Something is happening on the real estate market: Years of price increases have come to an end since interest rates have risen. Professional investors expect house prices to fall. What can you learn from them?
“Many investors are currently holding back,” says Christoph Haub from the consulting firm Ernst & Young Real Estate, “they are waiting for prices to fall further.” The low point is expected next year. Haub appeared at a virtual press conference on Wednesday afternoon, at which a “trend barometer” on real estate investments by insurance companies, pension funds and pension schemes was presented.
energy renovation is trump
“Energy efficiency is the top issue. It dominates everything,” says real estate expert Haub. “Most companies assume that only sustainable real estate will prevail.” Almost all of the 32 companies surveyed have analyzed their houses and made far-reaching renovation plans. Most investors renovate themselves. “If you put these properties on the market, there are disproportionate discounts,” reports the consultant.
Renovating poorly insulated houses yourself is therefore more economical than selling them. Why are energy renovations taking so long? “You do it best when you have a vacancy,” says Haub, speaking of “enormous investments.”
A billion dollar business
While professionals spent 114 billion euros on real estate in 2021, it was only 67 billion last year. Large investors determine the market: real estate funds, pension funds, pension schemes and insurance companies. The super-rich, who have their money managed by their own “family offices” or entrust it to private equity funds, also play a role.
Investors from the pension scheme are the only professionals who are currently still buying in Germany. Thanks to the long periods of their investments, it is not so important to reach the “absolute low point” – especially since that is only clear in retrospect, when prices rise again. “A lot of objects are viewed and analyzed, but only very few transactions are carried out,” says Haub, describing the approach taken by insurers. Real estate funds and the super-rich behaved differently: “They say, ‘We’re not going to grab a falling sword. We’re going to wait until the market is down’.”
Interest in offices is falling among those who are still buying. Investments in wind parks and other real estate for the production of renewable energy, on the other hand, have become attractive. Residential real estate in Germany is still important for professionals. However, they are slowly becoming less attractive, and Germany as a whole is also losing as a location, reports the real estate subsidiary of the auditing company Ernst & Young.
Good neighborhoods
“The social aspect comes more to the fore,” says consultant Haub. Residential real estate would be sought in “city districts that basically work well”. These include a mix of different population groups, good transport links, kindergartens, schools and businesses. “The real estate should provide a long-term contribution to value,” the consultant describes the income expectations of professionals, “so the social aspect plays a very important role.”
Billions in income from life insurance and pension plans must be invested as solidly as possible. Insurance companies, pension schemes and pension funds will later use the earnings to pay the payments to their customers, which can now be calculated. It is therefore a matter of very long periods of time. “People want to avoid investing in real estate that will only function well for 20 years,” summarizes Haub.
Falling returns, rising risks
While insurance companies and pension providers still generated a 4.5 percent return on real estate last year, they are expecting only 3.8 percent this year. “It’s a landslide,” comments the real estate expert. “In Germany, people assume that the market will no longer increase in value.” As yields converge, investors would increasingly switch to lower-risk assets such as fixed income securities.
Many insurance companies not only invest in their own houses, but also in real estate funds. Their transparency is often low; Investors would find out little about the condition of the fund properties. Since funds regularly invest not only collected money, but also bank loans, the risk for investors increases. As interest rates rise, expiring loans become expensive to renew, which can shatter a previously encouraging return outlook.