such as having an internationally respected currency, cheaper/easier financing and lower transaction costs.18 The common currency embedded in the EU framework combined with Germany’s aforementioned economic strength are important factors for its attractiveness towards foreign investments. This development was supported by the European Central Bank’s (ECB) low interest rate strategy. During and following the financial crisis, the ECB decreased the interest rate on main refinancing operations from approx. 4 % to eventually 0 %.19 Since an interest rate of zero alone was an insufficient stimulus, the ECB additionally fuelled economic growth by an unconventional monetary policy measure called quantitative easing (QE). Launched in the summer of 2014, the programme entailed the large-scale purchase of assets (covered bonds, asset-backed securities and public as well as corporate sector securities) for 60 billion EUR per month from March 2015 to December 2017, and 80 billion EUR per month from April 2016 to March 2017. From December 2017, the purchases were gradually phased down until the end of the programme in December 2018.20

Fig. 2.2: Investment in commercial real estate in the top seven German cities21

[36]2.1.3Foreign investment

Germany’s political and regulatory stability combined with its strong economic presence and the global reserve currency, the Euro, are the foundation for its attractiveness as a safe destination for foreign investments. As the German real estate market became more transparent and professional, it became increasingly interesting to foreign investors.22 Throughout the past decade, foreign capital has represented a significant and steady portion of overall investments in German real estate. From approx. 7 billion EUR in 2010, the proportion of foreign investment significantly increased to approx. 30 billion EUR in 2019. The largest investment volume originated from European countries, particularly the UK, France and Austria, followed by North America and, with some distance, Asia and the Middle East.23 Additionally, many conservative German investors with a preference for stable returns, such as insurance firms or pension funds, who had allocated their capital abroad, have re-focused their investment strategies on Germany.24

2.1.4Demand shift towards niche markets

Considering commercial investments in terms of the common risk profiles, there is a clear trend away from core investments towards riskier ones (see section 2.2 for more details on the risk profiles). Major reasons for this shift are megatrends such as e-commerce as part of digitalization and demographic change, a lack of core assets and yield compressions.25 The latter predominantly arise from a discrepancy between rent and price levels. While rents and prices have both been rising over the past decade, stronger demand due to favourable monetary policy (low interest rates, quantitative easing) and Germany’s character as a safe haven in times of uncertainty (e.g. Brexit) have caused a steeper rise in prices. Since prices are in the denominator of the yield equation, higher prices drive down yields, i.e. compress them. Given these yield compressions, investors struggle to meet yield requirements with conventional investments in prime assets (mainly office and residential) in so-called A locations. They increasingly turn towards alternative asset classes such as investments in health care and logistics properties or investments in B and C locations.

[37]

Fig. 2.3: Prime yields of office properties in the top seven German cities26

Real estate focusing on logistics and retirement/assisted living facilities in particular rank among the sectors with the most promising development prospects in the near future.27 Germany’s logistics market is notably strong due to several factors. Globalization and the following rise in e-commerce have and still are creating substantial demand for respective properties. Germany’s well-developed infrastructure, e.g. its lengthy rail and autobahn networks in combination with its location in Central Europe, place it in an excellent position to meet this demand.28

The positive future prospects for retirement/assisted living facilities can mainly be derived from Germany’s ongoing process of demographic change. Due to Germany’s low birth rate (compared to other EU countries) and its increasing life expectancy, the older part of the population is growing proportionally larger. This effect is partially mitigated by immigration, as immigrants tend to be younger than the German population average. Still, as the population ages and large portions of the workforce retire, the number and proportion of care-dependent people increases.29 Out of this megatrend arise a necessity for more care facilities and an opportunity for investors to meet this new demand. It is important for investors to adjust to these structural changes, as part of this new demand is shifted from other asset classes. For example, a decreasing workforce could negatively affect the demand for office properties while simultaneously increasing the demand for health care properties, e.g. long-term care or assisted living facilities.30

[38]A superordinate trend in urban design is the creation of mixed-use urban quarters, compared to a more prevalent differentiation between residential and commercial quarters in the past. Mixed-use urban quarters commonly feature a mix of office, commercial, residential and other usages. Reasons for this development include a combination of the general trend of urbanization combined with the population’s growing interest in individualization. The latter can be efficiently catered to within cities due to a more diversified service offering and a reliable infrastructure. A more diversified city offers people more opportunities for identification with their environment.31 Living in close proximity to their workplace, restaurants, entertainment, schools, day care and other services offers people high flexibility for structuring their day and helps to combine work and private life. This tends to lead to higher satisfaction with their living conditions and can benefit the local economy. Also, mixed-use quarters are more flexible and thus more adjustable to changing future demand and preferences in urban design. Potential side effects within mixed quarters can be increased noise, crowded public transport, pollution and a generally chaotic atmosphere.32 This illustrates a trade-off for residential usage between a calm environment without amenities and a noisier environment including amenities. Obtaining permission for the combination of residential with other usage types can also be problematic with regard to German planning law.33 As described above, part of the rationale for mixed quarters is the identification of the inhabitants with the former. For this, assumptions have to be made about these inhabitants prior to the development. If these assumptions turn out to be flawed or are outdated by the time of construction, this can have far-reaching implications for the investor and prevent the success of the urban quarter. Furthermore, finding tenants who fit the planned framework can be time-consuming and potentially costly for the investor. If buildings remain temporarily empty, this means the respective income could be insufficient to satisfy the interest and principal repayments of the debt assumed for the development.34 Developing mixed-urban quarters is a complex endeavour and investors should pay particular attention to the careful planning of the project. The upside is a quarter with a potentially very attractive quality of living.

In addition to these new fundamental developments, several niche trends can be identified for the near future. The predominant ones are co-working, student apartments, and silver living. Co-working arises as part of a trend called sharing economy. As the name indicates, resources can be efficiently allocated if different market participants share them with each other. The trend is fuelled by the megatrend digitalization as it enables parties to share resources with low transaction costs and to communicate easily. Its origin can also be traced back to increased price sensibility resulting from [39]the 2008 financial crisis and a stronger focus on sustainable, environmental-friendly forms of living in the general population. Co-working spaces first started appearing around 2005 in the United States. They generally provide a common infrastructure/equipment such as internet connection, printers, or coffee makers while the individual working spaces are rented by people from different organizations, start-ups, freelancers, and others. The concept is supposed to spark creativity and collaboration.35

The main cause for the rise in student apartments can be found in the steady increase in students enrolled in German universities/colleges over the course of the past decades. This growth is further illustrated by the increasing percentage of students per birth year. In other words, a larger percentage of the population enrols in college programmes (see Figure 2.4).

Fig. 2.4: Students enrolled in German universities/colleges36

Kipp-Thomas references further contributing factors such as comparatively low tuition fees and increasing international availability due to a higher number of degree programmes taught in English. The growth in student number could partly reverse in the future due to the aforementioned demographic change. Student apartments commonly feature single rooms with rather high-quality furniture. While student apartments are generally the preferred investment of developers, operators, and funds that specialize in this asset class, the recent years have experienced an increased interest from institutional investors, as well. Compared to conventional residential properties, student apartments tend to have higher administration costs and generally higher risk.37

[40]Silver living can be viewed as smaller submarket within health care and thus mainly linked to the reasons described above. It refers to high-quality living for senior citizens, generally in the form of serviced apartments rather than stationary care. The target audience is elderly people who require assistance in their daily lives but still want to continually experience a high standard of living.

2.2Real Estate Investment Strategies

2.2.1Risk profiles with current yield expectations

Real estate investments are commonly categorized according to their inherent risk profile. The four categories core, core plus, value-add and opportunistic as well as their main characteristics are explained in Figure 2.5. They are organized from the lowest to the highest risk level.

CoreCore+Value-addOpportunisticRisk levelLowMediumHighHighTypical locationAA – BB – CB – CProperty qualityHighMediumMedium – LowLowDebt financing0–60 %30–60 %60–70 %60–100 %Return (IRR, cash-on-cash)2.5–3.5 %3.5–6.0 %> 8 %Significantly > 8 %

Tab. 2.1: Real estate investment risk profiles38

In addition to these general categories, risk also tends to vary depending on the stage in the value chain. Investing in developments usually comes with higher risks than investing in existing buildings. It should be noted that different asset classes have unique challenges and opportunities which are followed by different respective risks. It would be fallacious and imprecise to state that asset classes have different levels of risk. A more accurate expression is that they differ in terms of their types of risk. As investors switch between asset classes they do not necessarily increase or decrease their risk exposure; they shift it. Over the last decade, yield compression has forced investors to shift their focus towards riskier and/or alternative strategies. For example, the typically risk-averse institutional investors can no longer solely rely on core investments to meet their return requirements. Hence, alternative strategies may be used to meet the yield expectations. The following section lays out a variety of such strategies. They can be divided into active management and strategies to enter the value chain at an earlier [41]stage. The former aims to actively manage existing properties or portfolios towards value growth; the latter focuses on (re)development or extension potential.

Fig. 2.5: Real estate value chain39

2.2.2Strategies for existing estates

2.2.2.1Single-asset vs portfolio acquisition

Investors can either purchase individual assets or portfolios. Within this framework, the size of the assets and portfolios can vary. This opens up investment volume as a strategic dimension. The potential advantages and disadvantages that come with asset or portfolio acquisitions in the framework of portfolio management and risk-return profiles are evident and by their very nature highly subjective. However, depending on the chosen investment volume, the investor will encounter different types and levels of competition. Private investors tend to stick to smaller investments, usually individual assets, whereas institutional investors tend to focus on larger investments, usually portfolios. These tendencies are illustrated schematically in Figure 2.7. Being aware of the competitor’s field at specific investment volumes may lead to advantages within the acquisition process and it facilitates market entry. Therefore, investors should incorporate this consideration into their acquisition strategy.

Fig. 2.6: Relationship between market participants and investment volumes

[42]2.2.2.2ABBA

The geographical characteristic of a property is mainly expressed in two levels, the macro-location and the micro-location. The former may be the overall city or village, whereas the latter describes the specific neighbourhood or district. Both levels can be designated A–D in terms of their risk profiles for real estate investments based on several scoring criteria, such as population and economic situation (macro) or access to infrastructure (e.g. public transport or autobahns), local supplies, cultural or educational facilities (micro). Core investments usually focus on A-locations in A-cities and thus achieve the lowest possible risk based on this system of risk categorization. The ABBA strategy suggests downgrading one of the two geographical characteristics to level B. This results in investments in either A-locations in B-cities or B-locations in A-cities.40