Aareal’s Winkelmann: Future direction of rates remains the big question

The future course of interest rates remains the most significant factor for Europe’s property sector, according to Christof Winkelmann, member of the board at Germany’s Aareal Bank.

However, investors in real estate will adjust to a higher rate environment, with property fundamentals continuing to be attractive across several key sectors, Winkelmann argued.

Speaking to Real Estate Capital Europe at MIPIM in Cannes last month, Winkelmann said industry professionals were trying to make sense of conditions during the gathering. “Going to an event like MIPIM is helpful, more than ever, to help us understand the situation we are all faced with. Exchanging views is important to understand the dynamics that different property markets are facing today.”

Winkelmann disputed the notion the industry’s performance has been uniformly weakened by the uncertainty caused by inflation and rising interest rates in the past months, noting strong property fundamentals in key sectors.

“There are pockets across European real estate doing very well,” he commented. “Suddenly, everyone likes hotels, as performance has recovered well, and they have higher yields. This supports dealing with an environment of increased interest rates.”

For logistics, there is still an undersupply and construction costs are significantly up, Winkelmann said. “So, while interest rates have in part led to widening cap rates, leases are readjusted quicker than in other property asset classes, as leases are generally shorter and are widely inflation-indexed. This might partially offset cap rate widening. The situation for retail assets is similar, as leases are also mostly indexed.”

Lending in an uncertain market

Wiesbaden-headquartered Aareal, which was voted Bank Lender of the Year: Europe at the Real Estate Capital Europe Awards 2022, closed several significant financing transactions across European markets in 2022: in November, a £240 million (€270 million) UK hotel portfolio refinancing for manager Tristan Capital Partners; in March, it provided a €586 million syndicated loan to logistics manager GLP for a multi-jurisdictional portfolio.

Last year, the bank completed €8.9 billion of new lending through its property unit, exceeding its forecast range of between €7.5 billion and €8.5 billion. In March, the bank’s chief financial officer, Marc Hess, told Real Estate Capital Europe Aareal will aim to grow its real estate loan book by up to €2 billion this year.

Despite remaining active in the lending market, Winkelmann said the lender is keeping a close watch on economic conditions. “The future direction of interest rates remains the big question. It is fundamental. The market has been caught off-guard not so much by the increase of the rates itself, but by the speed at which the various hikes have happened.

“So, as a property investor, you need to estimate how interest rates are going to develop in the short and medium term. Most did not buy real estate in recent years because [they] truly believed interest rates would remain at zero for the future.”

Looking ahead

Winkelmann believes the industry will adjust to higher rates, as market participants have a clearer view on where they will settle. “The forward curve is steepest for years one and two, then it becomes flatter. No one is expecting it to go back to zero any time soon. But there needs to be a point where the market gets a firmer grip on the end to the increases. As this happens, transaction volumes are surely going to increase markedly again,” he said.

The volume of capital raised for equity and debt strategies suggests a strong future for the sector, he continued. “Look at the amount of capital globally available for property investments opportunities, compared to any other point in time. I believe the amount has never been higher. There is of course no lack of capital available to be invested in the sector.”

Underpinning the sector is a lack of supply of core property, which is driving rental growth in key parts of the market, Winkelmann added.

“Rental rates are strong. If you look at Germany, but also other countries, we need housing. New build construction activity is falling off a cliff, so it puts more pressure on existing stock. Whether rental growth offset value decline is a tale yet to be told.

“It is important to look at supply and demand, and how that will support rental growth. Just because interest rates have gone up, does not mean people will say goodbye to real estate.”

Winkelmann has been a member of the bank’s board since 2016. Prior to that, from 2008, he was managing director of its special property finance unit.