Rethinking a niche market

Less fluctuation equals fewer voids: micro-apartment offerings designed for longer stays are weathering the crisis better. This niche market remains popular with investors. By Christine Mattauch

A welcome bit of good news amidst the coronavirus lockdown: Stayery reported the signing of a lease in Mönchengladbach. The Cologne-based company plans to offer 53 microapartments for business travellers on Kapuzinerplatz square in the city centre. “Great locations don’t come along that often,” says Stayery managing director Hannibal DuMont Schütte. He’s convinced that “demand for the product will bounce back in the medium term.” Is it really business as usual, in the middle of a crisis?

First acid test makes operators and investors more cautious

Micro-living is seen as the real estate industry’s answer to increasingly flexible working and living arrangements. Initially regarded with mistrust, the segment quickly became an investor favourite. The backdrop of the coronavirus crisis means it’s now facing its first acid test – and has proved remarkably resilient. The slump in demand has been less dramatic than feared, with many operators sticking to their expansion plans and investor interest holding up well. Some new concepts have also emerged. Having said that, it’s apparent that operators and investors are now more cautious. The pandemic has shown just how vulnerable some propositions are. From temporary accommodation for young professionals to student rooms and serviced apartments for business travellers, the segment is extremely varied. The consequences of Covid-19 differ accordingly. The general rule is that less fluctuation equates to fewer voids. Leases on small, furnished apartments for commuters, for example, who tend to use them as second homes, have rarely been terminated. “Players catering for long-stay needs have been better placed to weather the crisis,” confirms Andreas Polter, Head of Residential Advisory at Cushman & Wakefield in Berlin. The main impact of lockdown was on short stays. Stayery, founded in 2016, saw occupancy rates fall first to 50 percent and then to below 40 percent in its Berlin pilot project, while its Bielefeld site, which opened at the beginning of the year, had fewer than one in four beds occupied at times. “Nevertheless, we navigated the crisis better than the hotel industry,” says DuMont Schütte, looking for positives. He sought to cushion the effects by listing the apartments on the Immoscout website and offering them as an alternative to working from home, but “that didn’t make much difference in the end.” The attempt to focus more on the long-stay sector proved more successful, aided by a special three-month deal at a discounted rate of €1,000. Faced with the same difficulties, some providers resorted to desperate – and damaging – measures in their bids to be more flexible. 

Henrik von Bothmer, Senior Investment Manager Micro-Living at Union Investment, notes that companies are invading each other’s territory. “Hotels are selling their empty rooms to students, and serviced apartment providers are suddenly selling their rooms to traditional hotel guests.” Hotel chain 25hours, for example, offered students temporary accommodation at a discount price of €999. Von Bothmer: “This behaviour is driven by necessity and hopefully won’t last.”

There was also a slump in the student accommodation market, although it was less drastic than first feared. “Our tenancy agreements with students generally continued as usual,” says Reiner Nittka, board spokesman for GBI Unternehmensgruppe, which has a presence in the micro segment via its Smartments brand. Nittka puts occupancy of its “Smartments Student” product at 90 to 95 percent in the summer semester. Amos Engelhardt, managing director of Aalen-based i Live Group, likewise reports good occupancy rates. On the one hand, bookings from overseas students were down, “but demand from German students who were unable to spend their planned year abroad increased accordingly.” 

But what does the future hold? “It’s a huge challenge for this relatively new industry to adapt to changing demand,” says Polter. In Germany, the start of the university term has been pushed back to November; some seminars will be taking place online. Will the recession and online teaching mean that students end up living at home with their parents for longer? How many international students can be expected? They currently account for around 13 percent of students at German universities and Berlin-based rating agency Scope doesn’t anticipate the situation returning to normal until the 2021/22 winter semester.

Student numbers have risen considerably after previous economic crises

Scope believes that the longer-term prospects are positive, however: “Historically, the number of students has always risen considerably after economic crises, with employees eager to improve their quali- fications and parents investing more in their children’s future.” The i Live Group, whose properties are targeted at students as well as young professionals and commuters, with room types ranging from Comfort to Penthouse, sees itself in a comparatively strong position. Amos Engelhardt comments: “If fewer students come, we’ll simply take more professionals.” In a city like Cologne, he could “let each apartment three times over.” Despite this, for the first time i Live will not be raising rents at the start of the winter semester. With transaction volumes in Germany totalling €1 billion in 2019, micro-living is still a niche market for investors, albeit a very popular one. The fundamentals are unlikely to change any time soon. “The world may have been transformed by coronavirus, but there’s still a shortage of one- and two-room apartments in major cities,” says von Bothmer.

For his part, Ulrich Haeselbarth, Head of Investment at Hansemerkur Grundvermögen (HMG), believes that “flexibility will remain a key issue when it comes to demand for residential space.” HMG, which has acquired around 1,300 micro-living units for the various special real estate funds it manages, still has faith in the sector’s prospects, although Haeselbarth expects “a degree of consolidation”. Union Investment recently secured two micro-living properties in Hamburg and Düsseldorf and according to von Bothmer is on the lookout for further opportunities: “We’re ready and willing to make acquisitions at any time if the price is right.”

I’m convinced that demand for the product will bounce back in the medium term.
Hannibal DuMont Schütte Stayery managing director

Investor interest remains high, with some players still pursuing expansion

Von Bothmer notes that in the past, the rush to expand meant that not all companies took enough pains to cover their costs on individual investments and leases, especially in the serviced apartment segment. He takes the view that “some brands and operators won’t survive.” That is likely to be one reason why many investors have adopted a wait-and-see approach in recent months. Felix Embacher, Head of Master Planning and Specialist Accommodation at Munich-based research company Bulwiengesa, has seen comparatively few deals taking place. “And most of those were negotiated back when the world was still normal,” he says. Greater caution and closer scrutiny are exactly what operators like Stayery are planning. “In the future, we’ll want to double-check that location and demand are both right,” says DuMont Schütte. On the whole, however, he remains optimistic. Occupancy has been rising since the end of lockdown. Stayery properties are set to open in Frankfurt and Cologne in 2021, to be joined by Mönchengladbach and Dresden the following year. The company’s largest property to date, with 153 apartments, is scheduled to open in the Stuttgart area in 2023. Like with many others in the industry, digital transformation is high on his agenda – contactless checking in and out could soon be standard practice. “Those who were expanding are still expanding,” says market expert Polter. That includes the i Live Group. Engelhardt intends to double the number of micro-apartments in the portfolio from the current total of around 4,000 and to work with Commerz Real to complete Germany’s largest ever micro-apartment complex in Frankfurt, as planned, which will offer more than 1,100 units.

The Smartments Business Building in Munich was opened in 2016 and houses 162 serviced apartments. It was named after Kurt Landauer, a German businessman and soccer official.
Pamela Ossola

A balance between community experience and pandemic-proofing

What’s more, the trained architect hasn’t given up on his dream of a cosmos that combines residential, working and leisure space. He believes that “the desire for community hasn’t been diminished by coronavirus,” it’s just got more difficult to achieve. Community apps are currently popular, offering at least a virtual community experience in these times of social distancing. By contrast, developer GBI is taking a very different line by launching a new long-stay budget brand that is designed for space efficiency, offers a fully digital service and is located outside expensive city centres but benefits from good local transport links. The chosen name is Smartments Eco. “We’ve been working on this concept for quite some time. Coronavirus gave us the final push,” says Nittka. No reception, hardly any communal areas; this eco range is not just pandemic-proof, with a monthly rent of around €650 it’s also positioned at a price point significantly below the Smartments Business range. Further expansion in the budget sector is a smart move because higher-priced segments are already viewed as overcrowded and experience shows that many companies slash their travel budgets in a recession. The pilot project is planned for Frankfurt, with construction due to start this year. 

Cologne-based company Pantera, meanwhile, in which French property developer Nexity recently acquired a stake, has come up with a proposition for the elderly who feel they have too much space but aren’t ready to move into a retirement home. Pantera is developing small, centrally located apartments for them, barrier-free and with a menu of optional services such as shopping and cleaning. The first property will be in Ratingen, in Germany’s Rhein-Ruhr region, and is currently at the planning stage. The scheme will provide 90 apartments. “Our experience of constructing similar microapartments will be hugely helpful,” says Pantera CEO Michael Ries. The company has developed some 2,500 units over recent years, aimed at business travellers and students. At the same time, there’s no shortage of newcomers to the market with copycat concepts, often involving risky strategies based on excessive rents, as consultancies are finding. “We spend a lot of time urging realism and looking for alternatives,” says Felix Embacher of Bulwiengesa. The market will continue to offer opportunities going forward, but the right expertise and approach are essential.

By Christine Mattauch

Title image: iLive Group GmbH (Simulation)

More about these topics: