The old adage tells us the three most important things in real estate are “Location, location, location”. Of course, there’s truth in that – but investment is rarely that simple. We asked three PATRIZIA experts to break down real estate investment into its vital components.
1. Understand your data
Good decisions are based on thorough research. But although there’s lots of data available, Dr Marcus Cieleback, Head of Research at PATRIZIA, says: “Using research to its full potential is about understanding the story behind the numbers.” How you interpret data in respect to your strategy is key.
Consider this example from PATRIZIA’s Insight report on European Residential Markets: The UN estimates that the median age rose from 28.9 years in 1950 to 41.7 in 2015 and it is expected to rise further in coming decade, to more than 46 by 2050. Seven of the world’s ten oldest populations are in Europe. Stopping the analysis at this point would lead to the following conclusion for a residential investor: as the total population and its age structure are important demand drivers, the impact of both developments must be taken into account. A decline in the younger population would weaken demand for student housing, while growth in the older population would spur demand for retirement housing or care homes. However, this conclusion on its own would mislead investors. Simply focusing on senior homes or age care properties would lead to missed opportunities and higher risks, because the spatial distribution of the population must be considered as well.
Long-term-oriented residential investors must focus closely on the location of retirement housing or care homes, because in many rural areas, the strong demand we see today will disappear over the coming 25 years. So the risks associated with these assets will rise over time, while their tradability will decline, and that can result in a loss of value. Student housing, on the other hand, generally offers interesting investment opportunities: the ongoing urbanisation contributes to a housing shortage in urban areas, driving many students into student housing. As a consequence, depending on the situation on the free rental market, student housing might be a profitable niche for the coming 15-20 years.
2. Identify the perfect property
Naturally, location is a central factor. “Successful investments, especially in residential, can only happen in places where residents are and where they’re going to stay long term – i.e. growing urban centres,” explains Christoph Langmack, PATRIZIA’s Head of Acquisitions Residential. “It’s important to look closely, because cities don’t develop homogenously – some areas perform better than others.”
“Successful investments, especially in residential, can only happen in places where residents are and where they’re going to stay long term.”
Christoph Langmack, Head of Acquisitions Residential at PATRIZIA
Location doesn’t stand alone either. It’s linked to other factors like quality and structure. Langmack explains the type of questions investors need to ask: “Does the quality of the building – or portfolio, such as the latest acquisition of a residential portfolio comprising more than 800 apartments – match the location? Are the apartments of a size that’s in demand in this location? Does the building offer facilities that are in demand in this location?”
Finally, the thoroughness of the property evaluation is vital. “What is the building stock, what measures are required to maintain it? Are there taxation issues – especially with large portfolio transactions? Legal issues? These are often things you won’t find with just a cursory inspection.”
3. Grow your investment
Managing your asset intelligently adds significant value to your investment. Erik Beets, Group Head of Asset Management at PATRIZIA, explains that local, specialised expertise is indispensable. “Our [local] people know the markets, the law and regulations, the business partners, and understand how the market moves,” Beets says. “You have to be flexible and proactive to react to the market circumstances or issues you run into, but also to make sure that you’re taking advantage of everything you can.”
This may involve finding ways to improve the investment performance by, for example, dividing up the sale of ownership rights for individual apartments, or the purchase and sale of certain parts of the portfolio. The quality of the asset may be improved through sustainability projects and a more sustainable overall portfolio – by achieving higher energy classifications, for example. It pays to keep up to date with the latest innovations. Digitalisation and big data in particular offer new and exciting ways to optimise asset management. As Beets says: “The ability to learn from data is absolutely a game changer.”