Interest rates, inflation, energy prices. Jochen Schenk, CEO of Real IS, sums up the factors shaping the environment in which many companies like his own currently have to operate.

It is almost as if he is giving a class in real estate economics, were it not for the fact that Schenk oversees €12.5 bn of assets under management at the subsidiary of Bayerische Landesbank.

‘The European inflation is coming mainly from energy prices,’ Schenk said in an interview with PropertyEU at Expo Real.  ‘Higher interest rates will not bring those prices down. We expect that there will be a decline of inflation eventually, probably in one or two years.’

In the meantime, interest rates will rise even further. ‘We don’t know how steep it will be and how high,’ he noted.  

The market has come somewhat to a halt, according to Schenk. Developers are taking their time and deciding not to sell. How long this will last is anybody’s guess, he said. ‘Asset managers, like us, don’t have to sell right now, we will wait. We will try to sit through the steep curve of the interest rates.’

Schenk believes investors are reluctant to take the plunge right now, but that activity will return in the second half of 2023.

‘We’re doing some deals,’ Schenk said, ‘but not as many. In total -  bought and sold - we did €1.5 bn this year. In a normal year that would be approximately €2 bn.’

Whereas deals sometimes take four months from beginning to end, they can take more time now, for instance because banks will look more closely at the details.

German market
The uncertainty in Germany is bigger, according to Schenk, due to the energy problems. ‘We are looking for opportunities in all markets.’

The residential market is a hot issue in Germany, he said. The cost of land is high, obtaining the necessary permits takes a long time, building costs are high and so are the ESG demands for new housing.

Although there is a target to build 400,000 new homes, investors are not stepping in. Said Schenk: ‘We find housing in Ireland more attractive right now, that’s where we invest.’  But he noted that the conditions for investors in Germany might change soon, because the government and other stakeholders recognise the necessity of attracting more investment. The demand for affordable housing is very high and will rise in the coming years, according to Schenk.

Meanwhile, the German office market is undergoing big changes. ‘The old-style office does not work anymore,’ said Schenk. ‘During Covid we had a big change, when people started working from home. New work we call it.’

Because of this change companies are relocating because they need less space, but at the same time they want quality. They want an attractive spot, shared desks, meeting spaces inside with activity zones and bars. Schenk: ‘Office spaces have to change and that means the mindset of companies has to change. The office market will change with it, but it will happen step by step.’

During Expo Real Schenk expects to talk to a lot of people to hear what they think. ‘We won’t do deals this year. My next appointment is with an investor and my question to him will be: when does he think he will step back into the market again?’