Interview with Bernd Lönner, Vice Chairman of the Board of Management at Real I.S. AG
Mr. Lönner, the year 2022 is drawing to a close. How would you summarize it?
Bernd Lönner: The year 2022 presented the entire global real estate industry with major challenges. The COVID-19 pandemic was compounded by various global events, and the environment is subject to constant change. The war in Ukraine, severe supply bottlenecks, surging energy prices, inflation running at ten percent, and significant interest rate hikes have thrown our world out of kilter and heightened complexity. The question now is how to respond.
How is Real I.S. adjusting to this changed market situation?
Bernd Lönner: There is no doubt that we are dealing with a combination of unprecedented crisis factors. But this is precisely why remaining in stasis is not an option – we need to proactively deal with the challenges, keep our eyes open for existing opportunities and take advantage of them. Since the beginning of the coronavirus pandemic, Real I.S. has delivered proof of its ability to act flexibly and master unexpected problems, also in times of crisis. We have been able to maintain a strong growth trajectory, we have around €13 billion in assets under management and are represented at ten locations across the globe. Our local presence, which gives us proximity to the markets, is very important for the correct assessment of pricing and timing.
Addressing future issues is also important. For example, we have generated significant impetus in terms of digitalization and have also moved ahead swiftly with the topic of the "office of the future", including at our own company with the refurb of our headquarters in Munich. In addition, the energy crisis has heightened everyone's awareness that we need to up the pace of important steps toward environmental sustainability. We, too, are assuming responsibility, developing ourselves and our offering further, while harnessing innovative technologies to reduce consumption in our properties and cut greenhouse gas emissions, for example.
Can you tell us the three most important reasons why real estate investments are still worthwhile today?
Bernd Lönner: First and foremost, as a safeguard against inflation. We are still in a phase of high inflation rates. By indexing leases you can arm yourself against inflation and increase income in line with rising consumer prices. Secondly, the stable leasing markets, in the office and logistics market, for instance. Thirdly, real estate is less volatile compared to stocks and bonds. Real estate investments retain their value.
What specific opportunities do you see at the moment?
Bernd Lönner: Despite the uncertainty and rising financing and construction costs, real estate still offers good investment opportunities across all asset classes. However, meticulous selection is the order of the day. Risk-averse investors will find security in the residential, logistics and office segments in central locations producing stable rental income. Less risk-averse investors may want to take advantage of opportunities in the hotel and retail real estate market with initial yields of more than four percent. Opportunities are not only available in Germany, but also in Australia, for example. The Australian government's plans for infrastructure projects - with record investments of 120 billion Australian dollars over the next 15 years - will further enhance Australia as a business location, while also having a positive impact on the office property markets. Sydney is already experiencing upbeat development: office rents have been trending up again since 2022. However, Ireland also deserves a mention. This country’s residential markets figure among the most exciting in Europe. Ireland’s population is growing rapidly, and the supply of housing and commercial space can barely keep up with demand. We have also been invested in Australia and Ireland for some time now and are exploiting the potential.
What are your expectations of general market developments in 2023?
Bernd Lönner: In 2022, transaction terminations in the market ran above average as sellers and buyers did not reach a consensus on pricing. Supply and demand are slowly converging again. We expect prices on the market to adjust, but the fundamental demand for core commercial real estate will hold steady. This is because core properties are likely to offer relatively stable rental income in the coming quarters. The yield premium is supplemented by rent indexation, which will lead to rising cash-flow returns. This will limit purchase price declines in the investment market.
The year 2023 will doubtless be very challenging overall. But there are opportunities! You just have keep a sharp eye out and screen the market. Optimism is the first step in identifying opportunities.