Focusing on more than returns

How boots-on-the-ground data analysis can provide a competitive edge for real estate investors

The real estate cycle that began in Germany in 2009 continues to present major challenges to investors. The supply of core properties is becoming scarce, prices have reached new highs, and some returns have dropped sharply over the past few years. Add geopolitical uncertainties, interest rates that will rise in the medium to long term, and declining future liquidity, and it is possible that these influences may cause substantial increases in volatility in every asset class.

Choosing by sector

With market volatility increasing, Charles Tarrière, manager of the PATRIZIA TransEuropean Fund, recommends that “investors should focus on more than just returns – they should keep an eye on additional factors, especially a building’s long-term use options and rental income”.

“Rental apartments, such as student dormitories and nursing homes, can generate predictable, stable revenues”, Tarrière points out. Similar considerations apply to hotels and high-quality logistics properties, which are in high demand from tenants in the logistics industry because of the burgeoning e-commerce market.

“Investors should focus on more than just returns – they should keep an eye on additional factors, especially a building’s long-term use options.”

Charles Tarrière, Fund Manager PATRIZIA TransEuropean Funds, PATRIZIA Immobilien AG

Helpful market research

How can investors track down the locations with the greatest long-term promise? Tarrière mentions one example: “We studied the Berlin real estate market over several years and uncovered interesting details that no other data source could have provided”.

The PATRIZIA researchers discovered that the districts of Berlin-Mitte, Kreuzberg, and Friedrichshain, where technology firms and start-ups have settled, offer above-average appeal as office locations. Investors in these districts can benefit from the appeal that these locations offer for well-established firms wanting to be close to Berlin’s hive of technology and start-up activity.

The new data pools enabled PATRIZIA to buy office properties in selected areas of the city. The research effort has paid off: Office rents have doubled at some locations in just a few years, and in some cases, they have even trebled.

“When we began our research, we were pioneers at seeking out this information in the real estate sector,” Tarrière recalls. “Now we’re following up our experience in Berlin by taking a similar approach in other European cities.”

Each district is scrutinised in detail, whether it is in Amsterdam, Helsinki, Paris, or any other metropolitan region. What trends and business sectors are present in individual districts or streets? How are rents and returns evolving there? What parts of town are becoming home to many start-ups and established companies?

Build-to-core strategies may also be advisable as an alternative to investing in high-priced top locations: for example, in connection with urban renewal schemes. Investors can buy into targets like renovation and revitalization projects that can be upgraded over time to core or core-plus properties.

One example of a value-add strategy is investment in office complexes like the Apex House in Edinburgh, Scotland, which PATRIZIA bought at the beginning of 2018. But even in a top location like Milan, a value-add strategy can provide leverage for above-average value appreciation. That is why PATRIZIA acquired the Palazzo Montedoria office building at the end of 2018.

Investors from Asia

Demand in Germany and other European markets is being sustained by institutional investors from Asia. South Korea’s ABL Life Insurance, for example, intends to build its investments in Europe and has set its sights on countries with good credit ratings and stable political conditions. Its current target markets include Austria, Norway, Sweden, and the Czech Republic.


Photo: Mauritius Images