Is the investment in real estate oversubscribed?

What investors should look out for if they want to get a safe return

Residential properties in German metropolises are rare and therefore expensive. And this trend is increasing. Even during Corona times, purchase prices and rents in most large cities continued to rise. This is hardly surprising, given that quality properties in good to very good locations can generate largely secure returns.

A market that continues to impress

Investing in real estate has been one of the most lucrative methods of building wealth for centuries. That has not changed during the Corona times. The prospects for the German residential property market are still favorable. Michael Voigtländer, Head of the Competence Field Financial Markets and Real Estate Markets at the Institute of German Economy (IW Cologne), announced this optimistic message on the occasion of his lecture at the 10th Franconian Night of the PROJECT group of companies. Press representatives and real estate experts met on September 16, 2020, this time due to the coronavirus pandemic, for the online conference.

The economist underpins his optimism with hard facts. The traffic light system developed by the economic researchers at IW Cologne was still red in August. Looking to China, however, is encouraging. China has around two months in advance of the outbreak and the effects of the coronavirus and can therefore be viewed very well as an indicator of the further economic development. The recovery begins there, especially in the purchasing managers' index. According to the important leading indicator, incoming orders would increase strongly. The mood is brightening up and there is light on the horizon for Germany as well. Most of the negative forecasts also seem to have been oversubscribed; the German economy is now only down 6.5 percent in 2020, better than many industry experts suspected at the beginning of the corona crisis. However, it could take until the end of 2021 or the beginning of 2022 until the pre-crisis level is reached.

New preference for living
Contrary to all forecasts, sharp falls in prices on the residential property market have not occurred and are not expected. "The market even beat optimists like me," says Voigtländer happily, whose own spring forecast, which assumed weak wounds down to a minus of around ten percent, was exceeded in the positive. He names three reasons why, despite uncertainty, the corona crisis has so far passed this real estate segment so without a trace. On the one hand, living in the lockdown phase received a greater preference. Home office and home schooling have underlined the value of living. According to Voigtländer, people will therefore tend to spend more money on home ownership and also want to buy larger apartments - keyword work and study areas.

Homeownership undervalued
Second, the market is nowhere near as overvalued as some market participants suggest. The interplay of prices, interest and rents should be noted here. For this purpose, IW Cologne analyzed the costs for residential use and compared the costs for owner-occupiers and new tenants / existing tenants. The costs for owner-occupiers, consisting of the purchase price and ancillary acquisition costs, are financed with interest on borrowed capital plus the lost profit on the capital market. In addition, repairs, wear and tear and value development of the property are factored in. Last year, interest rates fell much more sharply than real estate prices rose. Without the crisis, prices would have risen even more this year. Apartment ownership is therefore currently undervalued, which makes the market highly attractive for investors. "Buying residential property is worthwhile," says Voigtländer, and at the same time restricts. "One hurdle for buyers, however, is the high ancillary costs." The real estate expert considers this to be questionable from a socio-political perspective, as tax exemptions for real estate transfer tax or reductions in transaction costs could counteract this.

Negative interest possible
As a third important point, according to Voigtländer, the low interest rate situation will persist for a long time. This is due to the massive interventions of the ECB, but also to demographic development. People live significantly longer and will have to save more and make more provision for old age in the future, while the working population is falling. Entrepreneurs and private households also keep their money together for the next crisis. "Negative interest rates in the real estate sector can therefore no longer be ruled out," predicts Voigtländer, referring to the example of Denmark, where this scenario is already a reality.

The individual dose of real estate investment

So we can see that real estate is in demand like never before - and it's worth it. But how should you invest in real estate? A whole apartment or even an apartment building is actually a size too big and too expensive for private investors. After all, having your own property also requires a lot of work in terms of administration and management. Investing in real estate funds is more convenient, safer and easier to dose.

More comfortable: Administration and management are omitted.
Safer: Here the risk is spread across several properties. In this way, the risk of failure is significantly reduced and, with a good selection, even reduced to zero.
Better to dose: In most cases, entry into a fund is available from a few thousand euros or as an installment variant with monthly payments. So there are no loans to be serviced.

One of the most interesting investment offers of the last few months is the alternative investment fund (AIF) "Metropolen 20" from the industry specialist PROJECT Investment. The Bamberg-based company has been successfully financing new residential construction projects since 1995. But PROJECT does not only focus on financing through funds. The Bamberg experts fall back on their own asset manager, the Nuremberg-based PROJECT Immobilien Gruppe. This plans, builds and markets its self-developed real estate projects. "Metropolen 20" invests in at least ten carefully selected new construction projects in the metropolises of Hamburg, Berlin, Munich, Nuremberg and Vienna as well as in the Rhineland and Rhine-Main regions.

Secure return with excellent capital investment

A secure return needs a number of criteria in order for it to work in the long term. The first criterion has already been indicated: risk diversification. If there are at least ten properties in different top locations, a failure is very unlikely. As a quality provider, PROJECT Investment has also been active on the market with great success for 25 years. Experience in planning and realizing new residential buildings is a clear safety criterion. Nationwide, the PROJECT experts have a property sales volume of around 3.3 billion euros. Another criterion is the financing structure itself. "Metropolen 20" is a 100 percent equity-based offer. The fund is not equipped with any borrowed funds. And finally, there is one more aspect that points to a secure return on investment with "Metropolis 20": independent recommendations. Both the rating specialist TKL and the industry medium Kapital-markt internally rated the new AIF from PROJECT as very good. Investors can choose from various distribution models: The recommended reinvestment in terms of yield optimization without early distributions, four percent p. a. on a monthly basis from the following month after subscription or six percent p. a. from the 36th month. The total term of the investment is eight years. The total return flow of funds is estimated at 152 percent in a medium forecast scenario. The fund has been available since July 2020 with a participation sum of at least 10,000 euros (plus five percent issue surcharge).