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Der Immobilienbrief, December 5, 2010

Column: New Approaches: The Market has more to Offer than Office and Retail

Bärbel Schomberg, Schomberg & Co. Real Estate Consulting GmbH

The collapse of Lehman marked the onset of a global crisis that impacted not just the entire financial industry but also the real estate markets, and directly so. Today, two years on, word has it that the investors have learned from the disaster and from past mistakes. There has been a paradigmatic shift, they say, and it has affected the investment behaviour of professional investors, too. But how credible are such assurances?

The financial sector – except for deals of very large volume - is beginning to recover by and by. Indeed, in medium- and small-scale real estate financing we are seeing the return of a desire for the highest possible gearing ratio so as to maximise the leverage effect. The low interest rates are already causing the market to heat up again fast. On the investor side, the low interest environment in alternative investments – rather unattractive for investors - has inundated real estate markets with liquidity.

It comes as no surprise therefore that the majority of market players have started chasing the end of the rainbow again: Investing in as-new office and retail properties in prime locations, let long-term to high-net-worth companies, seems to offer higher returns than the bond market while promising the same degree of safety. It is exactly the mismatched, price-driving relation between supply and demand that we have already seen so much of.

So can you think of one good reason to keep drifting with the mainstream? Why not take a new path, and try an innovative approach? In Germany, though, new real estate concepts always have to overcome a formidable opposition before meeting with a high level of acceptance. And this even if they have already proven to be successful elsewhere in the world. Just take the example of "student living." In the United States, its stable current revenues have made this segment an integral part of the real estate portfolios of institutional investors for many years now. Nonetheless the initial, reflex-like response in Germany to this supposedly well-known type of use range from "specialised real estate or operator real estate" to the categorisation as "non-fungible investment, difficult to manage, exotic and unsuitable for institutional investors."

And this even though the demand for student housing is greater than ever before. The Statistical Office of Hesse expects a total of around 196,000 students to enrol for the 2010/2011 winter semester in that German state alone. Nationwide, the number of students set a new record at roughly 2,120,000 during the 2009/2010 winter semester, according to the Federal Statistical Office. A decade ago, this number still stood at 1,800,000 students. Given the need for high-skilled specialists, the figure is likely to remain stable in the near future or indeed to go up.

Let’s assume for the sake of the argument that "student housing," rather than referring to dorms, stands for a cutting-edge approach to high-end living on an international level, and that a plausible concept for this approach is readily available: modern living in a boarding-house style that orients itself to the needs of today’s Internet generation. Would market players, with this concept in place, be willing to seriously consider the new product, or would they still cling to their mental patterns? With the Lehman crash just two years behind us, it is too early to provide a definitive answer to this question in regard to Germany. But investors who refuse to accept prices that are dictated by supply and demand in the mainstream segments of office and retail real estate will sooner or later have to open their minds to innovative ideas and give currency to new trends that can only help to enrich our real estate investment market.


The PDF file for this article is available in German, too.