German residential and retail real estate developer Trei Real Estate is reducing its exposure in its home market, while increasing its presence abroad, CEO Pepijn Morshuis told PropertyEU at Mipim in Cannes.
Three to four years ago, the geographic distribution of the pipeline was split 50/50 between Germany and other markets. Now, 75% is in Poland and the US and only 25% in Germany.
The combination of high land prices, rising construction costs, and increased interest rates, has made new developments in Germany economically unattractive, Morshuis said. ‘Construction costs have skyrocketed by nearly 40% since pre-pandemic times. Stricter ESG regulations have further inflated construction costs by an additional 15%.’
As Trei Real Estate acquired land holdings at much lower prices in the past, it now has several projects in the pipeline. These include a PBSA development in Veesparan (construction recently commenced), a project in Dusseldorf awaiting building permits, and another scheme in Berlin awaiting zoning approval.
By contrast, there is more reason for optimism in Poland. ‘We're much more bullish on the Polish market, especially for rental apartments. Existing rental demand is high, leading to significant rent increases, while new apartment supply entering the market is limited. This imbalance creates ample opportunities for us,’ said Morshuis.
Additionally, the Polish retail sector offers significant possibilities, as many retail companies have untapped locations in Poland, creating room for expansion.
Back in Germany, the company's entire focus is on refurbishing existing retail properties to make them ESG-compliant. ‘As for developing new retail space in Germany, we don't see that happening for the same reason - construction costs are just too high. Tenants wouldn't be able to afford the rents needed to justify building new,' explained Morshuis.
He admits financing in all markets is ‘a bit of a challenge'.
’In Poland, high interest rates make it difficult to leverage investments profitably. In Germany, it is a combination of factors. ‘Stricter ESG requirements have lowered the loan-to-value ratio offered by banks. Second, rising interest rates mean we need to be careful that property yields don't fall below them, creating negative leverage,’ he explained.
Looking ahead, Trei Real Estate plans to sell a few residential properties in Germany, but according to Morshuis, the negotiations are still at a very early stage.
Despite the positive mood at last year’s Mipim, the reality is that the market has not really shifted a year later. ‘My conversations with investors reveal a lot of caution. There's talk of opportunities, but deals aren't happening. This suggests the market hasn't truly recovered,’ concluded Morshuis.
