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Commercial Property

Gigantic amounts of capital are likely to be re-allocated into safe havens
From a top-down point of view we believe Germany is an ideal country for investors to redistribute capital to. Until this day Germany appears to defy global slowdown. While we believe Germany’s economy is likely to do better than Italy, Spain, France and the UK, we are convinced that Germany, as an export nation, by definition, has to suffer from a global slowdown. –
Switzerland certainly has as good if not better defensive qualities, which is why the Swiss Franc is “the” safe-haven currency. However, the asset rotation we are talking about goes well beyond a few super-rich hiding their assets from inland revenue. One of the major contributors to asset re-allocation should be the insurance sector which holds gigantic amounts of sovereign bonds

The Swiss central bank is already on the fence keeping the currency from further appreciation. There appears to be a limit to how much more capital can flow into this tiny economy.

Re-denomination risk
Germany on the other hand is large by all standards. Investors can efficiently familiarise themselves with the legal, political and economic facts and invest substantial amounts. Of course, Germany as a member of the EMU would suffer from a break-up. But, in the case of a redenomination of currencies and even in the case of the formation of a northern-Euro, investors are likely to make currency gains should they eventually swap Deutsch Mark for Euros. The opposite can probably be said about investors getting the Lira or Pesos back.

Top location, long-lease top tenant properties
As a consequence of the above, we believe that Germany, Switzerland and Scandinavia should see net inflows into their commercial property sector. That said, we do not share the widely held belief that Germany may be immune or unbundled from the rest of the economy. We believe due to many structural factors e.g. order book duration the German economy shows a delayed reaction to macro-economic changes. This has been experienced after the internet bubble as well as the financial crisis in 2008.
However, Germany will feel the pinch even though its relative competitiveness and a weak Euro may underpin its performance. While Germany will be affected by a downturn we find it likely it will not suffer as much as other countries. This alone should suffice to attract capital and underpin prices. In this situation we expect a similar development for real-estate as can be observed in other, listed markets: Polarisation. Low-risk high quality assets’ yield differential to the middle-segment increases drastically. Just as the market is willing to pay a fee to invest in German and Danish short-term sovereign bonds, the market will be increasingly willing to accept lower yields for top-location, top-class tenant with long, inflation indexed leases.
Conversely, just as in corporate and sovereign bonds, the middle is likely to be squeezed more (relative) than junk. At the same time, transaction volumes and hence liquidity should improve/deteriorate for the different segments of the market. In essence, we favour luxury, top-location and budget grocery retail as well as modern, prime offices, again with 5-10 year leases and non-cyclical, high-calibre tenants.
As with residential we believe that the same rationale can be applied to the metropolitans of Scandinavia

What to avoid
In essence, the opposite of what we like is what we would avoid:
a) Peripheral  and politically instable countries e.g. Spain, Italy, Greece, Hungary
b) mid-market, discretionary goods (furniture, clothing)  retail
c) Working class residential
d) East-Germany mid-sized agglomerations with negative demographics
e) Short-lease mid-class location office
f) London, Frankfurt financial district office location

Student accommodation/ micro-apartments a very attractive defensive investment

Structural deficit of affordable, small-area housing
Political stability aside, student accommodation or better micro-apartments are an attractive sub-segment of the property market per se. First of all, there is a structural deficit of contemporary student accommodation which practically guarantees full capacity utilisation
..that offers higher rental income per square meter
Further, as student housing and small-area housing are complementary, revenue per square meter is well above average. Competition for these spaces is high and so is fluctuation which allows for a faster than average price convergence to market values
Demand should remain very strong and is uncorrelated to the economy
Demand for student accommodation should not be correlated with the overall economy at least that is what consensus seems to think. We would argue that, in Germany there might even be a negative correlation as university education is still largely free and people should be more inclined to study as the labour market becomes more difficult. Plus, should the economy tank, demand for absolutely cheaper spaces should increase. In short, student accommodation is a defensive asset class
The combination with non-students provides advantages
The latter defensive features only materialise, in our eyes, if the concept of student accommodation is opened up for non-students as well. We consequently favour a strategy in which properties appeal to students on the one hand, to university staff, temporary overseas post-grads and professional commuters on the other. We believe this has a positive effect on ambient, maintenance-cost and the ability to charge a premium.

Top university cities with high rents and structural deficits provide superior returns
Obviously the mantra “location, location, location applies to this kind of property as well. In a top down fashion we picked the combination of top universities with student growth, middle to large cities with positive demographics, a high shortage of small living space and high prices per square meters.

Conversion lowers risk and adds to returns
Our strategy is it to convert non-performing office or other properties into out-performing micro-apartment residential assets. Lastly, student accommodation has become an asset-class of its own. A couple of years ago it still has been somewhat of a specialist and so illiquid property class. We observed a drastic change in attitude towards this, in the UK and Germany. We believe this trend will continue as student accommodation joins the likes of nursing homes


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student apartments

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