Future of the German real estate market
Interview with Tobias Hänschke (Management board of FiveRocks Development SE) on the development of the German real estate market in the near future.
Table of contents
What's The Future Of The German Real Estate Market?
Hello Tobias, glad that you are here today to give us some insights on the German real estate market. Currently, we have interest rates that are skyrocketing almost daily, the war in Ukraine and the inflation is at a 40-year high. How do you see the future of the German real estate market as a professional property developer?
I think you mentioned the right questions at the right time, in terms of what’s going on in the world and here in Germany. Especially the rising interest rates have an influence on how we develop and look at our real estate projects. Of course, it’s very important to go into scenario analysis for rising interest rates and also for the outlook of it. In the first step, we do a huge discount on the sales prices in our calculations. Then we can include a discount on the exit prices, in the acquisition price, on all the costs that are in between. So we have a certain buffer and don’t have any surprises at the end when we want to sell the property.
Is Real Estate In Germany A Good Investment?
So you think with the right preparation and with the right numbers real estate can still be a good investment in the near future?
Yes, I do! Years ago we had higher interest rates as well. Of course, prices were lower than they are now, but if you look at this issue as an investor, whether professional or private, there are other important factors when it comes to real estate such as the wisdom of location. If you have the right objects in the right locations, the interest rate won’t have too much influence in the long term. Investors have some special tax deductions from the government, which would also reduce the interest rate. Long story short, I think in terms of gaining assets and following a long-term strategy, real estate will always have a big influence.
Private vs. Professional person investing in real estate
You mentioned there's some commonalities between a private investor investing in the real estate market and you doing it as a business. What is in your mind the difference between it?
The big difference between private investors to commercial investors is that private investors probably can’t develop real estate full-time and therefore, they’re somehow limited in their possibilities. Of course, they can reach some certain levels where they can maybe do a smaller development. For example, a single home. That’s perfectly fine, but I think when you reach a certain level you can’t do it as a part-time job. It is impossible. Additionally, the time perspective of a private person investing in the real estate market is different. They mostly plan for ten years or more. In our developments, the range is usually between 18 and 36 months. This also makes some difference in the returns. We have probably higher returns in absolute numbers, but we will talk about our strategy later on.
What is a professional german property developer doing exactly?
We can actually talk about it right now. So please tell us a little bit more about your company, FiveRocks.
Our business model is not only simple, it is very real. We talk about real projects and we consider ourselves right now as a classical real estate developer. We build projects and then sell them again. Our long-term strategy is definitely that we want to get properties, the construction permit, to do the construction by ourselves and our companies and keep it in our portfolio, so we can achieve long-term yearly rental incomes and do the asset management for our projects themselves. Right now, FiveRocks has roughly 30 million euros of assets under management which are located in North-Rhine Westphalia. More accurately, Düsseldorf and Mönchengladbach. Then we have a new project which we acquired one month ago in the Munich area, Dachau. It is also in the S-Bahn region which is a very powerful statement in terms of location. In our pipeline, we have four different projects in the southern Germany area, in Stuttgart, in the suburb of Munich, and also in Nuremberg. We have existing buildings that we want to revitalize and do an energy efficiency program on it and last but not least, we have two new constructions and just bought plots to do the building on them.
Why do you have a focus on the b and c cities?
You mentioned location. From checking your website you have a clear focus on the B and C cities. So you basically avoid the really expensive A locations. Why do you have that focus?
First of all, the A locations have huge competitors. We are a small company, yet. Of course, we are growing fast, but despite this, it just makes sense to go into B and C locations. We saw the crisis with covid-19. People work from home and the focus of working at home is more than it has been before. In this case, it means that the living demand in B and C cities is increasing, prices are increasing and the value of the land is also increasing. This is, on one hand, difficult for us to negotiate, but on the other hand, the demand is a huge benefit. Hence, we are not worried about selling our buildings in these B and C locations. In the long term, it is great for people to live in these locations, because they have some kind of security in terms of economy and the way they want to live.
How does the future look like for fiveRocks?
You said that FiveRocks is growing. What does the near future hold for FiveRocks?
We started to issue a convertible bond right now. This is a huge step for us. With this emission, we are trying to be quicker in terms of the acquisition, because it’s not only the rising interest rates pressuring the market right now. It is also how fast the banks and investors can make their decisions. So for us, speed is sometimes king. This convertible bond should give us power in terms of acquisition and of course speed. Therefore, we took this chance and we are happy to welcome investors on board who want to invest in our company, who want to go with us on the market, and who want to become a part of FiveRocks.
So readers have basically a chance to become a part of your success story. Tell us maybe a little bit more about this convertible bond. What is it really and what's the benefit for an investor?
The convertible bond is the best out of two worlds. On the one hand, you have a yearly interest rate which is paid by us as, the lenders. On the other hand you have the chance to become a shareholder when you do the conversion of this debt or this bond into shares. So we give investors the opportunity to convert their investment into shares later. For example, with an IPO when we want to go public. Therefore, we give the investors a discount on the share price. The stock price will be deducted like, let’s say 30% – 40%, depending on the time frame of conversion. I think this is a huge benefit for the investors in terms of yield.
So you're looking to use that money to grow and then go public soon?
Yes, with this convertible bond we want to have at least the option to go public and to give our investors real shares with a real market price, but if we don’t go public because it is not the right time to go public, we will pay back the debt and give an additional 3.5% in five years. So each year 3.5% additional interest. Then in total, the investors get 7% interest every year for the investment.
That's a pretty good return considering it's debt which is pretty secure and you seem to have a solid business model with real estate.
Yes, this is the advantage of a real estate company to give investors real assets. We really want to use it for acquisition. We are a pretty small team, but we are an efficient team and don’t have many holding-level costs. Our expenses are pretty solid and pretty low so we don’t need to spend money on offices in the center of Munich. That would be stupid! We really want to use it for acquisitions. Then, of course, we can give investors collateral in terms of assets.
How Can Investors Profit From Real Estate?
Is there anything else that you'd like to share with us?
The future for FiveRocks works perfectly in combination with the security tokens. People would benefit from property development, afterward, we could convert the property development tokens into rental tokens and the people could profit from FiveRocks managing this property and also get passive income from the rents.
Yes, also from our perspective it’s like I said with being able to have the whole value chain. The token is a very good financial product that is giving investors the chance to be part of the whole real estate value chain. Otherwise, it would be kind of difficult for us to let investors participate, but in this case, the security token is absolutely perfect.