Interview with Ralph Winter & Market Outlook

The decline in core returns over the years is leading more and more investors to turn to “value-added” and opportunistic investments. Through active management, these strategies can achieve an excess return over bonds and core investments. This is also where the so-called “vintage effect” comes into play. A decline in valuations and the emergence of sellers in distressed situations creates interesting entry opportunities, especially during periods of recession.

The following chart shows the IRRs of active investment strategies after the “closing” year of such vehicles.  The vintages after a recession realize the highest IRRs. Considering that we are in the most severe global recession since World War II, we believe that 2021 will be a good vintage year for active strategies.

With the exception of the retail and hotel real estate sector, developments in the rental and capital markets of the DACH region in the first ten months of 2020 were characterized by a relatively high degree of stability. The vacancy rates for residential, logistics and office space remain at historically low levels. Net initial yields and rental price levels have hardly moved at all since the end of last year. This appears to be a contradiction to the economic development. Regulatory hurdles and the uncertain COVID 19 dynamics currently have a dampening effect on changes and price adjustments.

Typically, such a macroeconomic situation affects the real estate markets with a delay of nine to twelve months. Currently, this delay is further accentuated by short-time working and stabilizing measures, such as the prevention of insolvencies. But the second Covid 19 wave is also higher than the first in the DACH region and could lead to an “economic double dip”. We therefore expect that the pressure of suffering will increase.

In the USA, we have already seen deals with discounts of more than ten percent in the third quarter of 2020, even outside the hotel and retail property sectors. These negative effects of the recession will also reach the DACH region. Above all, we expect an increase in the number of insolvencies among companies in the retail and restaurant sectors.

For office properties, we expect a cumulative decline in rents of between eight and ten percent by the end of 2021 and ultimately lower transaction prices. Rents for logistics and residential space should continue to develop positively due to the tailwind from structural factors such as online consumption or demographic changes. By contrast, we expect a stronger correction for hotel properties. We would not be surprised if assets can change hands here at lower valuations of 20 to 30 percent

Every structural adjustment has its own character. We are currently observing a situation in which certain sectors are likely to come through the crisis robustly, while others are facing their greatest challenge in modern times. We recommend combining these two opposing trends in investment strategy, with investors taking advantage of the strength of one sector and the weakness of another.

The opportunity is greatest when a seller who finds himself in liquidity difficulties can approach the potential buyer directly. Since sellers want to handle such deals without much fuss, access to off-market deals is crucial. To benefit from such a situation, a network of real estate owners and access to financing is crucial. Value-add real estate expertise is required, as such investments require higher capitalization at the beginning. The anticipation of structural changes, active asset management and outside-the-box thinking is match-critical in this situation and the central success factor.