Currently, hardly a day goes by without bad news from or about project developers. Industry experts assume that a noticeable share of 40 to 50% of developers will not survive the current crisis. Reason enough for "Der Immobilienbrief" to take a closer look at Catella Project Management, the Düsseldorf-based residential and office property developer that has been in business for 25 years.
„Der Immobilienbrief“: Mr. Franken, at the moment the news about project developers going bankrupt is piling up. What is going on that well-known companies are now having to file for insolvency in rows?
Klaus Franken: Don't panic, Mr Rohmert, none of this is surprising - it's simple mathematics, which you also regularly show to the readers of "Der Immobilienbrief". Insolvency reports are never pleasant, but they are part and parcel of a functioning market. We already talked about this last year at the Expo Real. In this respect we are "on target". Anyone who has made expensive purchases and built up a large team in recent years can hardly "get their act together". That is easy to calculate. The turnaround in interest rates has caused all calculations that were "sewn on the edge" to burst and business models that were built on 1% interest rates to be torn apart. The value correction is inevitable and one should stop lamenting.
„Der Immobilienbrief“: Is this "natural", so to speak, and affects everyone in the industry?
Klaus Franken: Much is "home-made". After the consumption of the drug "zero interest", now comes withdrawal. At the same time, there are many other external effects that could not have been planned. This applies to the acceleration of inflation forced by the Ukraine war, which led to a turnaround in interest rates, as well as to the explosion in construction costs and energy prices, which no one could have calculated before the war. But that does not absolve us from responsibility for our own actions. Those who have enjoyed particularly much of the drug "zero interest" and have made their business model dependent on it suffer the most from withdrawal. High leverage, mezzanine on top and then money raised through bonds - this is the toxic cocktail with a direct path to the district court. If, on top of that, firmly planned and even contracted project sales fail in the current market environment due to buyer bankruptcies or other partly pretextual deadline or quality reasons, there is hardly any way out. Moreover, those who have predominantly bet only on condominiums will fall into a particularly deep hole. This is also mathematics - with higher interest rates, most of the clientele drops out. No one could have foreseen the developments of the last 18 months, but prudent commercial action must take market distortions into account.
„Der Immobilienbrief“: How do you deal with the market upheavals yourself?
Klaus Franken: Embracing new reality and building on the tried and tested has long been our guiding principle, which was also due to the Catella Group's conservative origins in Sweden. We have remained down-to-earth. This is not our first crisis either. But that does not change the fact that we had not calculated the extent and speed of the developments. No one who wanted to survive in the market could have done that. However, we did not take advantage of many supposed opportunities at high price levels in the past three years and remained very calm in our purchases. Nevertheless, we had to adapt our projects hard to the changed conditions. That was definitely not subject to entertainment tax. We would not have wished for the need to bring in more equity either. But that is what we did. We had dispensed with mezzanine and project financing via bonds anyway and acted quite classically with banks and equity.
It all sounds totally boring, but it is sustainable. The calculations look different now, but actually they don't - before the "zero interest phase", the plots were only half as expensive, the condominium projects were planned with 30 units per construction phase instead of 300, and factors never had a "3" in front before. And we were also lucky. We are not sitting on overpriced plots. With our conservative specifications, even if we ourselves thought we were sporting above our shadow, we have always lost out in the bidding processes in recent years. With "zero interest" and the assumption of perpetual value appreciation, many projects have been calculated beautifully. Now we are going "back to the roots": land prices are halving. Condominiums are being built handpicked again. Investors are once again allowed to demand returns.
„Der Immobilienbrief“: Is everything as gloomy as it seems at the moment?
Klaus Franken: On the contrary, now is the time of opportunities again. While some developers will no longer be able to correct their optimism of the past and the complexity of their financing structures, opportunities are resulting from this right now. There are simply solid certainties in the market. But it always comes back in a crisis, the "German Angst". Then the media, banks and equity investors focus on the wrong issues.
The reality is quite different. Full employment secures purchasing power and thus rental income. What more do I need for a good real estate investment? Ok, the valuations and exit opportunities are unpleasant at the moment, but that only affects those who are focused on a quick "flip". In the long run, it is the indispensable demand of the tenant base that counts. Unfortunately, the industry has recently preferred to deal with valuations and financial constructions rather than those that keep the whole real estate industry going month after month via rent payments. Let's deliver what tenants need and our business is secure.
„Der Immobilienbrief“: What is your current focus?
Klaus Franken: In a nutshell: Housing, the new office and infrastructure. Housing, especially in new construction and climate-protection neighbourhoods, is seeing brisk sales and stable rental prospects. The demand is unbelievable and the supply is plummeting - here, too, it is pure mathematics to get a solid investment off the ground. The structural change in working life is serious. Even new office buildings of the last 5-10 years often miss the mark. Today, the only thing that counts is the top location, the flexible office with plenty of communication and additional benefits. It is no longer about a number of desks. Working life must be celebrated as an event. Users are willing to pay high prices for this. This creates new parallel worlds that do not correspond to our experiences. On the one hand, the vacancy rates of "out of time" properties are growing. On the other hand, top rents are rising. Today, this is no longer a mathematical contradiction, but a function of the changed working life. On infrastructure: The deficits in Germany are unfortunately all too well known; so here, too, there is an indispensable need that the state alone cannot cover.
„Der Immobilienbrief“: What is Catella's current position, what are your plans?
Klaus Franken: Profit and capital strength offer a good outlook. The company figures are very transparent. Q2 this year brought a profit of 8 million euros. Less than hoped for, but profit in these days is not a given. So we don't seem to have done everything wrong. The coming months will offer a variety of opportunities that can be seized with the appropriate capital strength. New projects and investments can be well calculated if one prices in the current framework conditions. We have already talked about land prices and the certainty of indispensable demand. Many may not yet get used to the new price structure, but it will certainly come sooner or later, as is usual in Germany.
„Der Immobilienbrief“: Mr Franken, thank you very much for your time and your assessments and comments.