Admittedly, the headline of the article on the cash roundtable is a bit awkward: “I don’t see any alternatives to productive material assets”. But the somewhat condensed quote from Nico Auel, Managing Director of RWB Partners GmbH, which specializes in private equity funds of funds, sums it up: Investors are currently finding it even more difficult than usual to find the right strategy for their capital investment.
The stock exchanges are shaking, the bond markets are plummeting due to rising interest rates and there is generally great uncertainty about the progress of the Ukraine war and its consequences. The bank account is also not a real option because the high inflation is eroding the value and “custody fees” may still be incurred.
Even the real estate market, which is otherwise seen as a lifeline in times of crisis, is groaning and creaking, especially in new construction. Building materials are scarce and expensive, there is a shortage of skilled workers everywhere and property prices have sometimes reached dizzying heights. Added to this are steeply increased mortgage interest rates. At just under three percent for ten-year loans, they are still low in a long-term comparison, but they have almost tripled since the turn of the year. This increases the monthly burden on buyers, restricts their financial leeway and is likely to throw some project developer calculations overboard. We can already hear that new construction projects are being postponed or scrapped altogether.
Housing construction has already stalled in 2021. According to the Federal Statistical Office, building permits were issued for a good 380,000 apartments last year, meaning that the target set by politicians of 400,000 new apartments per year appears to have almost been achieved. However, only around 293,000 apartments were completed in 2021, 4.2 percent fewer than in the previous year.
The backlog of apartments that have been approved but have not yet been completed has therefore continued to grow strongly. With almost 850,000 apartments not yet built, it has now reached its highest level since 1996. Nobody knows how many of these will eventually be built. However, the rise in interest rates will certainly not boost new construction. The number of new building permits issued in the first quarter of 2022 has already fallen by 3.6 percent compared to the same period last year.
However, the higher borrowing costs are also an important factor for existing properties. “Our investors experienced a small ‘interest rate shock’ – without a doubt,” says Sebastian Engel, Chief Sales Officer (CSO) of Alpha Real Estate GmbH, at the cash roundtable. Andreas Schrobback, founder and CEO of the AS Group Holding, also confirms: “We also noticed a certain reluctance and shock rigidity, a wait-and-see attitude, similar to that at the beginning of the corona pandemic, among private buyers.”
Both companies offer condominiums in existing properties as capital investments, the AS group of companies also as part of the refurbishment of listed properties with high tax advantages. However, both Schrobback and Engel point out that investors – unlike owner-occupiers – can deduct the interest from taxes. This significantly cushions the consequences of the rise in interest rates. This is also offset by the high rate of inflation, which will sooner or later also be reflected in rents and purchase prices. Even if a drop in prices is to be expected in some regions – especially in the overheated hotspots – and for some types of real estate: most of these properties are likely to remain so for a long time due to inflation, which according to most forecasts will remain more or less pronounced will quickly grow back to its original value and may even achieve higher returns than originally assumed through an increase in rent. In addition, apartments in many parts of Germany are not only generally scarce because of the misery in new construction.
There is also a high demand for some other types of use, such as care properties, even if the returns may not skyrocket at first. Rauno Gierig, CSO of Verifort Capital, which is active in this segment, emphasizes that an investment with a return of 3.5 or four percent is now great. “I say to customers: Log in for the next ten years. It doesn’t get any better,” he says. “And if it should get better, don’t fret. You have a material value and you might even be able to get a better sale price when you exit, but you definitely have a stable building block over the years because real estate is needed and the cash flow is flowing,” Gierig’s appeal continues.
Verifort Capital recently launched a healthcare fund and has since placed it. The fund properties are rented on a long-term basis. Investors may initially be largely indifferent to temporary fluctuations in value, provided the properties are not sold. Real estate investors should not plan this before the end of ten years anyway because of the additional purchase costs and for tax reasons. So solidly rented properties are definitely suitable for bridging a possible weak phase of the market.
In general, however, a prerequisite for the success of a real estate investment is that the space is needed and in demand. This is certainly no longer a matter of course everywhere in Germany, but what counts is the right type of use in the right place with the right environment. In order to assess this, expert management, which not only manages the objects but also actively improves them, is becoming increasingly important. This also includes a criterion that is becoming more and more important, not only because of the exploding energy prices: the energetic status of the building.
All participants in the roundtable emphasize the great importance of the topic of ESG, i.e. the consideration of environmental concerns (environment), social standards (social) and good corporate management (governance). In the case of real estate, the focus is usually on the energy balance of the building and, if necessary, its improvement. It is not only decisive in relation to the amount of the enforceable cold rent, but can also make a significant difference when the property is later sold.
But ESG is also playing an increasingly important role in corporate investments, reports Nico Auel. Not only because RWB pays attention to it, but also because the ESG pressure on the target funds is growing on the part of the large investors investing in parallel. For private investors, however, the focus is more on inflation. They deal with the topic on a daily basis and they also think about what it means for investing, says Auel. “This is much more specific than, for example, the topic of ESG, where it often quickly becomes vague.”
In terms of inflation, companies that offer products or services that are in demand and are as unique as possible are particularly well positioned, so that they can pass on cost increases to their customers in the form of higher prices. The aim is to identify such companies and – as is generally the case in private equity – to support them in increasing their value by expanding the business and/or reducing costs. Qualified management – at the level of the fund of funds, the target fund and the company itself – is therefore also essential in this case.
“There may also be uncertainties here and there with real assets,” says Auel. “But I don’t see any alternative products that would be more suitable now and therefore divert capital away from company investments or other productive assets,” is the full quote that forms the basis of the roundtable headline. The emphasis is therefore not only on “tangible assets” but also on “productive”.
This eliminates alternatives that neither generate ongoing income nor can their value be increased through active management. These include assets such as gold or even crypto “currencies” such as bitcoin, which are often considered to be suitable as “stores of value” despite their considerable volatility. Such investments can only be successful if the market price of the unchanged asset – without the influence of the investor – remains at least stable and others are willing to pay more for it one day than you do. This is more like a bet than an investment.
This is different with productive material assets such as real estate or company investments. They have value because they or their products are needed and used, they generate revenue and have value that can be increased through active management. Even if the general environment develops negatively for a while, the individual assets can be quite successful with qualified management.
All four roundtable participants also emphasize the great importance of the sales partners, who, especially in the current phase, have to explain the connections to the customers and show them solutions. But read for yourself: The detailed summary of the roundtable can be found here.