EY Study: Real Estate Asset Managers are challenged as never before

• Rising interest rates lead to price corrections and a decline in transactions
• Landlords and tenants pull together for energy transformation
• Hardly any rent defaults – index clauses are enforced

More than 80 percent of asset managers invest in the implementation of ESG strategies in 2023. Investments in personnel growth, on the other hand, are clearly taking a back seat, as the Asset Management Study 2023 by EY Real Estate shows: Only one-third of the 40 or so asset managers of all types active in Germany still want to invest in additional employees. Last year it was still 96 percent. Although the energy transformation of their portfolios is at the top of the agenda for the vast majority and is associated with major challenges, 92 percent of the survey participants want to tackle these with their existing staff – new hires are only an option for 31 percent. 44 percent would like to resort to external support. Transferring tasks to property managers is an option for only 14 percent of the respondents.

“The prevailing environment for asset managers is characterised by uncertainty, volatility and great complexity. Working with the portfolio inevitably comes into focus – be it dealing with tenants or the energy transformation of buildings,” says Oliver Schweizer, head of the real estate sector in Germany at EY. “The numerous challenges require special expertise: a staff freeze could turn out to be short-sighted, even if it is initially perfectly understandable from a cost and risk perspective.”

Transaction market paralysed

Almost all respondents (92 per cent) agree that rising financing rates will lead to price corrections in transactions and that fewer transactions will be implemented in 2023 than in 2022 (86 per cent). Only one in five asset managers stated that they would be able to realise planned sales under these circumstances. Nevertheless, Germany remains a very attractive investment location for more than 90 percent of the respondents.

A slightly positive trend can at least be seen in construction and trade services: While last year almost 90 percent of the asset managers still considered the lack of capacity there to be a challenge, this year it is only 70 percent. At the same time, 58 percent of those surveyed expect prices to continue to rise in the construction sector.

Hardly any rent losses recorded so far

84 percent of the asset managers are not currently registering any increased rent defaults in their portfolios. However, almost two-thirds of the respondents are confronted with space reductions or branch closures as an after-effect of the Corona pandemic. Index rents are now commonplace across the board: in the context of high inflation, 98 per cent of survey participants said they were negotiating them more strongly. And: despite rising costs also on the tenant side, especially for ancillary costs, more than 80 percent of the survey participants also fully implement indexation clauses in rental contracts.

“Despite multiple crises, rising costs and a generally unsteady environment, the vast majority of tenancy agreements stand the test of time,” says Schweizer. “It depends very much on the partnership relationship. Together and in dialogue, viable solutions can be found for most challenges, as was already shown during the Corona crisis.”

More than 80 per cent of respondents expect increased discussions with their tenants on service charge bills. Their increasing importance is also reflected in the exchange with tenants about energy saving measures, which 82 per cent of asset managers are engaged in. The establishment of ESG criteria for the portfolio is reflected in the form of “green clauses” in leases – for 71 percent of asset managers they are now standard. Areas with poor energy efficiency are noticeably more difficult to let in view of the energy costs in the view of almost two-thirds of the respondents.

Energy transformation is a high priority

For 58 percent of the asset managers, the energy transformation of their portfolios is currently an investment priority. 71 percent of the respondents are planning to identify energy-saving potential in their portfolios. Thus, 57 percent have already been able to reduce energy consumption and around three quarters are aiming for further reductions. Cooperation with tenants in recording consumption data and selecting energy sources plays an important role here: Almost two-thirds of the respondents want to initiate this exchange in the medium term. A quarter also stated that they already rely on their own energy generation. In the medium term, more than half of the asset managers want to move towards (partial) self-sufficiency.

ESG implementation suffers from inadequate data basis

The majority of asset managers (84 per cent) agree with the statement that ESG due diligence is now carried out for acquisitions and that portfolio-wide ESG criteria have been established. However, not even half of the respondents have the data basis to calculate CO2 emissions and physical and transitory risks. In connection with the incomplete data basis and risk assessment, the reporting requirements of the Disclosure Regulation and EU taxonomy can only be fully met by half of the participants.

“Asset managers have recognised the necessity of ESG issues – however, there is a lack of implementation, although the technical means are available both in terms of hardware and software. There is still considerable efficiency potential in their application, especially with regard to existing reporting obligations at portfolio level,” says Schweizer.

For individual buildings, smart building technology is already an integrated instrument in asset management for 43 percent of the respondents. At the portfolio level, on the other hand, only a few participants already use modern technologies for monitoring and reading (13 percent). Around 40 percent of the respondents are currently planning to use corresponding digital tools.