In light of the worsening situation in the German (residential) real estate market, Claudia Reich Floyd concludes: “German real estate companies have unfortunately learned nothing from the Global Financial Crisis and have taken on too much debt.”
The portfolio manager and head of the German office of Hazelview Investments, a global alternative investment manager focused on real estate, recognizes an overall shortage of housing in Europe at too high a cost, which will be exacerbated by increasing ESG requirements. Still, Reich Floyd sees an increased risk of default in Europe only among smaller companies – so far, at least.
“Inventory gets pricing power!”
Conversely, this means for the real estate expert: “Inventory gets pricing power!” Because high inflation is reflected in rental prices. This bodes well for the segment of listed real estate investment trusts (REITs): Reich Floyd and her colleagues expect a total return of up to 36.6 percent for global REITs over the next two years. In the “worst case scenario,” they expect “only” just under 9 percent. This figure is derived from an initial return of more than 6 percent at today’s price of the Hazelview portfolio and an increase in value of only 3 percent from rent increases.
According to Hazelview Investment’s latest calculations (as of Sept. 5, 2023), this appreciation depends largely on the property type: currently, it varies from 2.4 percent annually for local shopping centers to as much as 14.4 percent for hotels. “That’s higher than was expected,” admits Reich Floyd, but attributes this to a distorted perception related to vacant office properties, particularly in the United States.
Special sectors in the real estate market with higher growth
“However, the real estate equity sector has become more differentiated over the past 20 years, producing more specialty sectors with structural growth,” the expert says. Among these sectors, she counts datacentres, for which there is growing corporate demand, as well as student housing and self-storage – two real estate concepts that thrive on the principle of economy of scale. Mobile towers and logistics properties also continue to offer selectively high growth potential, she said. “Our job is to figure out which companies can assert their pricing power in these sectors.”
You can find Hazelview’s latest presentation in German here (“Where are we now?”, September 2023).
Hazelview Investments has been an active investor, owner and manager of global real estate investments since 1999, dedicated to creating value for people and places. Hazelview employs a global investment and asset management team of more than 90 people in its offices in Toronto, New York, Hong Kong and Hamburg, and manages CAD 12.3 billion (approximately EUR 8.5 billion, as of June 30, 2023) in real estate assets. For more information, please visit the website: www.hazelview.com.
