Better to live in the city.
Real estate. Wealthy investors and family offices are looking for secure investments with long-term stable returns. Tino Lurtsch, Managing Director at Schroder Real Estate, and Georg Gmeineder, Alternative Director Real Estate at Schroder Investment Management, will show how this goal can still be achieved today through selected properties in metropolitan regions.
The 1000 square metre ground floor is home to the branch of a food company. Above it there are apartments in modern layout with balconies or roof terraces. The delivery zone is soundproofed and spatially separated from the entrance area of the apartment users. The underground car park is used by apartment tenants and customers of the grocery store. The development is easily and conveniently accessible by public transport.
"This is my idea of a modern, urban property", explains Tino Lurtsch, Managing Director at Schroder Real Estate. "For us as investors, this concept still has a special charm," adds Georg Gmeineder, Alternative Director Real Estate at Schroder Investment Management: "The combination of residential and food retail allows returns to be achieved that are one to two percentage points higher than those of purely residential properties. Many investors are desperately looking for investments that are stable and yield significantly more than three percent in the long term. This is such an opportunity.
However, this type of property is still very rarely available on the market in sufficiently good quality. But the Schroders experts are convinced that the trend is clearly in this direction. "Both in terms of urban planning and economics, it makes sense to make better use of limited space. Örtliche Building permit authorities are therefore already demanding higher utilisation as a prerequisite for planning permission in order to create urgently needed living space," explains Lurtsch. In addition, food retailers are also being drawn more and more into the cities.
The expansion managers in the retailers' real estate departments are thus following the sales department's mission to be closer to the customer in order to make shopping easier for him. "This will further consolidate the trend away from single-storey retail properties towards integrated residential and commercial buildings in conurbations", sagt Lurtsch.
Schroders is thus building on a megatrend. Urbanisation in metropolitan regions is steadily increasing, resulting in significant population growth there. To cope with this, new concepts of "urban living" are urgently needed.
In fact, the population growth in Germany of around 2.5 million people between 2012 and 2019 took place primarily in the cities. For example, according to analyses by Statista, the leading provider of market and consumer data, the population figures in Hamburg and Cologne rose by around seven percent, in Berlin and Munich by nine, in Frankfurt am Main by eleven and in Leipzig by just under 13 percent.
In addition to the slight birth surplus, the statisticians see the main reason for this as being the influx from abroad and the surrounding rural areas. The younger generations in particular are pushing into the cities. According to the Federal Statistical Office, more than 1.2 million people between the ages of 20 and 40 years moved to the independent cities between 2012 and 2019. "And this will not change even with the pandemic and the trend zum Homeoffice. Young people appreciate the leisure activities and the exchange mit Gleichaltrigen", explains Lurtsch.
The demand for modern living space is additionally strengthened by the trend towards more and more single households, which has been continuing for decades now. Dies leads to an increased demand for space in the growth regions and thus to a shortage of space. According to statisticians, the number of single-person households in Germany has already risen by 46 percent to 17.3 million over the past 30 years. In 1990, around 15 percent still lived in Germany alone. By 2018, this figure had risen to 21 percent. And by 2040 the figure is expected to rise to as much as 24 percent. That would make 19.3 million single households.
The development of modern, affordable housing in prospering urban areas is following this trend. "Real estate with a high proportion of residential space should therefore continue to enjoy high demand in the long term and, as a capital investment, bring stable rental income," calculates Georg Gmeineder.
Despite Covid-19, the German residential real estate market has indeed proved to be very robust to date. Reports from major housing companies show that there have been almost no rent losses to date. Rent deferrals and rent losses average only one percent.
Based on the trend of rising demand for residential space and increasing densification in attractive urban areas, there is also a higher demand in the area of food and complementary goods for daily needs. Just as with a residential investment, food retail stores in sustainable locations can therefore also generate stable and reliable returns for investors.
In recent crises, the food retail trade has always proved to be a rock in the surf. During the global financial crisis of 2007/2008, sales growth slowed down briefly, but subsequently showed an upward trend again. In the current Covid-19-induced crisis, sales even increased from the ninth calendar week of this year. In the first half of 2020, a growth of 22 percent was achieved compared to the first half of 2019.
"The reasons for this are not only the hamster purchases, which in the twelfth calendar week even led to a growth of 29 percent compared to the previous year", Tino Lurtsch points out, "but also the fact that gastronomic establishments were avoided and meals were increasingly taken at home". In the future, this will perhaps level off somewhat, but the basic growth trend will remain.
"I find it particularly interesting that even the continuously increasing online trade has hardly any influence on the food retail trade", Lurtsch continues. According to the latest Online Monitor Report 2020 of the German Retail Federation, the market share in the online food retail segment is only 1.4 percent.
This is apparently due in particular to the competition-related low product margins to which the four major food retailers have been exposed for decades. These narrow margins simply do not allow new competitors such as Amazon Fresh, Hello Fresh, Picnic and Co. to offer the goods with dem sonst at the usual price advantage in online retailing.
"So it is not surprising that the big food retailers also dominate the online market," Lurtsch explains. Only Amazon Fresh currently makes it into the top five of the largest online grocery retailers - alongside the existing regional players. According to Statista, the combined turnover of Amazon Fresh & Prime Now in Germany for 2019 was around 116 million euros. For comparison: This corresponds to the approximate turnover of 13 Aldi stores. According to the EHI Retail Institute, food retailing as a whole generated 166 billion euros.
"The leading German food retailers Lidl/Kaufland, Aldi, Edeka and Rewe - and this is important for investors - are now among the 20 largest retail companies in the world, according to a Deloitte study. Their high creditworthiness makes them very attractive tenants," explains Georg Gmeineder and adds: "I am particularly impressed by the long-term nature of the (indexed) leases for this type of use. In as a rule, these are concluded for ten to 20 years. This creates a very solid basis for calculation".
The cities also benefit from the direct local supply of the surrounding catchment area. Inner-city traffic is relieved and the emission level is reduced. "This is important for many of our investors. Ecological, social and governance factors (ESG) have long been among the minimum standards," explains Gmeineder. The search list would include in particular properties that are up to date in terms of energy efficiency. "In the end, it is not only the tenants who benefit from high-quality, modern and efficient buildings, but also the investors who benefit from the value of the properties. Modern buildings in good locations are attractive for a good tenant clientele, which in turn ensures more secure rental income".
On balance, the experts predict that investors could expect a cash-on-cash return (before taxes) with this type of real estate investment, which is significantly higher than the approximately three percent that so-called core residential investments bring. "The return naturally depends on the respective regional market, the proportion of rental income from the apartments in relation to total rental income and the level of financing," says Gmeineder and concludes: "But in the zero-interest era, which will now last much longer, I can hardly find an investment with a similarly interesting risk/reward ratio." ®
How to invest - in Urban Living.
The real estate experts at Schroder Real Estate have many years of experience with retail and residential properties. The total portfolio included retail real estate im Wert of well over one billion euros, which was partly purchased directly from retail companies through off-market sales and lease-back transactions, and partly directly from real estate developers through existing good contacts.
The team also has a high degree of experience in the construction of residential portfolios. After all, it has been managing apartments in Germany and abroad for numerous clients and funds for years.
Schroders believes that the combination of sustainable residential and food retail uses offers a long-term and crisis-resistant form of real estate investment. It also allows a higher level of return to be achieved than with an investment exclusively in "residential" - with comparable risk.
Due to the high investor benefit, Schroders will now launch a German special fund based on this strategy. Er is intended to enable the investment in a diversified Urban Living Germany portfolio.
Based on a research-oriented approach, investments will be made exclusively in economically strong regions and cities with growing populations, good purchasing power and sufficient demand for local supply. Particular attention is paid to the quality of micro-locations.
In the actual construction of the portfolio, Schroders will concentrate on so-called off-market acquisitions - transactions that are not publicly offered. This will be made possible by Schroders' established network of local developers and its long-standing cooperation with leading food retail companies.
Schroder Real Estate Investment
Management GmbH; Taunustor 1;
60310 Frankfurt am Main
Georg Gmeineder; 069 975 717 214
Photos: Simon Menges