The asset class and location clearly ticked all the boxes: at the end of June, Nuveen Real Estate bought the City Park warehouse complex in the Liesing district of Vienna for €65 million. It was the US investment company’s first acquisition in Austria as part of its European Cities strategy, which is focused on particularly resilient locations. Fund manager Liz Sworn praised the “exciting opportunity” that the Austrian capital offers for investment.

Exciting, really? Vienna? That shows how much perceptions have changed during the coronavirus crisis. Solid, reliable locations – i.e. safe havens – are now in favour. Covid-19 has altered the prior- ities of investors and developers alike. In addition to growth, liquidity and tenant demand, the quality of a country’s healthcare system now matters, along with the seemingly banal question as to how good or bad a government is at crisis management. Is enough capital being made available, and quickly enough, to minimise the impact of the economic slump? Is a long view being taken to limit the number of infections and provide enough hospital capacity? Has enough confidence been instilled in companies and consumers to stabilise demand, including demand for office and warehouse space? Another effect of the crisis is that investors are showing a preference for their domestic markets. That’s not just because travel restrictions have made performing due diligence in other countries more difficult. Safety is what counts in a crisis and investors are more familiar with their own markets, which is why “home bias” can actually be advantageous. Based on a sample of REITs between 2004 and 2015, researchers at the University of Florida demonstrated that institutional investors prefer to invest in local markets and that this asset allocation strategy “is associated with superior portfolio performance”.

Re-rating of risk combined with social change

One thing’s for sure: the pressure on the real estate industry to invest remains high and is only likely to increase. Governments are pumping huge amounts of money into the economy via support packages agreed at national and European level, while central banks are likely to keep interest rates at a historic low for the foreseeable future. In a trend study conducted by Wealthcap in July of this year, 60 percent of respondents expected ongoing high levels of investment in real estate, with a fifth anticipating a further increase. Unlike in the last financial crisis, there’s no likelihood of a crash, according to Berlin-based rating agency Scope. Financing arrangements have been robuster in the past decade, it says, with other factors being more important: “Re-rating of risk and social change will accelerate structural change instead, with the consequences becoming apparent at the level of asset classes and locations.”  In short, the crisis is amplifying existing trends.

In terms of mitigating risk, three countries stand out: Germany, Austria and the Netherlands. Germany was already highly regarded by investors prior to the pandemic. According to CBRE, transaction volumes in the German property investment markets reached a new record of €84.5 billion last year, with the country taking top spot in Europe ahead of the UK, which has been hit by the uncertainty around Brexit. The pandemic seems to be reinforcing this trend. Whereas the German share of European commercial transactions was 26 percent last year, figures released by Savills show the total rising to 32 percent in the first half of 2020.

The Ericus-Contor building proves that it’s possible for premium properties to change hands despite the coronavirus pandemic.

Germany is exceptionally popular with real estate investors

As Europe’s strongest economy, Germany can draw on formidable financial re- sources to fight the pandemic. Although the country’s public debt to GDP ratio is set to rise to 68.7 percent this year based on an IMF forecast, that is still significantly below France (115.4), the UK (95.7) and the US (131.1). The picture is similar when it comes to economic performance. Germany took a major hit in the first half of the year, and the decline for the full year could amount to 5 percent according to the Munich-based Ifo Institute, but economists expect both France and the UK to see double-digit contractions. As a damage limitation instrument, short-time working (“Kurzarbeit”) previously saved Germany from high unemployment during the financial crisis and the scheme has now been made more flexible. “Overall, the German government is doing precisely what should be done during deep recessions,” says the IMF.  On top of that, the German healthcare system coped well with the first wave of Covid-19. The investor view is that “as was the case after the financial crisis, Germany will recover fastest from the effects of the pandemic compared with other countries,” says Marcus Zorn, deputy CEO of BNP Paribas Real Estate Germany. Savills’ ranking of resili- ent cities puts four German cities – Berlin, Frankfurt, Hamburg and Düsseldorf – in the top ten. 

In the office segment, the country bene- fits from extremely low vacancy levels in leading cities such as Berlin, Frankfurt and Munich. If demand for space falls in the wake of the crisis, the German market is better placed to cope with it than those elsewhere. “I regard declining rents as pretty unlikely,” says Alexander Kropf, Head of Capital Markets Germany at Cushman & Wakefield. There is more prospect of rents moving sideways, he feels, with logistics properties being a winner from the crisis: “In the past, the German logistics market has largely flatlined.” Matthias Pink, Head of Research at Savills Germany, also cites healthcare properties such as care homes and local medical centres as possible winners.

As was the case everywhere, transactions in the commercial real estate market collapsed in Germany, but the market didn’t grind to a complete halt. For example, Swiss Life purchased The Cube, a skyscraper in Frankfurt that is home to the German Stock Exchange, while Hamburg Trust acquired an office new build and a number of existing buildings in the Cologne area. Union Investment acquired the landmark Ericus-Contor building in Hamburg’s HafenCity district from Augsburg-based real estate company Patrizia. The property boasts DGNB Platinum certification. The deal “proves that it’s possible for premium properties to change hands despite the coronavirus pandemic,” said Martin J. Brühl, Chief Investment Officer at Union Investment. 

Other players equally convinced of Germany as a location include La Française Group, which is headquartered in  Paris. “Germany is like a second domestic market for us,” says managing director Jens Göttler, who is responsible for La Française’s international investments and works out of Frankfurt. German investments account for two thirds of the company’s non-French portfolio. Among the properties acquired by the French company in the past are the Two Towers office skyscraper in Berlin, an office complex in Düsseldorf and – on behalf of South Korean investors – an e-commerce fulfilment centre in Mönchengladbach. Göttler is confident that “Germany will emerge stronger as a real estate location from the coronavirus crisis. We’re expanding our presence further.” Among the market’s strong points, he emphasises the creditworthiness of tenants. In the first half of this crisis-ridden year, rental receipts from La Française’s German portfolio were running at between 90 and 95 percent. “By international comparison, that’s very good.” The Netherlands is also on Göttler’s shopping list: in August, he finalised the purchase of an office property in Amsterdam. The Dutch capital’s office market, which suffered from oversupply for many years, has performed well more recently. The vacancy rate at the end of 2019 was 6.2 percent, and at €460 per square metre prime rents are almost on a par with those in Berlin.

Due to latent excess demand for core investments, in Vienna it’s possible to achieve a premium even during a crisis.

Deals continue to be done in the Netherlands despite coronavirus

The Dutch economy is in good shape overall. Public debt – which according to IMF forecasts will be 58.3 percent at the end of 2020 – is lower than Germany’s, while the economic slump will likewise be moderate. The IMF’s view is that the risks are lower in the Netherlands than in other countries in terms of its public finances and the effects of the pandemic on the economy. That’s despite the fact the economy of this former colonial power is highly connected and therefore susceptible to global shocks. This very openness and internationalism is also a positive factor that drives demand for office space and logistics properties. According to the most recent market report by Cushman & Wakefield, demand exceeds the available space. Rotterdam in particular is popular with investors due to its status as a hub for goods moving to and from Continental Europe. Deals continued despite the coronavirus pandemic: Aviva, Union Investment and Nuveen – which has its own office in Amsterdam as of this year – all purchased major logistics centres in the Rotterdam area, while Union Investment also acquired a development project in Almere.

Austria is popular with investors from the German-speaking countries

Resilience is a quality also associated with Austria, thanks to a low number of infections, comparatively strong economic data and a conservative fiscal policy. Big international funds mostly ignore the Alpine republic, but it’s popular with investors from other German-speaking countries, including during the current crisis. In May, Deka acquired the 32,000 square metre Austro Tower in Vienna for its new office fund “Fokus Büro Wien”. The property is scheduled for completion in 2021 and has been pre-let on a long lease. Zurich-based Eastern Property Holdings, meanwhile, secured an office building in the Austrian capital’s second district comprising almost 30,000 square metres. After refurbishment, its tenants will include the city authorities and state police. What makes investment here so attractive is a vacancy rate of 1.8 percent in Vienna’s CBD and of 4.7 percent across the city as a whole. As with many cities that have a lot of old building stock, modern space is in particularly high demand and new builds have pre-letting levels of significantly above 50 percent. Prime rents are moderate, at around €310 per square metre, thanks to a combination of tradition and regulation. “We like the market because it’s boring in a positive way,” says Matthias Brodeßer, Head of Transaction Management International at Warburg-HIH. The Hamburg-based investment management company opened an office in Vienna in 2018 and currently has €488 million invested, with plans for more. Brodeßer rejects criticism that the market has low liquidity, pointing to a lack of properties rather than a lack of investor interest. “Due to latent excess demand for core investments, in Vienna it’s possible to achieve a premium even during a crisis,” he says.

More caution, a stronger focus on familiar markets, a greater preference for core assets – in a downturn, that’s the obvious response. Experts are unwilling to speculate as to how long such attitudes will be a feature of the real estate market. “The unprecedented nature of the crisis makes any forecast highly uncertain,” thus the verdict from Scope. But regardless of an understandable desire for stability, a wait-and-see approach isn’t the only or even the best strategy. It’s also possible to regard a crisis as a buying opportunity.

“There’s an increasing focus on domestic markets”

When times get tough, investors traditionally revert to their domestic markets. Is that the case now?
As in previous crises, we expect the proportion of cross-border transactions to decline considerably. In 2009, after the financial crisis, the figure fell to a fifth compared to the previous year. That’s why I believe there will be an increasing focus on domestic market.

Are there differences between European investors and those from overseas?​
In times of crisis, the reflex is always to invest in your own backyard. Unless it’s on fire, that is. In some regions, the pandemic has led to elevated risk and – unlike in 2009 – a tidal wave of capital seeking investment opportunities. As such, it’s entirely possible that global investors will continue to regard Europe as a safe haven, especially the “more boring” markets in real estate terms, like Germany and Austria, which have been less affected by coronavirus. The German market is notable for very low risk, particularly compared with other countries around the globe.

People talk about home bias. Are the decisions made in this kind of context always good ones?​
You have to ask yourself why someone ventures into foreign markets. When markets are booming, investors have typically exhausted the opportunities in their own country. In the process, prices rise and yields fall. The aim of making acquisitions abroad is to diversify and capture good performance – with a tendency to ignore certain downside risks. In a weaker economic environment, the focus is on risk management; diversification becomes less important. Especially as there are now more opportunities in the domestic market to pick up a bargain and more product is becoming available. Staying close to home is therefore completely rational.

Where do you see the strengths of safe havens like Germany?
Even in times of crisis, the market continues to function, albeit at a lower level. Transactions are still taking place, yields and rents are less volatile than in other markets. There are also fewer risks at occupier level. When you look at the job market in the US and compare it with Germany, there just isn’t the same kind of downward spiral here.

Will returns continue to fall if Germany becomes even more popular as an investment destination?  
I don’t see that happening, but there are differences between the various property types. Many market players have serious doubts about shopping centres, whereas retail parks are performing well because they cater for daily needs. As an asset class, I also take a generally positive view of logistics, especially when warehousing is used to support online shopping. When it comes to office buildings, we’ll have to see how demand evolves structurally, but it’s difficult to imagine there being any further yield compression.

By Christine Mattauch