What asset classes still make any sense
Author Prof. Felix Schindler, Head of Research der Warburg-HIH Invest Real Estate GmbH
 

Real estate is becoming more and more expensive, and the initial yields continue to decline – this is a rough summary of the current development on real estate markets. Some sceptics are already talking about a bubble and are already making comparisons with 2007. However, they are acting prematurely because a prudent investment strategy taking account of several key factors continues to be beneficial.

And indeed, there is an essential difference between the current development and the situation in the years 2007-2008 – from the point of view of investors and also from the point of view of the market. However, a differentiated view of the markets and overall conditions is absolutely essential in order, in the current market climate, to identify sustainable and valuable real estate investments, correctly assess yield opportunities and simultaneously to mitigate risks or to achieve a good diversification of risk at the portfolio level.

Particularly in comparison with investments on the bond markets, which account for a dominant percentage of the portfolios of many institutional investors, real estate, even in the current situation, continues to offer an attractive yield level which differs considerably from the corresponding constellation in 2007. Whereas in 2007 the yield spreads between the initial yields on the real estate markets and ten-year government bonds were virtually zero and in certain cases were negative, and whereas real estate was thus classified by investors as being of a lower risk than government bonds, we are currently seeing yield spreads at all-time highs. Although initial yields during the past 12 months have again declined considerably, particularly at the TOP-7 German locations, the yield spread with regard to German government bonds has widened further in the same period. On the investment markets, this development has been accompanied by a significant decline in the overall volume of transactions despite the strong demand for real estate. This shows that investors still continue to be very risk-aware and, despite the shortage of supply in the core segment and also despite the yield and investment pressure, investors are only willing to a limited extent to accept higher levels of risk with regard to the property quality, existing tenants as well as the micro and macro locations.

Despite the high level of purchase prices in the core segment, risk-aware and security-oriented investors should continue to follow this strategy in order to achieve capital growth and sustainable cash flows which are as stable as possible from the real estate portfolio in the long term. No compromises should be accepted particularly with regard to the macro and micro location of the investment property. With regard to the macro location, it is particularly important to focus on regions and locations with a strong economy and which have positive economic and demographic growth prospects and overall conditions. A factor which is equally important for a successful investment in real estate is concentration on central, established and sustainable micro locations at the specific location as well as professional management of the property over the entire life cycle in order to ensure that property-specific risks are minimised and recognised at an early stage and also to take advantage of opportunities.

At the fund and portfolio level, the aim is to consistently implement the investor’s own strategy and to adequately diversify the portfolio in order to ensure that unsystematic risks are minimised as far as possible and also to take advantage of opportunities which become available. In particular, particularly in the current market phase, investors should focus on diversification across locations and types of use as well as broad diversification with regard to durations of tenancy agreements as well as the sector affiliation of the tenants and their creditworthiness. At the property level, it is very important to ensure that the property is sufficiently suitable for alternative uses, and it is also important to ensure that the areas of the property can be divided efficiently. A particularly crucial factor of success has proved to be diversification in relation to the investment timings, in other words, it is important to ensure that the available funds are continuously invested over the entire cycle.

Within the office segment, existing properties in the second rental cycle in established office locations at locations featuring strong growth promise to be an attractive addition to investments in the TOP-7 locations in the current market phase. These properties frequently feature a sustainable rent and frequently also have a stable tenant with a strong affinity to the location. At the same time, these properties are only subject to a limited extent to competition posed by new buildings and project developments because, firstly, the sustainable rents at these locations frequently hardly justify current new building prices and, secondly, the development of residential projects is much more attractive.

Asset Management needs innovation:

Bring on the central database of insti-tutional real estate holdings in Germany!
Author Ingo Hartlief, Stellvertretender Sprecher der Geschäftsführung
CORPUS SIREO Holding GmbH
 

At the beginning of the process of working together with an investor, the asset manager is faced with the task of transferring newly acquired portfolios into existing systems or of creating new solutions for the management of such portfolios. However, would it not be better for investors and asset managers to risk a radical step in terms of data management in order to concentrate fully on the real estate portfolio right from the very beginning?

CORPUS SIREO has in recent years managed dozens of portfolios of domestic and international investors in Germany. Our experience has shown that, in the first few weeks after being engaged by the owner or another service provider, there is a considerable volume of work for transferring, processing and properly implementing the basic data or for transferring documents. One of the reasons for this situation are different software solutions for the management and customising of real estate holdings, hardly permitting any interchange of data. A further aspect is that different definitions or data and documents which are missing or which have been processed differently first have to be harmonised.

However, a consistent joint procedure could considerably reduce the volume of such work. Why would it therefore not be possible to create a central database for properties of institutional investors based in Germany, containing the master data and performance data as well as the documents relating to the portfolio and property history? The trick is to ensure that the relevant asset manager is approved for the portfolio to be managed, and has immediate access to the relevant data without having to become involved in the lengthy implementation process. Responsibility for continuously updating the data now lies with the new asset manager.

The way to such a database is certainly challenging. However, it eventually results mainly in advantages – also for the investor:

• Initially, investors have to be sufficiently confident to transfer sensitive data to a central data service provider. However, portfolio management systems and also CRM systems nowadays involve cloud-based solutions, and customers transfer confidential data and business relations to the corresponding service provider.
• The question regarding the operator of the central database is somewhat more complex: Should this be a commercial provider (see model IPD/MSCI for measuring the performance of institutional investors) or an association (ZIA transaction database)? A sector initiative of investors and asset managers is required in this respect.
• The one-off costs involved in processing the data in accordance with uniform standards must also not be underestimated. It is also necessary to create common acceptance of the definitions specified by the operator of the central database as a result of liaison with investors, asset managers and software providers.

Once the above issues have been processed, the investors will benefit from high quality or even greater quality of the asset management services. There will be an increase in the level of competition between the asset managers, because the process of changing service provider will become easier should the services of one service provider no longer be appropriate. Particularly as, in the case of a central database, a situation of dependency as a result of individualised systems and “specialist knowledge” is virtually no longer possible. Moreover, in view of the considerable reduction in the volume of implementation work, the asset manager is able to concentrate much more quickly on his core task, namely that of managing the real estate portfolio.