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ECB headquarters and other office buildings in Frankfurt:
real estate
professional Tassu Degen
expects stable to rising prices
Photo: Boris Roessler/ dpa
manager magazin: Mr. Degen, the world is in turmoil. We have the war in Ukraine, high inflation rates of more than 7 percent and rising interest rates, as well as problems in the economy such as supply bottlenecks. All of this also has an impact on the real estate markets, how do you and your customers deal with this in the commercial real estate sector?
Tassu Degen:
The war is terrible, we can only hope that there will be a solution and an end to the disaster as soon as possible.
Inflation and rising interest rates are the main issues on the real estate markets.
However, we were not really surprised by this.
This development became apparent to us years ago.
Since we have concluded multiple indexed leases, especially in the commercial sector, we are now largely benefiting from the development.
That means: contracts in which our rental income automatically increases to the extent of the official inflation rate.
We also assume that inflation rates will remain at this level in the next five to eight years and will not fall significantly below 5 percent.
Does that mean you didn't have to change your investment policy for your clients at all due to the developments of the past few months?
Basically not.
We are currently observing the markets and the global economic situation and development very closely.
Our focus will be more on solid and long-term portfolio investments and not so much on short to medium-term and opportunistic investments.
But you could hardly foresee the war.
no
We have assumed that the large amount of money that has entered the markets, among other things due to the low interest rates in recent years, together with the high demand from buyers and investors for the products that are scarcely available on the market, will lead to the rise in the price level, so will lead to inflation.
Of course, we could not know that there would be another war, which would further push this development.
There is already much speculation that the current rise in interest rates could herald the end of the property boom that has lasted for years. Deutsche Bank, for example, believes that the boom will probably end in 2024. What is your expectation?
It is quite possible that real estate prices will stagnate at times in the coming years or even fall temporarily due to the rise in interest rates.
In the long term, however, I don't think the market will turn into a downtrend.
The demand for objects is high.
Added to this is the high level of liquidity in the market and the small number of alternative investments.
The money supply has doubled over the past ten years, and we will have that for the next ten years at least.
The high pressure on the real estate asset class will therefore continue and keep prices stable, at least in the long term.
But interest rates are now rising. Where is the extra money that you expect in the market to come from?
A large part of the real estate business in which we are active is carried out entirely without the use of loans on a pure equity basis, so the interest rate level only plays a minor role.
This applies above all to the area of large-volume commercial real estate investments, but also to all other asset classes.
I therefore believe in rising, stable and calculable real estate markets in the long term.
“I believe in rising real estate markets”
That was not always so.
No, it's a big contrast to 2007, for example, when the big financial crisis hit.
There was also a lot of pressure in the market, but unlike today, everything was very heavily leveraged.
Today there is hardly a bank that has such problems from real estate activities, because we are so heavily financed by equity from the large amount of money over the past ten years.
You're talking about the commercial real estate market. But what about residential real estate, do these statements also apply there?
The difference in residential real estate is that indexed leases are less common.
For this reason, investors are currently tending more towards commitments in commercial real estate.
In principle, however, residential real estate continues to be one of the most important real estate asset classes alongside offices and retail.
The solid cash flow and the stable increase in value make the residential property an integral part of every investor's portfolio.
The most difficult of these three right now is retail.
There is a huge problem there, we left there five years ago.
The development of the cities and the long-term trend towards online shopping are currently still too difficult to assess.
Added to this are the effects of the Corona crisis.
Logistics real estate has recently gained in popularity.
Hotel real estate is also slowly becoming interesting again and will be back at the level it was before Corona in two to three years.
But above all, office and living will be fine again after Corona.
However, private real estate buyers, for example condominiums, usually use loans for financing. How will interest rate hikes affect this area?
In this market segment, too, I do not expect a sharp fall in real estate prices due to rising interest rates.
There is simply too much equity in the market for that, and demand is high.
However, the situation can become problematic for those who have financed a property in recent years and whose loan is now due for renewal.
I'm talking about private people who have bought property in the last five to eight years.
It was often 100 percent financed, sometimes even the ancillary costs.
These buyers can get into serious trouble as a result of the rise in interest rates.
How do you think interest rates for mortgage loans will develop in the near future after the recent rapid increase?
“Mortgage rates can go towards 3 percent”
Of all the crystal ball glimpses, this is the hardest.
Interest rates have risen again to a level of more than 2 percent within a short period of time.
I think mortgage rates can still go towards 3 percent.
But not far beyond that, and not for long.
By that I mean no longer than five years.
A strong and long-term increase in interest rates would then also lead to problems within the industry, for example with extensions, project developments and others, as well as with classic companies.
In the worst case, an economic crisis could follow, which the banks are unlikely to risk.
Real estate is considered a reliable protection against inflation when investing. But in view of the speculation about an end to the price and rent boom and the prospect of persistently high inflation rates, which you mentioned: is this protection against inflation still in place?
A real estate investment still protects against inflation, nothing has changed about that.
The math is simple: you have a rate of inflation and you assume that the price of real estate will also increase by this rate.
With inflation at 2 percent, the property should be worth about 20 percent more after ten years.
But of course the property must have continued to be successfully managed over the last ten years and it must then also be sold and realize the price.
With higher inflation of, for example, 5 percent or more, one can almost certainly assume that the value will increase.
With commercial real estate, you have the advantage that there are usually indexed leases, so inflation protection is practically built in.
So are commercial properties generally better suited to protect against inflation than apartments and houses?
Commercial properties offer the greater plannable profit with indexed rental contracts, correct.
But if you have a residential property in a prosperous city like Cologne or Berlin, you can increase the rent significantly almost every time there is a change of tenant.
In this respect, living as a protection against inflation is not necessarily worse, but different.
At the office, it is more comfortable for the investor.
There you have the fixed indexing for several years.
With residential, on the other hand, you have the higher management costs, but other advantages, such as the limited supply or the broadly diversified tenant base.
However, not everyone can buy a complete office building or an entire residential complex right away. What do you advise investors with a lower account balance for real estate investments?
There are basically three different asset classes in real estate.
First, there are the interest and yield houses.
These are multi-family houses and commercial properties in cities between 500,000 and around five million euros, for investors who usually have one million euros to around 50 million euros in equity at their disposal.
Then there is the area of larger investments that we manage for our clients.
These are nationwide properties from around ten million euros.
And then there are smaller investors who buy condominiums or terraced houses as an investment.
Here, too, you have to have a precise strategy in terms of location, location or the age and condition of the property, for example.
In principle, cities with economic growth and an influx of new residents are to be preferred.
These are basic rules that have always existed. Once again: The current development with the corona pandemic, increases in inflation and interest rates as well as war and general uncertainty will not change anything?
No, basically not.
We can talk again in two years and then see if I was right in my opinion.