Investing in Residential
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For many baby boomers and generation X, studio-type apartments would have been a short-term living arrangement while chasing the dream of a spacious multi-room home with garden, fit for entertaining. How quickly perceptions and needs change. For millennials – city-dwellers by choice – micro-living is becoming a chosen way of life. Real estate managers and investors are spotting the opportunity and Corestate Capital is leading the way. The firm launched its fund BVK-Residential Europe-Immobilienfonds Corestate with Bayerische Versorgungskammer, the German pension fund, to invest specifically in this space in Europe with a focus in Germany and Austria. Thomas Landschreiber, co-founder and chief investment officer of Corestate, and Norman Fackelmann, who leads BVK’s real estate investment management team, talk about the factors driving the trend and their expectations for this market.
Thomas Landschreiber: There are some mega-trends driving the demand for micro-apartments across Europe. Urbanization is a significant factor. We are seeing population increases in city centers with strong economies that offer good job prospects and excellent universities. These locations are attracting workers willing to travel to find employment and the student population. Micro-apartments are in demand by both groups.
Norman Fackelmann: Significant immigration into Europe is contributing to the urbanization trend. Although the residential asset class generally is benefiting from this, smaller and more affordable apartments in central locations like Frankfurt, Berlin, Munich, Cologne, Stuttgart, Vienna, Zurich and Bern are proving especially popular. This is where people want to live, study and work. Demographic trends are driving the value of real estate in the micro-apartment and student accommodation space, and these locations have the strongest growth rate potential.
TL: The single society is another trend. This group is wider than young, mobile workers and students. It includes single parents and divorced persons, and also single pensioners. Micro-apartments are a good option for these groups because they can continue living in inner city locations, but at more affordable rates than they might otherwise find if they rented larger, family-sized residential properties. Corestate initially focused on providing these properties for the student market. But after analyzing the tenants in our buildings, we recognized that 25 percent were not in fact students. The properties were only advertised on student websites, not on the open market, so these groups were proactively seeking out furnished micro-apartments. We saw there was a wider need for this type of living and an opportunity to expand the product further beyond the initial target student group.
TL:On average there are between 20 and 30 percent one- and two-bedroom apartments available in German cities. But there are 70-80 percent single and two-person households seeking suitably sized accommodation. There is a perception that residential real estate is coming to the end of the investment cycle, but we are at the beginning of the cycle in the micro-apartment market. There is a supply and demand imbalance in single-person housing, so for managers and investors, this segment of the market offers real development and investment potential in the coming years.
NF: BVK is always looking for new investment opportunities to diversify its portfolio. At the beginning, BVK had lengthy discussions with Corestate about micro-apartments and student accommodation, and found we were in alignment on our expectations for this market. As core investors, we want a stable cashflow and we expect this type of asset to deliver that. Our target is to achieve a yield of four to five percent for our pension schemes. Micro-apartments are a rare opportunity to invest in an asset with an attractive long-term return forecast and at the same time to become involved in a specialist segment for asset management.
TL:These are also management-intensive assets. Institutional investors place a lot of importance on finding the right partner with a good track record on the operational side of the business.
NF: I absolutely agree with that. A good operating partner is a priority when investing in these assets. The majority of investors do not have the capacity to focus on the more operational aspects of the business. So it is important to find a partner that can evidence operational track record, and that understands both investor and tenants needs. Take annual tenant turnover, for example. In traditional residential, this is around seven to eight percent in the core city markets. For student housing, the rate is between 30 and 40 percent. While this is operationally challenging, because the manager is re-letting about 40 percent of its apartments, from an investor perspective, it is an advantage. Higher turnover can make it easier to increase rent in line with the market. This can be difficult with traditional properties in Germany with longer lease periods.
No fleeting trend
TL: Student accommodation and micro-apartments are also let completely furnished. The tenant’s every need is also catered for, right down to the technology provision. It is a fully serviced package often with communal areas such as learning areas, washing areas and TV lounges. It is selling a community; a new way of life. So from a management point of view, there are greater considerations at play.
“A good operating partner is a priority when investing in these assets”
NF: BVK is a long-term investor, so we do not see this market as a temporary or passing trend. Demographic patterns and the desire for urban living point to a steady demand for micro-apartments.
TL: Student numbers are also increasing with more foreign students coming to Germany and other European cities to develop their education. The growth rate is about 4.5 percent each year and this trend will continue. While student accommodation will always be a niche sub-class of residential with lower volumes, this asset class is here to stay and offers good long-term opportunities for managers and investors. The same applies to micro-apartments due to demographic trends, growing urbanization and the lack of supply catering to single-person households. Demand for three, four, five-person households will decline in the coming years. Micro-apartments are here to stay.
NF: We are also looking globally for opportunities in this space. BVK already has a partner in the United States and we continue to look at Europe beyond our core markets in the German-speaking countries.
TL: Spain is interesting. The economy is beginning to rebound there and it is an attractive destination for Latin American students for language reasons. There is potential there and we are continuing to analyze opportunities in other markets.
This article was sponsored by Corestate Capital and appeared in PERE’s Investing in Residential supplement, which accompanied the June 2018 issue of PERE magazine.