Rainer Nonnengässer, Head of Germany & Netherlands, AMRO Partners
REFIRE had the opportunity to talk recently to Rainer Nonnengässer, a veteran of the student housing sector in Germany, having worked for the market leaders almost since its inception. He's now heading up the Netherlands and Germany for the UK-headquartered AMRO Partners, who are entering these two markets for the first time. The group has been active to date in the UK and Spain, and currently has more than €1.05 billion of assets under management.
REFIRE: What's your overall view of the German residential real estate landscape?
Nonnengässer: While interest rates were so low over the last ten years, liquidity flowed into real estate in the absence of alternatives. Investors who would have had 60-70% of their reserves in fixed income had to go somewhere else for the last ten years, and they're now happy to go back into government bonds again. The liquidity stream going into real estate will be lower than in the past.
REFIRE: You're seeing changes in patterns of demand?
Nonnengässer: There are notable changes, many in full swing. The nature of demand is changing, a lot of the stock needs to be repositioned over time. Even big landlords like Vonovia are affected - renters in urban areas are now often looking for something other than a naked apartment with no kitchen, and with bathroom tiles from the 80's. The available stock is not matching with the structure of demand, where 50% of households are single households. Not only of young people, but also older people. This mismatch between offer and demand isn't so bad when the rent is €5.00 per square metre per month, but that's no longer the case. Only 11-12% of German housing stock is below 30 square metres. A lot of investors are therefore looking closely at niche sector, such as senior housing, co-living and student living.
REFIRE: We can't all live like students, surely?
Nonnengässer: The line between student housing and micro-living is a bit blurry. Plenty of people are coming to a city because of a job, and might want to stay for 2-3 years. They're not thrilled with having to go out and buy a kitchen when they're not sure how things will pan out.
Rents have gone up strongly overall through organic growth over the last six, seven years, and post-COVID. We've seen waves of immigration adding to upward price pressure. Travel restrictions have been removed, the Chinese and Asian students are back. Erasmus and other exchange programmes mean more young people are on exchange programs in Europe than ever before. The rise of English-taught courses means there is wider interest in coming to Germany to study.
REFIRE: How has this affected student rents?
Nonnengässer: The traditional role model for students over the years was living in a WG (Wohngemeinschaft), basically flat-sharing with 3-4 others sharing the rent of a 100-sqm apartment, with the rent at €6.00 per sqm. But in Berlin or Munich the cost of a room in such a shared flat has tripled over the last ten years. So the delta between living in such a flat-share model or living in a purpose-built student apartment (PBSA) is no longer 50-60%, it's just 10%.
The cost of a WG-Zimmer (room in a flat-share) in Munich is between €700 and €900 per month, and for a purpose-built studio it's between €800 and €1,100 so there is already some overlap, depending on micro-location. The Bafög (state student subsidy) has seen a small increase, but not much. There is also a student loan system administered by (state promotional bank) KfW. They raised their interest rates in October to 9%, which is pretty disastrous.
REFIRE: What are the supply-side benefits of investing in student housing?
Nonnengässer: There's been a general collapse of investing in residential, with the sudden withdrawal of the government subsidy programme at the beginning of the year helping to kill it off. This will likely mean no new supply on the student housing side for probably the next two years, while demand continues to rise.
Despite the partial re-introduction of the KfW subsidy programms in summer this year, you only get subsidies for refurbishments and no longer for new-builds, because the government believes their is no correlation between subsidies and number of new-built units. Hence for the next three years we will likely see rising rents. In 2019, pre-COVID, Munich was the only city that had gone through the €1,000 mark. Now Berlin and Frankfurt are there, and some others. Even a B-city like Freiburg is at €900. For a 20-sqm apartment. And of course a typical contract is for 12 months, longer than the academic year. There are some 6-month contracts, but these are mainly for exchange students.
REFIRE: What are the key drivers behind AMRO Partners move into Germany, at this point?
Nonnengässer: There are three main drivers. The first is the demand-supply imbalance. With three million students, Germany is a sizeable market. The Netherlands also has a huge supply demand imbalance, but the market is much smaller, with around 600,000 students. Secondly, the availability of financing in Germany. There are KfW programmes supporting refurbishments and new-builds meeting higher energetic standards. With these you can achieve all-in financing costs of about 2%. So given current cap rates, in Germany you can have a positive gearing effect, not so readily possible in the Netherlands and Austria, where such financing support does not exist. So the green debt model that we have in Germany is highly attractive.
The third major driver is the availability of projects. Over the last ten years, in reality, my main competitor was the condominium development segment. On every site we were competing with other developers who were trying to build condos, a business which is effectively dead at the moment because people can't afford to or are severely restricted in buying. The developer has costs per square metre that are at, or higher than, current market prices. So we are seeing a lot of pipeline opportunities these days, which were supposed to be condo development sites and projects two years ago.
REFIRE: What is your timeframe for investment?
Nonnengässer: I think this window of opportunity will last, at least for the next 12 to 18 months. The pausing of interest rate movements is not enough. When they start moving lower, for the first time, that'll be the signal for a turnaround. Then we'll see a path where financing becomes accretive. This could last some 12-18 months, and is the window for us to get dug into the market and start as many projects as feasible.
REFIRE: Are you looking to buy existing properties, or concentrating on development?
Nonnengässer: We are an integrated developer, investor, operator. Over the last five years, AMRO Partners has completed 11 projects in Spain, with currently more than 2,000 beds. We plan to do the same in Germany, where there is not a lot of stock you could buy as the price is too high. Much of the stock currently being marketed in Germany is not optimally sustainable. Everything built five, six years ago, based on gas and with limited technical innovations would require capex to become compliant. With current asset prices being based on 100% occupancy, and assuming rental growth of 5-6%, we prefer development.
Our strategy is both new-build and refurbishment projects, so both greenfield and brownfield. The greenfield opportunities are likely to come from resi developments that have come unstuck, while brownfields are probably office buildings of the '70s that have come to the end of their life-cycle.
REFIRE: What volume are you targeting?
Nonnengässer: Over the next five years, we're looking to develop 5,000 beds. At an average of 350 to 400 beds each, that's about 9 to 15 sites. In Spain we've done projects for about 2,200 beds. It took us four years to build that up. We hope to be a bit faster in Germany, at least for the first two years.
REFIRE: And your geographic focus?
Nonnengässer: The top seven cities, plus university towns. The focus is on western Germany, and south of the river Main, along with Bonn, Münster and Aachen.
REFIRE: That rules out a lot of cities. I'm thinking Jena, Gera, Greifswald, among others...
Nonnengässer: There's a reason for that. It helps to invest in slightly dysfunctional rental markets. In Erfurt or Magdeburg, for example, they have shiny bright universities that have benefited from a lot of transfer money from west to east over the years, and they don’t suffer from housing shortages. You can still find a small place to rent for €200-300 a month. Building something there means you’ll never recover your costs.
REFIRE: How important is branding in making the student houses attractive to new tenants?
Nonnengässer: In my opinion it can be overrated. We’ve seen in the UK how piles of extra amenities very often just raises your operating expenses. What really counts is the vibe that you can create in the individual building, creating a family feeling for young people who are probably away from home for the first time for longer than three or four weeks. As an operator you can really create lasting value by having the right person or team on site to engender that atmosphere. If it’s a cold and unemotional environment, the brand adds nothing. From all my experience, I can say that the key credential in creating a successful brand is community, more so than the quality of the materials in the building, or other technical aspects. But our working title for the brand will be AMRO Student. Watch out for us.
