Aurelis market survey: "Production-related real estate"
- Growing competition, globalization and digitalization drive structural change
- Production-related real estate less specific than frequently assumed
- Capital market still underappreciates EUR 600 billion asset class
- Companies increasingly prepared to outsource
- Comprehensive offerings for real estate management could point way ahead
Rising international competition and the effects of digitalization (Industry 4.0) over coming years will exert their most significant impact on manufacturing companies. Both of these trends will also bring about a change in demand for production-related real estate respectively Unternehmensimmobilien (multi-use and multi-let commercial properties)*. Users in the future will primarily demand a high level of flexibility in space portfolio management, cost efficiency, and property development or redevelopment experience. Although cost efficiency is also often required, this factor currently seems to be less important than portfolio flexibility. These are the main results of a study that university professors Tobias Just and Andreas Pfnür conducted on behalf of real estate developer and rental company Aurelis Real Estate GmbH & Co. KG.
Their main task was to find out whether production-related real estate represents a growth segment for asset managers and real estate investors, whether market potentials are identified and exploited, and how market participants' requirements are changing. Corporate real estate managers and CFOs at 300 large medium-sized manufacturing sector companies in Germany were contacted to this end. With a more than 22 percent response rate, this is the largest survey conducted in Germany on this topic to date.
Estimated EUR 600 billion stock of production-related real estate
First, the value of Germany's stock of production-related real estate was estimated: based on previous estimates of the entire commercial real estate base, the authors calculated the stock of production-related real estate. This entailed adding together only the factory and workshop buildings and commercial and logistics spaces segments. This corresponds to round one fifth of the entire commercial real estate volume, or around EUR 600 billion.
Digitalization changes value creation process – globalization adds to competitive pressure
Tobias Just believes that the greatest structural change of the last decades will occur in manufacturing industry, testing not only the competitive position of each individual manufacturing company, but also the international competitiveness of German industry overall.
The survey participants identified the most important drivers of structural change in rising competition (affirmative responses: 78.8 percent), globalization (47.0 percent), and digitalization (42.2 percent). A total of 66.1 percent of the individuals surveyed believe that digitalization will, or could, result in manufacturing spaces replacing office or service areas to a greater extent in the future. Whether digitalization could succeed in repatriating manufacturing processes to Germany from low-wage countries received a somewhat cautious assessment, by contrast. Only 8.2 percent of the respondents foresee this prospect, while 27.9 percent regard it as a possible outcome.
Flexible spaces' growing value
Adaptability will be the overriding objective for users in the future: 63.6 percent of respondents stated that their demand for flexibly usable spaces will grow. "Firstly, this is about flexibility in the real estate portfolio – in other words, the capability to have access to spaces quickly, or rapidly stop using them if they're no longer needed," explains Andreas Pfnür. "Secondly, production spaces can be replaced to a greater extent by office, service or warehouse spaces in the future. This important success factor nevertheless requires a lot of resources in real estate management, and a willingness to invest in this asset class."
Overestimated specificity of production-related real estate
Industrial companies have to adapt to rapidly changing competitive situations in utilizing their spaces, making the topic of third-party usage increasingly important. Andreas Pfnür clarifies a widespread misunderstanding: "Capital providers frequently assume that manufacturing processes are specific, so that the property where manufacturing processes are realized also has to be specific. This allegedly limited capability for alternative utilization makes institutional investors reticent toward production-related real estate as an asset class. For us, it was surprising that many users gave an at best moderate assessment of many of their buildings' specificity: two thirds of respondents regard it as probable or possible that their company will find existing properties on the market, or vice versa, that properties out of their portfolios are suitable for others."
And manufacturing companies pay attention to the same criteria not only in selecting properties, but also when choosing locations: transportation connections (relevant for 89.2 percent of respondents), proximity to qualified employees (78.5 percent) and proximity to customers (64.6 percent). Pfnür believes that the conclusion to be drawn is that a large proportion of the EUR 600 billion volume is marketable – a potential indication that high ownership rates in Germany do not reflect property-based factors, but rather organizational or institutional reasons.
Investment pressure heightens institutional investor interest, but experience is lacking
Between 40 and 50 percent of the companies surveyed stated that they detect growing interest among investors in production-related real estate, including at B and C locations. "This matches our experience and previous market survey results. Such results have already been showing for some years that significantly higher cash flow returns can be generated with Unternehmensimmobilien compared with established asset classes such as office or retail," notes Aurelis CEO Joachim Wieland. He believes the trend toward investments offering higher returns is the logical consequence.
At the same time, investors lack expert knowledge, which prevents this area from achieving a breakthrough. According to the respondents' estimates, two thirds (61 percent) of equity and debt providers are unfamiliar with companies' production-related real estate. Moreover, 42.6 percent of equity providers and even as many 67.3 percent of debt providers do not understand how real estate and real estate management can contribute to corporate success and profitability, according to respondents. A lack of market and portfolio transparency might be the reason: only 35 percent of companies surveyed stated that they have access to benchmarking to document the financial value that real estate portfolios add. This might result in a "Catch-22" situation where investors are wary of such properties without access to the reliable data against which to benchmark them, resulting in a lack of interest that eliminates any incentive to first measure and establish benchmarks.
The lower the ownership ratio, the more clearly are opportunities identified
Two out of three companies are prepared to sell properties they no longer require. Nevertheless, 48.4 percent of companies have no experience in these types of transactions. An interesting result from the survey is that the lower the ownership ratio, the greater the company estimates the savings potential that it can achieve through a low ownership ratio. The conclusion is clear for Just: "Companies with higher ownership ratios are not yet sufficiently aware of the benefits of reducing their ownership ratios."
Demand for flexibility, cost efficiency and redevelopment experience
A total of 92.4 percent of the companies surveyed identify real estate portfolio flexibility as the strategic priority of forward-looking asset management. Cost efficiency ranks second, with 54.5 percent of respondents seeing economically efficient space management as a major challenge. The redevelopment of existing locations ranks third, with a 51.5 percent response, although at the same time 45.5 percent of the companies have no experience in this area.
Willingness to outsource has risen enormously
Tobias Just sees manufacturing industry at a crossroads: "Companies have to create the right preconditions in their real estate management to emerge stronger from the coming structural change in the competitive environment. The potential that currently lies unexploited in real estate portfolios can often be realized through outsourcing real estate management."
And companies are becoming increasingly willing to outsource, in fact – in technical or infrastructural facility management (82 percent and 77 percent respectively), in transaction advice (66 percent), or redevelopment (65 percent), in the rental/leasing of parts of spaces not utilized operationally (60.0 percent), and in commercial building management (56 percent). Even in assessing space requirements and real estate portfolio planning – where outsourcing was still inconceivable just a few years ago – a positive trend is emerging with 30 percent prepared to outsource. Actual outsourcing potentials are even gauged somewhat higher. Here, figures lie between 56.6 percent and 75.2 percent of task areas.
Potential must be leveraged
Joachim Wieland is convinced that the survey results suggest the benefits of end-to-end value creation partnerships: "The depicted structural change is pushing manufacturing companies to act strategically. The market's potential now has to be leveraged. Users need asset managers to ensure rapid response and flexibility, as well as project development expertise. For its part, the capital market needs to know that corporate real estate is in the hands of someone who knows this asset class, making it possible to invest in due to their track record. These requirements are entirely compatible."
Aurelis nevertheless renders its services only for its own real estate. Aurelis' CEO believes that, as owners, they have a particular interest in both satisfying users and maintaining properties' future-viability. "We purchase the properties, invest in them, and generally also look after them subsequently. For this, you have to be prepared to respond constantly to changes in companies' requirements," notes the Aurelis CEO. But he also thinks it is important to know your own limits: "Pre-acquisition, we examine precisely whether we have an idea for how a location or property can be utilized subsequently. If we then have the impression that a property is too specific, we don't invest," assures Wieland. "In this case, a property is better leveraged in the user's hands."
*The terms "production-related real estate" and "Unternehmensimmobilien" are comparable typologies in this context. Whereas the first designation relates to "properties needed for manufacturing and logistics processes in light industry or mixed production", the second is defined as "mixed business parks, properties for warehousing/logistics and light manufacturing, and converted properties". The term "light industrial properties" is also appropriate.