The future for project developers is uncertain

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Erfurt The heart still says yes, the head no – this is how Peter Ottmann, head of the Nürnberg Messe Group, announces the end of the large-scale project “NCC Süd”. The exhibition center should be enlarged by 2024. The operator wanted to invest a good 200 million euros.

The total would have weighed twice as much, because in times of Corona all major events such as trade fairs have been canceled due to the current restrictions. Now the construction of the NCC Süd is postponed. It should start at the earliest in 2024.

The example shows: Companies question major projects in times of crisis. For project developers this results in a complex picture – objects that are already under construction are being continued. Everything else is uncertain.

However, uncertainty is not a noun that can upset project developers so easily, since it is part of the business. The companies buy plots of land with a vision, create zoning plans and make millions in advance – mostly without knowing at the start of the planning process which buyer will ultimately succeed.

The years of the property boom benefited the industry. So-called “forward deals” increased. With these transactions, investors secure a property in early construction phases. Payment is usually made in blocks according to the construction phase.

A win-win situation for both sides: Investors get real estate cheaper than when it is finished. The project developers are relieved of part of the risk – so they can start new projects at an early stage.

In the corona crisis, these transactions are no longer a matter of course. “We hear from market participants that many forward deals are not currently taking place,” says Andreas Schulten. He is the general representative of the Bulwiengesa analysis company specializing in real estate. His annual project developer study is considered a reliable barometer of the state of the industry.

The latest study published Bulwiengesa in late March. It still shows the picture before the corona crisis. For the Handelsblatt, Schulten and his colleagues have once again checked out 23 major project developers and updated their forecast.

The result: Even if the projects already under construction continue, 78 percent of those surveyed report delays. Just under half postpones projects even though they have already received planning permission, and more than two thirds state that projects that have not yet received planning permission are delayed.

This has clear consequences for the new building: Before the corona crisis, Bulwiengesa still expected that a total of 20.5 million square meters of offices, apartments, retail properties and hotels would be built by 2024. Schulten predicts that a fifth will not be created as planned.

There is particular reluctance with the speculative new building, which is being built without a clear customer beforehand. 7.9 million square meters of such space should be created in the office area alone. A third of it is now breaking away.

Sven Bienert, professor at the Ireb Real Estate Academy at the University of Regensburg, reckons with this: “Only from 2021 will the very restrained new deals become visible and then increasingly contribute to problems.”

Regional differences

Ulrich Höller has headed the business for the ABG Real Estate Group since the beginning of this year. Office and residential projects in particular include the portfolio comprising EUR 2.7 billion, including the “Voltair” in Berlin and the “Deutschlandhaus” in Hamburg, two office complexes that total more than EUR 800 million.

On the construction sites, everything goes on “fairly normally”, says Höller – he is pleasantly surprised by this. There have been isolated delays in material deliveries. In the early days of the corona crisis, he was afraid of a shutdown on construction sites, but this did not happen.

What about new business? “We are currently waiting for property purchases or acquisitions that we do not have to purchase urgently,” says Höller. He also anticipates that office letting will be slower in some locations than before the crisis.

Basically, he looks ahead positively. The vacancies in the big cities are at a historically low level. Where new office space is in demand, there is hardly any offer on the existing market. In Berlin, for example, the vacancy rate in the office area is 1.2 percent, in Munich 2.7 percent. The market is only turning significantly beyond five percent from a landlord to a tenant market, says Höller. Among the five largest cities, the mark was only exceeded in Düsseldorf and Frankfurt.

The uncertainty has triggered a reassessment of the risk-return profiles of real estate loans. Roland Fuchs (Allianz Real Estate)

Financiers take a closer look at project developments than before. According to the latest BF Quarterly Barometer survey, financial institutions are demanding higher risk premiums, and their margins have increased from 220 to 231 basis points.

The current economic uncertainty and the higher volatility of the market would have triggered a “reassessment of the risk-return profiles of real estate loans,” explains Roland Fuchs, financing specialist at Allianz Real Estate.

But the focus is not only on the financing of the new buildings, but also on sales. The listed Consus recently achieved this on a large scale. Since the beginning of May, Consus has sold 25 properties with a project volume of 4.3 billion euros. All this has nothing to do with Corona, emphasizes Jürgen Kutz, CEO of Consus RE. These are measures of the strategic realignment.

In the course of the merger of Ado Properties and Adler Real Estate, Consus should become part of the new company and, in addition to the previous business of forward deals, also build for its portfolio. In the planning business, Kutz does not expect major changes from Corona. If, for example, a new neighborhood project with residential and commercial space arises today, construction sections with retail or hotel space would initially be put aside, other property segments would be preferred, says Kutz.

Concerns about rental apartments

The sale of large rental apartment projects to institutional investors has proven to be reliable in recent years. But: “In the past few weeks we have seen that many of the projects are being converted into owner-occupied housing projects,” says Schulten von Bulwiengesa. Rental apartment sales were probably also based on the assumption that high rents can be sustained. “Some investors are obviously getting cold feet now,” says Schulten.

It remains to be seen whether selling property is actually an easier option. Developer Instone recently stopped selling 300 apartments for its Augusta project in Augsburg. However, the project with a total of 420 apartments is to be continued, Instone emphasizes. In the meantime, the company has withdrawn its previous forecast for the financial year “due to the considerable uncertainties associated with the Covid 19 pandemic”.

The German-Swedish developer Bonava reports strong interest in residential real estate. However, the economic situation is constantly changing. The effects of the corona pandemic are unpredictable.

More: End of the special boom: In the case of office landlords, revenues break down

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