Wordrap – amongst real estate managers

Over 5000 international investors and representatives of financial institutions are heading to MIPIM 2017 where they are expected to discuss geopolitical developments including Brexit, the impact of the tech revolution on real estate and global social changes. The rapid price increases on the European real estate markets are making it progressively more difficult for investors to obtain adequate returns on with acceptable risks. More and more experts are warning of a real estate bubble.

The questions:

1. The top locations are almost sold out. Are higher returns only possible with higher risk? Is something being inflated here? Are we heading for the next real estate bubble?
2. The main theme of this year’s MIPIM is innovation. Property Technology (PropTech) – a passing fad or a long-term trend?

Gerald Beck, STRABAG Real Estate GmbH

1. The long-lasting low interest rate phase has reduced the returns to a minimum in all of Europe. The interest rate hike in the Unites States, however, is the first sign of a turnaround. It will take a while until this development reaches Europe, but in the meantime there are still properties for sale in Eastern Europe that could bring attractive returns. The time lag in this case will not be sufficient to cause a bubble.
2. PropTech is certainly a topic for the future and the real estate industry will have to deal with it. I doubt, however, that it is going to go as quickly as in other areas, because the resistance to change is (still) too high. One also has to be aware of the fact that real estate ventures are long-term projects requiring planning, construction and administration and not short-term consumer goods. This, combined with the high investment sums, does not allow any hasty experiments. Beyond dispute, nevertheless, is the fact that the BIM & Co have provided  irreversible developments and will sooner of later find universal application.

Frederike Benscheid, Senior Manager at Deloitte Austria

1. At the moment the market has stabilised at a very high level. The prime locations (A) of the properties in Vienna are undoubtedly an area that should be closely monitored. From an overall market point of view, we do not expect any market-wide problems to develop here in the next little while – as long as there are no drastic changes in the global interest rate policy.
2. The technological developments in the world of real estate are not just a trend, but also the future of the field and they affect all the market participants without exception. Up until a few years ago, managers had the security of solid structures and procedures that hardly needed to be questioned. In the meantime one can hardly ignore the demand and supply of the possible changes. Predominant topics in this area are disintermediation and transparency. There are various apps available, which could be found in the B2B and B2C areas as well as diverse crowdfunding solutions that provide an alternative to the traditional financing of real estate.

Stefan Brezovich, ÖRAG Österreichische Realitäten AG

1. Because of high demand and the enormous cash inflow, the returns on real estate investments have further decreased in 2016. The perpetual correlation between returns and risk are still valid. At present we can see returns in the office branch, which were for a long time reserved for housing. The low level returns take the risks of loss of income and the need to additional investment only partially into account. Rising interest rates (for the moment in the long-term areas) and a jump in inflation should make us aware of a potential bottoming out. Because of substantial contributions of equity capital, we do not see a bubble just yet. Should the banks lower their requirements for own capital, then the situation might change.
2. Property Technology deals with all technological developments in the real estate industry and is therefore a fundamental stage of development and not a passing fad. The transfer of classical day-to-day business procedures to digital operations using the latest technology has long begun. Areas of application are planning, project management, property search, administration, communication with tenants and many more. Apps, 3D printing and virtual reality tours have already established themselves as permanent fixtures in the field of real estate. The use of drones (e.g. technical monitoring of buildings) and robotics (e.g. cleaning, security) will expand in the near future.

Michael Ehlmaier, EHL Immobilien

1. A general rule in the investment sector is that pursuing higher returns comes at the cost of taking a greater risk. Because the interest rates – and therefore also the yields – have been at a record low in the past years, top locations only generate proportionately lower return rates. However, this is not related to a developing bubble or other dangerous circumstances. Many investors chose Vienna because of the metro stations outside of the Gürtel, where the prices are still moderate and the risk is higher but definitely still justifiable. Those in search of double-digit returns must search for special challenges (like vacancies and legal usage conversions). Normally this will entail external financing with relatively high and unfavourable interest rates. In contrast, residential real estate is a safer asset class with lower purchase returns than the asset classes retail and office, where a potentially higher probability of vacancy is already calculated into the purchase yield in the form of a risk premium.
2. Digitalisation and its consequential changes are also changing the world of real estate. Examples include broker portals, digital communication platforms for property management and real-estate crowdfunding. Digitalisation concerning communication platforms is the order of the day – and clients are specifically demanding it. We are currently working on our “Project Property Management 4.0” that assures the owners of the real estate that we manage full transparency through digitalisation. This is not a short-term phenomenon; it will bring changes that improve business life and the entire real estate branch.

Fabian Kaufmann, Managing Director CC Real GMBH

1. The Austrian real estate investment market is characterized by an imbalance concerning the supply and demand. While the demand from institutional and private investors is at a record level, there are progressively fewer suitable properties on the market. This is a development that should be closely observed in all of Europe. Big investors are looking for big projects and those are scarce – not only in Austria. Even if returns are dropping and the investors are prepared to take greater risks, I do not see any danger of a bubble formation at the moment.
2. Beside numerous technical developments all around smart homes and smart buildings, digitalisation is also pushing the interactive communication with consumers to new heights. This results in completely new forms of relating to customers. Chatbots are one of many relevant technological support systems, which make it possible.  In doing so, there are text-based dialog systems that are able to transmit the required product information to the customers in an entertaining fashion and in real time as well. Such technological developments have to be closely followed to avoid being overwhelmed by them.

Richard Lemon, DPC Immobilien

1. The tragedy of real estate bubbles is that we unfortunately do not see them coming before they burst. But no, I do not believe that there is a bubble developing on the Vienna real estate market. A recent noticeable increase of inflation and a slight recovery of the economy in Europe lead to the conclusion that the ECB needs to marginally retract their monetary policy. For now the low interest rates alongside the pressure on the returns will certainly stay.
2. Innovation is not just a passing fad. It remains to be seen which technical innovations will ultimately prevail. At DPC we always strive to find new ways to make the search for properties as easy as possible for our customers.

Wolfgang Macho, IMV Immobilien Management

1. The principle that higher returns are only possible with higher risks also applies to the real estate industry – be it the location or the type of property. The question of a real estate bubble is one that comes up again and again and I get the impression that some people have been talking about it for so long in the hope that it will actually happen. I have a very clear opinion on the subject: as long as the interest rates remain like they are at the moment, there will be no real estate bubble and my estimation is that they will continue for a long time yet.
2. Some of the PropTech companies will be able to establish themselves in the field. Digital development will not stop with the real estate industry. We are only at the beginning and in 5 years’ time, the innovations that we only imagine today will have long become reality. Therefore, there is great revenue growth in this area.

Eugen Otto, Otto Immobilien

1. Many institutional investors have indeed expanded their investment portfolios to other asset classes such as hotels, logistics sites, or specialised properties (e.g. parking garages) with the hope of higher returns. Furthermore, there is an increased demand for the lower classes (B locations) of classical office properties with good infrastructural connections as well as in the area of corporate properties for investment purposes. Although prices for real-estate investments are at a high level, partially because of lacking investment alternatives, we can rule out the potential bubble building on the Viennese market regarding commercial properties.
2. The interaction between buildings and their users – Internet of things – will gain importance in the future. Useful technical innovations in building management, therefore, are certainly not a short-lived trend, but a long-term development that will constantly accompany us in our everyday routines and (hopefully) make our lives easier.

Michael Pisecky, Managing Director of sReal

1. Globally speaking there is a lot of capital available and the pressure to invest is very high. Essentially, there are investors who are trying very hard to simply try and generate profits without development or any value-adding activities. It might have been the securities business up until 2008, where fewer and fewer transparent construction returns were detailed and we all know how that worked out. Afterwards, the capital was more often used for real estate. First there was a run on the housing market and now almost all types real estate are in demand and we are rushing from record year to record year as far as revenues are concerned. When the prices rise quicker than the economic growth, then the sales prices could only rise, because some investors are satisfied with lower returns. How will that work out? I wish much success to all the investors who develop and consequently create high value added.
2. Digitalisation is undoubtedly happening, naturally in the real estate sector as well, both in the service area as well as in maintenance and above all in new buildings. PropTechs are here to stay. Personally, I believe that ProTechs that improve the efficiency of the services are urgently necessary. The developments that would like to replace us are our competitors and we are ready to meet the challenge – the PropTechs, however, have to strategically choose sides beforehand.

Andreas Ridder, CBRE

1. Generally one can only obtain higher returns with higher risks. Until now we have   usually noticed that in the critical phase of a real estate cycle, the difference in returns between very good and inferior properties has shrank considerably and, as a result, the additional risks hardly paid off. In the current cycle, however, the situation is different in that one can still get a very high rate of return even on lesser-valued real estate. This is a very sound development and is not really a basis for bubble building.
2. IT will penetrate into all areas of our lives, also into our real estate, and that is certainly a long-term phenomenon. Especially in the areas where technology could help us save costs and become more efficient, it will become indispensable!

Markus Schafferer, PEMA

1. Because the Austrian and the German real estate markets are much more conservative than their Anglo-Saxon counterparts, I cannot detect a bubble coming our way. Quite the opposite, I am optimistic that 2017 and 2018 will bring increases in the returns on housing and the office sectors. Afterwards, I expect a lateral movement at most, but not a downswing.
2. Like with all other technical innovations, it will take some time before we find out if PropTech will catch on. One aspect will never change, however. At the end of each procedure - no matter how much technical support is available - it is a person who has tt make the decision. Therefore, beside the obvious facts and figures, human experience and a gut feeling will always play an essential part.

Wolfgang Scheibenpflug, Vienna Airport

1. The high demand for prime location properties in housing or the so-called Class A buildings inevitably causes some investors to look for other alternative asset classes. Negative developments, which would encourage  long-term low interest rates by applying pressure on the investors, should be carefully observed.
2. PropTech is the logical continuation of digitalisation in the real estate branch.  Improved efficiency, higher profits and better service provisions are important advantages for the market participants. Ultimately, however, the human aspect in the consulting services and the long-standing market experience cannot be replaced with technical applications.

Peter Ulm, 6B47

1. Rising prices and a scarce supply on the real estate market have caused the traditional investments to bring merely slight returns. Alternatives offer investments in real estate developments that facilitate significantly higher returns. The risk of a real estate bubble in Austria is very low at the moment. There is an indication of a lateral movement in the selling price development, which shows that the prices are remaining stable.
2. In order to run a successful company, it is essential to actively react to the changes on the market. The advancement of the real estate industry, especially through the influence of the young Start-ups in the area of IT and technology, is a necessary step to react to the needs of the population. The changes in the way of life and work also have a big influence on the development and planning of new real estate projects.

Peter Vcelouch & Manfred Ton, Cerha Hempel Spiegelfeld Hlawati

1. It is a fact that there is an increased interest in the lower classes of real estate (B and C locations), because they still offer reasonable returns. If the middle-to-long-term returns are not sufficient to amortise the expenses, particularly the financing costs, there is an increased risk situation and a chance of a resulting real estate bubble. In this respect there is little difference as far as location is concerned. Real estate investments always require careful consideration and calculation.
2. There is no stopping the process of digitalisation or the transfer of business activities to the digital world. The modern information and communication systems cannot be prevented from affecting the building and real estate industries. We view PropTech as a long-term trend, even if it does not seem realistic to do all the procedures electronically – at least not for the time being. In many cases the law still requires a real rather than an electronic action; just think of the notarial certification of the real estate sales contracts. It is also not yet common practice at the moment to rent or buy a new office space or an apartment merely on the basis of a virtual reality tour. Even in the past one hardly ever bought property having only looked at it in a glossy brochure.

Ernst Vejdovszky, S IMMO AG

1. The rate of return – high or low – is, on the one hand, an expression of how high or low a buyer estimates the risk to be and on the other hand, dependent on how high the returns would be from alternative investments or the level of interest rate. At the moment in acquisitions we are relying on a niche strategy to find properties that bring high returns on the market, but at the same time show small risk. A bubble formation is usually accompanied by a high proportion of borrowed capital when buying property – and this is currently not the case.
2. As professional participants of the real estate branch, we are naturally observing all the technological trends and innovations with interest in order to use them at the right time. This is also the case concerning the topic of PropTech, which is rapidly developing at the moment.

Hans-Peter Weiss, ARE Austrian Rea Estate

1. Prime locations are scarce and expensive. Low prices for land enable high returns on lower-class properties (B and C locations). At the same time, those locations are often not well established, whereby interesting projects can lead to an upgrading of an area. I cannot recognise any acute indications of Austria heading for a real estate bubble at the moment. Behind the consistent housing price dynamic is an actual highly-defined demand. Investments in residential property are increasingly popular and the low interest rates are favourable for external financing.
2. There is an enormous need to catch up in this area for the real estate branch. Digitalising of the market and its business procedures will in the future influence the assessment of real estate. In the long run the trend should go in the direction of digitalisation of properties during the entire life cycle. A “digital twin” could provide all the information about a given property.

Richard Wilkinson, Erste Group Commercial Real Estate

1. Achieving a significant yield today involves moving to secondary locations or more risky assets. If interest rates remain low this will continue. The longer this goes on the higher the risk of a bubble. Generally, we can hope that interest rates will normalize without pain, with the economy posting sensible growth and real estate prices adjusting only moderately. Whilst the residential market is supported by population growth, especially in Vienna, the issue of affordable housing persists. I personally expect a moderate correction in residential in the medium-term. For commercial properties we have seen the bottom of the long term yields in leading markets like the UK and we can expect that to flow over to Austria soon. Most of our clients are now taking advantage of the very low level of interest rates and fixing their financing costs for the long term thereby significantly reducing their risk.
2. Construction standards have always been evolving. But what is new is the unparalleled ability to integrate technology into new buildings - and that trend is unstoppable. The challenge will be to integrate that innovation into the much larger stock of existing buildings and to make sure that these too attain optimal efficiency and usage.

Thomas G. Winkler & Claus Stadler, UBM Development AG

1. One can always achieve good returns by investing in real estate. There will never be a “zero percent income” real estate. At the moment there are no alternatives to real estate. We have a limited supply and a high demand. This naturally puts the real estate investors under pressure. Investors are also examining the economic fundamentals of properties or considering investing in such assets as hotels, which offer higher returns than offices. For us as developers the current market conditions are ideal.
2. This is definitely a topic that may not be regarded retrospectively and has to be actively observed. Digitalisation of procedures, BIM (Building Information Modeling) and the handling of Big Data are some of the catchwords of the future. For us digitalisation means, above all, professionalisation. The development in the area of the B2C field is growing most rapidly, as can be seen in the simple example of the increased internet searches. A lot of the new business ideas which are forced onto the market today are meant to facilitate the existing procedures or to create new cooperation opportunities altogether. We see a great deal of potential here and we are constantly scanning the market for new ideas.