This publication talks to the largest listed real estate firm in Germany about the market and its investment philosophy.

The German real estate development market has been strong recently and investors should consider the market more closely, with plenty of potential still ahead, Consus, Germany’s largest listed real estate firm, says.

Frankfurt-listed property investment group Consus AG, with about €10 billion of gross development value of properties under development, is upbeat about its domestic market, and is spreading the word. Consus, with about 750 employees, invests in Germany’s nine top cities: Berlin, Leipzig, Dresden, Stuttgart, Munich as well as Frankfurt, Cologne, Dusseldorf and Hamburg. The firm proudly notes that it is the leading player in these cities, citing a report earlier this year from European research house bulwiengesa.

At a time when interest rates in much of Europe are ultra-low or often negative in real terms, a hunt for yield is understandable, but there are avenues which don’t require inordinate risk. Consus’s business model – in terms of how the property investment journey starts and completes – minimises investment risks, Benjamin Lee, chief financial officer, told WealthBriefing in an interview.

Lee spoke to us during a regular trip to London, highlighting how the firm is tapping into an international investor base. And institutions such as family offices and corporate investors, along with the likes of other wealth management entities, are a growing part of the conversation. Lee said the potential to get such investors more involved is exciting.

“Historically, they [family offices] haven’t been significant clients. However, we are getting increasing interest from them,” Lee, who has worked at a number of major firms, including many years as an investment banker for UBS, said. (He has been in his current role since April 2018.)

“They are looking for yield and diversification,” he said and, for many investors, real estate is a core asset allocation area. Yields are highly attractive in a low-yield context. Shares in Consus can and should be treated as “growth stocks”, he said.

Mismatches
There is a shortage of supply of residential properties in Germany, Lee said, arguing that a rising population in Europe’s largest economy was a factor. Immigration, combined with increasing employment in city centres due to digitally-driven businesses, for example, is driving a need for residential developments in the top nine big cities. The number of German developers in the multi-billion euro bracket is small, relative to the size of the overall economy, compared with the likes of the UK, he said.

“There’s huge potential,” Lee said. “There is also a limited amount of competition and, where it exists, is more in the luxury [property] area, whereas Consus' focus is on the middle market” he added.

Europe’s real estate market is highly fragmented. Germany, the largest economy in Europe and the powerhouse of the eurozone, is an obvious market to study. According to PricewaterhouseCoopers in 2018, four German cities bagged four spots out of 10 for having the most attractive investment and development prospects (Berlin, Frankfurt, Munich and Hamburg).

Asked about any downside risks, Lee replied: “German property is an extremely robust sector, due to the strength of the economy and the strength of the underlying structural demand and shortfall in supply.

The key downside risk is construction costs, both labour and materials. The main push on this was the ramp in housing production, which has now occurred. However, risks remain on prices in both areas. Consus is proactively addressing this through our digitalisation strategy and build up of in-house production capabilities.”

Business model
Lee explained what he said is Consus’s strong business model - involving a forward-sales approach that minimises development risks. Land is acquired, developed, and then sold forward and prepayments from the forward sales of the property are constructed. This approach is not yet standard operating procedure in Germany, he said.

“Most developers out there are less disciplined and see what they can get,” he said. 

Lee said that the firm has limited competitors. “Our scale allows us to develop the largest projects; our forward sale model allows us to efficiently fund not only residential, but also related retail and commercial opportunities, and our expertise in both new build and refurbishment allows us to take on complex urban brownfield projects,” he said. 

The firm has expanded organically and through its purchase of SSN, a deal that closed at the end of last year. That purchase, valued at an implied enterprise value of about €1.1 billion, boosted the Consus gross development volume from €6.2 billion to €9.6 billion, and the overall number of projects from 53 to 64, it said at the time. 

Consus has been busy this year as well. In April, it reported €656 million of pro forma revenues for 2018, and pro forma adjusted earnings before interest, taxation, depreciation and amortisation of €253 million. Consus said that it had a net debt of €2.104 billion at the end of 2018, reducing its underlying debt.

In early May, the firm successfully placed a senior secured corporate bond with a total nominal amount of €400 million with institutional investors. Those notes were issued at 98.5 per cent with a duration of five years (until 2024), a non-call period of two years and a coupon rate of 9.625 per cent per annum over the term.