The market dynamics have changed

This interview by Christian Lovrinovic was first published in Raiffeisenzeitung on June 30, 2023. You can find the original version here: Karl-Maria Pfeffer: ?Die Dynamik ist aus dem Markt gekommen“ - Raiffeisenzeitung

The market dynamics have changed

With quality and an opportunistic approach, RPHI - Raiffeisen Property Holding International is defying the current tough headwinds on the real estate market. CEO Karl-Maria Pfeffer analyzes market developments and focuses on cash flow strength.

Since the sharp turnaround in interest rates a year ago, the real estate industry in particular has faced strong headwinds. How do you see this "new world"?

Karl-Maria Pfeffer: A lot has changed since the Corona pandemic. In terms of interest rates, from a long-term perspective, we see a typical wave movement, as it always happens. The last few years have been characterized by exceptionally low interest rates and enormous momentum in the real estate market. Cheap money has been looking for investments and many investors have opted for concrete gold. To this I would like to add that the rise in real estate prices over many years was also a certain anticipation of inflation, which has now come to stay for a while.

What is the sentiment on the market?

Pfeffer: You have to differentiate enormously here, institutional investors are currently holding their breath in Vienna and are still waiting for the market to develop for the time being. This has a lot to do with the challenging interest rate environment. In the meantime, you can get reasonably attractive yields again for short-term investments, which makes it possible to wait. In the case of very high-priced real estate, therefore, it is currently difficult to generate qualitatively equivalent returns. However, this will change again as soon as rent levels pick up - and they will have to pick up in view of inflation. At the same time, the focus on operating cash flow has become more important again, and the elements of value enhancement and hope for the future, which have to some extent dominated the real estate sector recently, have currently taken a back seat. As RPHI, we have always looked to be cash flow strong so as not to be forced to follow every trend.

How are the individual segments developing?

Pfeffer: In residential real estate, we see a kind of full braking in many segments, apart from the absolute top segment, where there is virtually no impact. Higher-priced residential property is also facing rather moderate price declines, relative to the strong price increases of recent years. In general, there continues to be cost pressure, driven primarily by land prices in recent years, which continues to prevent prices from falling more deeply. Since the Corona period, construction costs have also risen more sharply. Even if there is likely to be a small dip here this year, in 2024 and 2025 the strong wage increases and higher energy prices will have a noticeable impact on manufacturing costs. The situation is somewhat different for office and commercial properties, which are showing stable development provided they are modern and efficient buildings. The investment market is waiting in the wings, and in our operating business we were able to pass on inflation via indexation in 2023 despite many prophecies of doom. Solid market participants are able to digest the current inflation quite well. Quality plays a central role in this in every way - for both the building and the tenant.

How is RPHI coping with the new challenges?

Pfeffer: The market dynamics have changed, the days of building fast and selling immediately and thus making a quick buck are definitely over. This is certainly not a disadvantage for quality providers like us. We are in a very good cyclical position at the moment, all our properties are fully let and we have no pressure to sell. That was already the case during the Corona period. We skipped the interim peak in construction prices in 2021/22. In the meantime, construction prices have even returned to levels comparable to those before the pandemic in some areas. We are taking advantage of this and have brought 2022 projects into the implementation phase. Beyond that, our development pipeline is well filled - we have enough projects in the pipeline up to 2030.

What is currently being realized?

Pfeffer: We are implementing two projects of our master plan "Stadtquartier @ Wien Arena" in Wien-Landstra?e in Neu Marx. Here, by the end of the decade, the new "Wien Arena" will be built in the immediate vicinity, which will have 20,000 spectator seats. On the one hand, we are building the "Home of Handball" there, the new European headquarters of the European Handball Federation EHF with an area of around 6,000 sqm. The groundbreaking ceremony took place in May, and completion is scheduled for the European Championship finals in Vienna at the end of 2024, which is quite ambitious. The project has a volume of more than 20 million euros. Directly adjacent, we are building a student residence with 418 single and double rooms combined with 40 serviced apartments as well as stores and office space. The student residence will be operated by the experienced operator Milestone Operations Ltd . The investment volume here is more than 50 million euros. Completion of this project is scheduled for the winter semester of 2024/25.

The focus of RPHI is the office market. The widespread introduction of home offices in Corona times has shaken up this segment considerably. What's the next step?

Pfeffer: We see the shaking up of the office market by the home office more as a myth. Initially, the possibility of working at home led some market participants to question the entire office building business model. Companies had seriously considered using the home office for a permanent reduction in space. However, in our experience, this approach has not caught on. Instead, there is a shift in the use of office space, away from "single cells" to open spaces, but these again require more space. Many of our premium customers want to offer their employees a very high-quality workplace.

The topic of sustainability and #ESG is omnipresent. How do you deal with it?

Pfeffer: ESG has arrived in the broader society and is given a value and price, which is good. We haven't developed a building since 2011 that doesn't meet environmental sustainability criteria. We take the classic route of certifications, such as LEED Certification or ?GNI - ?sterreichische Gesellschaft für Nachhaltige Immobilienwirtschaft / DGNB German Sustainable Building Council . For example, the "Anton" residential project we developed was the first ?GNI/DGNB Platinum-certified residential building in Vienna. Just under two years ago, we then started to certify all our buildings according to the high safety standards of SAFE Asset Group as well, which is about operational safety and security for the users, but also about resilience and governance. In this respect, we are certainly among the pioneers. This approach was started during the Corona period and was then strongly influenced by the war in Ukraine. In Kiev, we operate our four-star Radisson Blu City Centre hotel, one of the few remaining operational hotels in the city. Despite the war, we are currently managing an occupancy rate of up to 40 percent. The hotel is valued precisely because of its comprehensive security standards by journalists, international organizations and embassy staff.

How did fiscal 2022 go, and what do you expect for this year?

Pfeffer: Ultimately, 2022 was a very solid fiscal year, which we actually closed better than planned. Despite the war in Ukraine, we managed to maintain stable development and achieve one or two successes. Despite the challenging circumstances, we are very positive for 2023. At the beginning of the year, we succeeded in indexing the rents at our major earnings generators in Romania and Bulgaria accordingly, thus adjusting them to the inflationary environment. This was a major step. We are also in the process of realizing the aforementioned projects in Vienna at reasonable prime costs. Our development pipeline is also well filled. In the Wiener Stadtquartier Arena, we still have two more development phases ahead of us. We are also currently in exploratory talks with potential tenants for the development of a 50,000 sqm office site in Budapest. And in Bulgaria, we are also working on a major project development with a lot of potential for us as the local market leader in the premium office segment. In Slovakia, in Bratislava, a unique residential property is currently being built in an unrepeatable premium location.?

How has your real estate portfolio developed?

Pfeffer: Over the years, our portfolio has fluctuated in terms of volume within a range of 300 to 700 million euros, depending on how much we have just resold. In recent years, we have managed to sell some large-volume, successful properties, such as the Tatra Center in Bratislava or the Allianz Campus in Vienna. The handball headquarters currently under construction has also already been sold to the EHF under a forward contract.Therefore, our portfolio is currently in the lower range of the bandwidth, with the new additions in Budapest or Vienna it will increase again.