Real estate investments: Which types of property are suitable as investments?
The René Benko case caused a stir in the real estate sector and beyond at the end of 2023. Its Signa Holding, which is involved in the construction of numerous luxury properties such as the Elbtower in Hamburg, had to file for bankruptcy. High construction costs, inflation and rising financing expenses due to variable interest contracts weighed on Benko, who financed too many, too expensive projects on credit. But is Signa insolvency also a warning sign for private investors? No, because as long as the real estate investment is solidly calculated, concrete gold “shines” even in times of crisis. According to experts, hospitality properties in particular could be worth a look.
Real Estate Market 2023/2024
Despite comparatively high interest rates, inflation and an impending recession, the real estate market in large parts of Germany and Europe did not collapse as sharply in 2023 as feared. According to one Survey published by the Immowelt portal in December 2023 It is true that the average prices of condominiums per square meter declined in 71 out of 75 major German cities surveyed. However, the five-year comparison shows that current prices are still significantly higher than in 2018. Especially in major cities: According to Immowelt, condominiums have continued to rise in value in many large cities that were already expensive in 2018. In Munich, the level rose by eleven percent to 8191 euros per square meter, in Hamburg by 32 percent to 6047 euros. This is followed by an increase of 14 percent Frankfurt/Main, where the square meter is currently offered on average for 5550 euros. Although the price level in all three cities fell compared to the previous year, it was still above the 2018 level.
Positive signals are likely to come from the interest rate front in 2024. A cut in the key interest rate by the ECB, which would benefit the real estate sector, is not yet certain. But there is evidence of stabilization. As a result, a new pricing structure for real estate should also emerge. Also because rents could continue to rise due to the limited supply of real estate in sought-after locations. For investors, this means stable cash flow and increasing returns, which makes real estate investments more attractive again despite possibly higher financing costs.
Your “own four walls” as an investment
But which real estate investments could be worthwhile? Common suspects include owner-occupied residential real estate. Either to move into the house or apartment yourself or rent it out. Which option is better depends, of course, essentially on the budget and the individual life plans of the potential buyer.
Despite the tight market environment in Germany, residential real estate as an investment remains attractive, such as a Analysis by BNP Paribas (Q3 2023) clarifies. For example, net prime yields for new construction properties rose moderately in the third quarter. The increase compared to the previous quarter was in the range of 10 to 15 basis points. Munich was still the most expensive location (3.45%). This was followed by Berlin and Frankfurt at 3.50% and Hamburg and Stuttgart at 3.55%. For Düsseldorf and Cologne, the two cheapest A-locations, 3.65% was estimated.
Asset class commercial real estate - also for private investors
While many experts currently consider office properties to be less fast-growing due to the changing world of work, an investment in commercial real estate, particularly in hotels and hospitality properties, could be worthwhile. This is because the holiday hotel industry is characterized by decades of growth and crisis security - even during the challenging corona pandemic, which many businesses have survived. In addition, despite significantly higher inflation, tourism is still on the upswing in many places. Innovative concepts, such as “Adults Only” or offers for “Workations” and more and more attractive year-round destinations, are also creating new prospects for operators and investors.
As always, when choosing a suitable HOGA property, the location counts. In addition, the wider the orientation, the lower the seasonal fluctuations. For example, in contrast to a country inn, a city hotel often has a relatively stable booking rate throughout the year, as it appeals to both business travelers and tourists. This applies abroad as well as in the DACH region, with destinations such as Mallorca having the advantage of a more attractive travel climate all year round.
In addition, according to a Union Investment white papers characterized by a relatively small number of actors. On the investor side, family offices were more likely to make a name for themselves than larger institutional investors. The transactions are financed either from equity, through private investors in closed real estate fund structures or regional banking consortia. However, hotel investments are equally popular with private and institutional investors because long-term and fixed leases ensure constant cash flows that bring stability to real estate portfolios.
Even in the challenging year 2023: Despite increased financing costs due to interest and inflation as well as economic and geopolitical uncertainties, the Investment activity of hotel properties in the first quarter of 2023 continued to rise. At 4.1 billion euros, around 18% more was invested in hotels in Europe in Q1 2023 than in the same quarter of the previous year. In addition, due to higher interest rates, hotel returns in Europe in the first quarter of 2023 were on average around 70 basis points higher than at the end of 2019. In the top 10 hotel markets in Europe, prime yields for hotels with leases were between 4.4% and 5.5% in Q1 2023.
A market analysis of BNP Paribas Real Estate For hotel properties, it is assumed that with the foreseeable end of the interest rate hike cycle, planning security for investors is likely to continue to significantly increase, which could result in a nationwide market upturn in 2024.
